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What is Naked Short Selling?
Before we get into Naked Short Selling let’s understand the basic premises around short selling.
Short selling is the sale of a security that is not owned by the seller.
The motivation for short selling is an investor's belief that a stock's price will decline, enabling the short seller to buy the stock back in the future at a lower price and make a profit.
Normally, when one short sells a stock, their broker will lend them the shares to sell. The loaned stock will come from the broker's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to the short seller's account.
As payment for borrowing the shares, the short seller is charged a fee, quoted as an annualized percentage of the value of the loaned securities - i.e. a borrower of a stock with a 5% stock borrow rate will be charged $5 per year for every $100 of stock borrowed. Stock borrow rates change daily based in large part on the supply and demand to borrow that particular stock.
If the number of shares available to borrow is in short supply and/or great demand (which is often the case in highly shorted stocks), finding shares to borrow can be difficult and expensive.
A frequently asked question and outlined in our FAQ’s but let’s look at naked short selling from various perspectives.
How does naked short selling effect the stock market?
When a seller "naked short sells a stock" they do not own the shares they are selling and therefore are selling artificial shares. This is like counterfeiting a stock. This process creates an obvious unfair advantage to the seller and an imbalance in the market as the sell side is now increased with more shares – many of which are counterfeit. There is a time limit on how long the seller can sell these shares and be naked on the trade and the time limit is 3 days. This is where the RegSho rules come in and the data we track. If the sellers broker-dealer has not located a borrow to cover this short trade within 3 days they will need to purchase back the shares they have sold on the open market. This process is referred to as a "Buy In".
Naked Short Report - track short selling interest on NASDAQ and NYSE STOCKS, check daily short interest, naked short data and short squeeze stock perfomance