what is Naked Short Selling

Naked short selling is a prohibited trading practice that involves selling securities without first borrowing or securing the right to borrow them. This can potentially lead to a lack of supply for the shorted securities and a drop in price. Despite the regulatory bans, naked short selling can still occur and is considered illegal for several reasons: 1. **Market Manipulation**: Naked short selling can artificially depress stock prices, which is a form of market manipulation. This practice can lead to significant financial losses for investors holding the affected securities and can undermine investor confidence in the market. 2. **Illegality and Regulatory Measures**: Naked short selling is illegal in many jurisdictions, including the U.S. and the EU, where it was banned following the 2007-2008 financial crisis. The SEC's Regulation SHO, implemented in 2005, requires broker-dealers to have reasonable grounds for believing that shares could be borrowed before the short sale and prohibits naked short selling. 3. **Risks and Consequences**: Naked short selling exposes the seller to the risk of a price rise, which can lead to losses if the price of the stock increases instead of decreasing as the seller had anticipated. Failure to deliver the shares in a timely manner can also affect the buyer and the normal functioning of markets. 4. **Controversy and Public Perception**: Naked short selling is controversial due to its potential to manipulate markets and the public's perception of it as a fraudulent practice. It can also drive volatility through speculation, as seen in the case of GameStop, where excessive betting against the stock contributed to an epic short squeeze in 2021. In conclusion, naked short selling is a risky and illegal practice that can lead to market manipulation and instability. Despite regulatory efforts to prevent it, naked short selling can still occur, posing risks to investors and the overall market.