Where's the SEC in short-selling shenanigans?

The following was written by Arne Alsin for RealMoney.com

When brokers allow twice as many shares of a company to be sold short as are lendable, it is evidence of a structural problem. Undergirding the market is an implicit triangle of trust between brokers, companies and investors. For the market to function properly, investors must have confidence in the system. They must be confident that their property is protected, that rules are uniformly enforced and that rule violators are punished.

Stocks are accounted for as a so-called "fungible mass" in a book-entry system, in the same way as currency. It requires confidence for the system to work. Depositors don't demand actual currency for their cash assets because they have confidence in the book-entry system of banks.

As one money manager explained after struggling for weeks to get delivery of their Overstock shares he lost faith in the system. He didn't trust that his brokers would not lend out his shares. So he demanded actual certificates, which took another several weeks, and they are now in a bank vault.

When shareholders resort to demanding actual certificates for their shares, as has occurred en masse at Overstock, it is akin to a depositor going to his bank and demanding actual currency -- a so-called "run on the bank."

In the days before federal insurance, a run on the bank used to be a banker's worst nightmare. It's fair to call the growing demand for certificates in Overstock a "run on the brokers." And it may turn out to be the Wall Street broker's worst nightmare.