July 21, 2008
The purpose of securities regulation is to facilitate the smooth functioning of capital markets, while protecting investors. Naked short selling is a form of legalized gambling, not a form of investing. It has been justified historically on the basis that it enhances market liquidity. However, there is no empirical proof that this is actually the case. Rather, there is substantial evidence that it enhances the ability of certain market participants to manipulate the prices of listed securities. It is hard to understand how permitting this activity protects investors. As a result, the proposed legislation should be revised to prohibit naked short selling by all market participants.