What is Naked Short Selling?
Naked short selling takes the whole process of selling a stock short one step further, but before you can understand naked short selling, you must understand the basic process of short selling stocks. What is short selling? The traditional process of short selling stocks involves selling borrowed stocks. In traditional short selling, the seller borrows stocks from a shareholder for sale, but must buy stocks to fulfill the sale. Selling a stock short is a practice investors use when they expect the price of a security to fall; they sell the stock at a high price, but when the stock price falls, they then buy at a low price to complete the transaction. In traditional short selling, the stock must be borrowed, or an attempt to borrow the stock must be made. Naked short selling differs from traditional short selling in that there is no attempt to borrow the stock from a shareholder. In naked short selling, the seller simply doesn’t have a stock to sell; the trade is then written off due to
Short selling is a bet that a stock will drop in price. The normal short selling process involves a trader ensuring a security is readily available to borrow by checking inventory lists (referred to as a “Locate”), and then arranging to borrow the shares for delivery to complete the transaction settlement. Shares are then purchased at a later date and returned to the lender. The short seller makes a profit on the margin between the initial short-sale price and the hopefully lower share re-purchase price “Naked” short selling is the practice of selling a security short without first ensuring the ability to borrow the shares you’d need to complete the transaction. When naked short selling is rampant, the number of shares seen in play on the markets greatly increases because trade volumes are taking into account shares that are not actually owned or held–and may not even exist. This can even push the volume levels higher than the entire outstanding float for a stock. Following the laws o
Let’s go over what regular short selling is. Selling a stock short is taking a negative position on a stock, it’s essentially a bet that the stock price will go down. To do this, a person has to first borrow shares from a brokerage house or a bank, sell those, and then buy shares of the stock back at a later date to repay the borrow, hopefully when the price has gone down. It’s common practice on Wall Street, and is really just a form of credit given by the brokerage house or bank. Naked short selling is selling a stock short without first borrowing the shares. If a stock is illiquid (no shares readily available), and a trader wishes to speculate on an anticipated hourly move in the share price, nothing is harmed by allowing him to sell 1,000 shares and then buy them back 45 minutes later. That, too, is common practice on Wall Street. Naked short selling helps the market prices adjust quickly.
Naked short selling is selling short without borrowing the necessary securities to make delivery, thus potentially resulting in “fail-to-deliver” securities to the buyer. Naked short selling can have a number of negative effects on the market, particularly when the fails-to-deliver persist for an extended period of time and resulting in a significantly large, unfulfilled delivery obligation at the clearing agency where trades are settled. This being akin to con job thievery, the SEC allows the well-heeled players on the Street to practice naked short selling with relative impunity. Consider this: If one were to sell prime real estate, raw acreage, to an investor… Only to find out later that the seller did not have perfected title to the land (or to make this analogy closer – that the land did not even exist)? Then when confronted by the bunko squad, offering the excuse “But sir, I was planning to buy the land back after it declined in value.” Nowhere in the world would such a scheme
Naked short selling is a practice of improperly appropriating a security and arranging an immediate sale of the security. The sale is conducted before the seller has proper ownership or has been authorized to sell the security by the current owner. Naked short selling is conducted with the anticipation of being able to buy back the security at a lower price in short order, thus covering the original sale and managing to make a profit from the venture. While the strategy of selling a stock short is considered ethical and legal in many parts of the world, naked short selling is considered to be highly unethical in most markets. In many countries, federal laws now prohibit the process of selling stocks short when the seller does not have full and verifiable ownership of the stocks. Even some countries that provide some degree of exemption on the practice of naked short selling will only allow the practice as a strategy to stabilize given market. The laws governing naked short selling in t
