September 10, 2008
The sale of securities neither owned nor borrowed constitutes fraud.
Unless the seller either has the securities or has cash to cover all potential losses from their sale, there are serious counterparty risks associated with naked short selling.
I can't see a good reason why market makers need the ability to engage in naked short sales. If there is no asking price, the bid simply rises. When a market maker engages in naked short sales, all buyers are deprived of a market price for their holdings.
The sale of shares neither owned nor borrowed, artificially expands supply, and artificially lowers prices.
'Locating shares for borrowing' isn't sufficient, because this creates a loophole whereby multiple market actors can locate the same shares for naked short sales.
All market participants selling shares must be required to produce shares on closing. No other solution ensures fairness in the marketplace.
Unless the SEC enforces this principle, the SEC is allowing fraud in the marketplace, and investor confidence will inevitably be eroded.