This is an old revision of this page, as edited by 71.131.79.101 (talk) at 03:38, 9 September 2005 (→Advantages for the market of naked short selling). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.
Revision as of 03:38, 9 September 2005 by 71.131.79.101 (talk) (→Advantages for the market of naked short selling)(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)A naked short sale 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."
Advantages for the market of naked short selling
In criminal stock fraud operations, retail investors are encouraged by either a stock promoter or bucket shop to buy a stock pushing it's value far beyond its true value. This is also called pump and dump. If naked shorting were allowed by SEC rules, other brokerages would step in and naked short the stock bringing it back to true value. In essence, SEC rules against naked shorting allows criminal 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.
Disadvantages for the market of naked short selling
Naked Short Selling causes a drop in share price. Companies who are doing a stock offering will have to issue more shares to raise the same amount of cash.