Naked Short Selling

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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.
References in periodicals archive ?
"A naked short sale is prohibited on the nation's stock market.
The public perception of short sellers, particularly those involved in a naked short sale, is that of being directly responsible for the decline of stock values.
The Skinny on the 2008 Naked Short Sale Restrictions.
When a trader short sells shares he doesn't own, it's termed a naked short sale. SLBS allows the trader to borrow shares at the initiation of the short sale.
They do not utilize the recently banned Credit Default Swaps or the Naked Short Sale which do destabilize the market and clearly contributed to the current financial crisis.
In the current instance, at least market makers are exempted from the naked short sale ban, which mitigates the adverse effects to some extent.
Germany has declared war on speculators, wrongfooting European partners who said they were not consulted about an overnight ban on naked short sales of a range of assets, that sent markets reeling.
In September 2008, ASIC took emergency action to temporarily ban short selling in Australia, including naked short sales and covered short sales.
Bris (2008) focused on the firms subject to the July 2008 SEC emergency order banning naked short sales. He found that the ban had no particular impact on market quality (as measured by volatility, for example).
While I agree with the authors that naked short sales can have a detrimental effect on the price of a stock, they state that the demand curve of that stock remains unaffected.
This is typical for so-called "naked short sales", whereby the seller offers shares which they do not own in the hope that within the three-day period they can purchase the shares at a reduced price for final delivery.
In a 2006 public hearing, Cox spoke candidly of "abusive naked short sales...which can be used as a tool to drive down a company's stock price to the detriment of all of its investors.