Naked Shorting

Naked Short Selling

The sale of shares one has neither borrowed nor made arrangements to borrow. Under Regulation SHO, investors engaging in naked shorting much abide by a "locate" requirement and a "close-out" requirement. The locate requirement forces brokers to have reasonable grounds to believe that the short-sold security can be borrowed; the broker must document this prior to the security's sale. With some exceptions, the close-out requirement means that brokers who have failed to deliver a short-sold security for 13 days must purchase similar securities and present those instead. Naked shorting is very high risk.

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Naked Shorting

What Does Naked Shorting Mean?

The practice of short selling shares that have not been confirmed to exist. Ordinarily, traders must borrow a stock or determine that it can be borrowed before they sell it short. However, as a result of various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen. Although no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory three-day stock settlement period as evidence of naked shorting. Naked shorts may represent a major portion of these failed trades.

Investopedia explains Naked Shorting

Naked shorting is a form of price manipulation forcing stock prices down without regard for normal stock supply-demand patterns. In 2007, the Securities and Exchange Commission (SEC) amended Regulation SHO to limit possibilities for naked shorting further by removing the loopholes that existed for some broker-dealers. This regulation requires that lists be published that track stocks with unusually high trends in “fail to deliver” shares. Some analysts point to the fact that naked shorting, albeit inadvertently, may help markets stay in balance by allowing negative sentiment to be reflected in certain stocks' prices.

Related Terms:
• Margin
• Option
• Regulation T—Reg T
• Stock Option
• Short Squeeze