Naked Shorting


DEFINITION of 'Naked Shorting'

The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.

While 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.

BREAKING DOWN 'Naked Shorting'

Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns.

In 2007, the Securities and Exchange Commission (SEC) amended Regulation SHO to further limit possibilities for naked shorting by removing loopholes that existed for some broker/dealers. Regulation SHO requires lists to 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 the negative sentiment to be reflected in certain stocks' prices.

  1. Short Selling

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  2. Spotting Clues In Qs

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  3. Regulation SHO

    A regulation implemented on January 3, 2005 that seeks to update ...
  4. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  5. Custody-Only Trading

    A system in which shares must be registered to the holder by ...
  6. Failure To Deliver

    An outcome in a transaction where one of the counterparties in ...
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