July 24, 2008
Short-selling of a stock AFTER it has been legitimately borrowed is a property right. On the other hand, naked short selling is equivalent to counterfeiting. It allows individuals or firms, by virtue of their market making activities, to create virtual shares, by fiat, in a public company with whom they have no relationship or real ownership.
"liquidity" is a poor excuse to allow options Market Makers to counterfeit shares. Options are normally created and traded independent of the underlying company. The underlying company has no obligation to facilitate, and receives no benefit from, a liquid market for derivatives in its stock, yet they may be damaged by abuse of this rule exception.
Less clear is the issue of naked shorting by Market Makers in a stock. But in this case, Market Makers should be required to locate shares or cover within a 3-day window, or be subject to penalties sufficient to prevent abuse of this privilege. "Liquidity" should not provide an open-ended alibi to counterfeit shares and damage a publicly owned company.
Selective enforcement of naked short selling rules is unacceptable. Naked short selling rules must be enforced for ALL stocks.