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.
Even with the academic support for short selling, the perception of wrongdoing by naked short sellers continues to exist.
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.