Deutsche Bank's naked wrist slap

Regulators impose another minuscule fine for short-selling transgressions by giant firms.

Securities industries watchdogs have had it with naked short selling -- and if the biggest securities firms don't watch out, they could be left with some unsightly welts on their wrists.

Thursday's sort-of crackdown comes courtesy of the Financial Industry Regulatory Authority, the industry group that kind of watches over the biggest broker-dealers. It slapped Deutsche Bank (DB) with a $575,000 fine for five years' worth of violations of rules against naked shorting, the practice of selling a stock without making an effort to find shares to sell.

Where are the teeth?

Finra hit National Financial Services, a unit of Boston-based fund giant Fidelity, with a $350,000 fine for similar violations.

Securities rules say brokers can't do a short sale, in which a trader borrows and sells a stock in hopes of repurchasing it later at a lower price and pocketing the difference, without first identifying "reasonable grounds to believe that the security can be borrowed," in Finra's words.

Both Deutsche and National Financial virtuously set up systems to prevent this from happening, Finra said. The idea is to prevent abusive short sales that manipulate the market.

But as luck would have it, Deutsche then "disabled its system in certain instances." National, going one better, "created a separate system for certain customers," Finra said.

Deutsche and National Financial, which neither admitted nor denied Finra's findings, aren't the only ones playing this game. So is Goldman Sachs (GS). It got fined $450,000 last week by the Securities and Exchange Commission and NYSE Regulation for 521 violations of short-selling rules -- including several instances in which the firm found itself in the SEC's short-selling "penalty box."

The censures of the three firms come as the SEC seeks to crack down on naked short-selling with what you might describe as mixed results. Yes, fines and bad publicity are always useful tools. On the other hand, three giant players managed to settle cases by spending just $1.4 million -- a mere fraction of Wall Street's ever- increasing trading profits.

"The SEC has done a fantastic job identifying naked short-selling as a destroyer of shareholder value," said John Tabacco, who runs the locatestock.com electronic stock-locating service. "But when you compare $1 million in fines with hundreds of millions of dollars in execution and clearing profits, you can see where the firms just see this as a cost of doing business."