May 11, 2009
It is my understanding that, if you borrow shares, then selling these shares that you do not own (but have borrowed) is legal (Short selling).
However, selling shares that you do not own and have not borrowed is illegal. (Naked short selling).
Is it (naked short selling) illegal? Yes or no?
Somehow, this naked short selling practice must be eliminated. It is a beautiful way to make money if you have criminal intent. e.g. You simply sell 25,000 shares of ABC Corp at $20 with no intent to deliver the shares. You have made $500,000. What is the situation of the person who bought the shares if he asks for his share certificate?
In the above case, the paper trail is:
seller - seller's broker - buyer's broker - buyer.
Does the seller not have to declare to his broker that he doesn't own the shares? Does the seller's broker not have an obligation to the buying parties that the shares are not there.
Regulating this in today's electronic environment, where everything is carried out by computers, will make your job of eliminating naked short selling difficult. Or easy. Simply prosecute those who fail to deliver their shares. Make a test case and publicize the trial. Do it again, and again.
Please do not sweep this practice under the rug by saying that "accounting mistakes" are the cause of naked short selling. We know that that is not the case. Maybe it is carried out because people know that they can get away with it, and as long as they can make money (lots of money), then they will continue to do so. Greed is a strong motivator in humans.
Thanks for reading. I wish you well.