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Naked short selling

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A naked short is one in which a stock broker does not find the stock shares to borrow within 3 or 13 days. A retail investor is not allowed to naked short, but a market maker is allowed to have a naked short for "bona-fide market making."

PRO naked short opinion:

In criminal penny stock fraud operations, retail investors are encouraged to buy a stock pushing it's value far beyond its true value. If naked shorting were allowed by SEC rules, other brokerages would step in and naked short the penny stock bringing it back to true value. In essence, SEC rules against naked shorting allows penny stock fraud operations to exist and make large profits. By making naked shorts illegal, volume of trading is reduced resulting in higher spreads and illiquidity. Also, present naked shorting rules allow brokerages to make large profits doing "bona-fide market making" while stock markets are falling. Since retail investors are not allowed to do naked shorting, this presents an unfairness or uneven playing field.

Con naked short opinion:

(note: The next paragraph is from a book. Does wikipedia have permission to use this text?) Naked Short Selling is the illegal practice of short selling shares that may not even exist. Phantom stocks, ghost longs, and other forms of naked shorts flood the market with unaccounted-for shares, causing a devaluation of the legitimate share price of many companies’ shares. While it is likely that you may have heard the term “naked short selling” or been introduced to this problem, you may not fully understand the jeopardy to which this practice could subject your company. Once you are made aware of the potentially devastating effects of naked short selling and the costs it imposes upon the markets, small business­es, and investors, you will understand why it is an urgent issue that sim­ply cannot be glossed over or ignored. Indeed, there is no more pressing issue than dealing with the failure of our securities system to provide authentic and accountable trading for investors. This scheme deprives companies of their ability to finance themselves and grow, it robs investors of millions of dollars in potential profits, and it costs the U.S. economy untold billions of dollars. (end of paragraph from a book).