Naked Short Seller

Naked Short Seller

An investor who sells shares that he/she has neither borrowed nor made arrangements to borrow. Under Regulation SHO, naked short sellers must 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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If a naked short seller does not borrow the stock he sells, he will be unable to deliver that stock to the buyer to settle the trade.
Naked short sellers effectively gain more leverage than if they were required to borrow securities and deliver within a reasonable period of time.
Again, it's not up to the naked short sellers to decide.
[T]hese individuals may claim that the price decrease is a temporary condition resulting from the activities of naked short sellers....
Even with the academic support for short selling, the perception of wrongdoing by naked short sellers continues to exist.
Yet an even more recent study concluded that naked short sellers actually are informed and trade upon accounting information (Liu, McGuire, & Swanson, 2012).
SEC Rule 204 was constructed to force the closure of open short sales and thereby reducing the ability of naked short sellers to close at a time of their choosing.
SEC rule changes in July 2009 were enacted to eliminate or greatly impair the ability of naked short sellers to maintain open short positions past the normal three day settlement period for security transactions.
Shares are often unavailable, however, for securities that are most popular with naked short sellers.
However, as this study has shown, when there is actionable intelligence using available information, naked short sellers are taking action despite current regulations.