Naked Shorting

Filed Under »
Dictionary Says

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.
Investopedia Says

Investopedia explains '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.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Custody-Only Trading

    A system in ...

  2. Regulation SHO

    A regulation ...

  3. Short Selling

    The selling of a ...

  4. Threshold List

    A daily public ...

  5. Securities And Exchange Commission - SEC

    A government ...

  6. Failure To Deliver

    An outcome in a ...

  7. Spotting Clues In Qs

    A method of ...

  8. Short Squeeze

    A situation in ...

  9. Easy-To-Borrow List

    A list of ...

  10. Hard-To-Borrow List

    An inventory ...

Articles Of Interest

  1. Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.

  2. Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.

  3. The Truth About Naked Short Selling

    The media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.

  4. The Short And Distort: Stock Manipulation In A Bear Market

    High-quality stock reports needn't be confused with stock manipulators' dramatic claims.

  5. How does somebody make money short selling?

  6. Triple Screen Trading System - Part 4

    How can a trader use the Elder-Ray oscillator as the second screen of this system? Find out here.

  7. Investors: Rely On Your Gut

    Find out how your personality and natural instincts can direct your investment choices.

  8. Trade On Support For The Best Exit Strategy

    Find your sound exit strategy based on support and resistance levels, while understanding the psychology behind them.

  9. Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.

  10. How To Talk Like An Investor

    Learn all the lingo you'll need to start investing or to impress your coworkers around the water cooler.
Sponsored links

comments powered by Disqus
Hot Definitions

  1. Love Money

  2. Shark Watcher

  3. Judo Business Strategy

  4. Dogs Of The Dow

  5. Chinese Hedge

  6. X-Mark Signature

Recommended
Loading, please wait...
See More »
Trading Center