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All of this doesn't address the concept of naked short selling in the post's title. Naked short selling happens when Bob sells short 100 shares without having
by delaaxe 6y ago
All of this doesn't address the concept of naked short selling in the post's title.
Naked short selling happens when Bob sells short 100 shares without having borrowed them from anyone beforehand, effectively conjuring new shares out of thin air. Certain market participants are allowed to do this for "liquidity purposes"
- JackFr 6y agoSo as the buyer opposite the short, in such a case, what do I have in my account? It’s not thin air.
- otherme123 6y agoYou have the right to receive a share, as soon as it is available in the market. They have 2 days to fullfil your account, or they issue a "fail to deliver". Naked shorts are allowed to market-makers, because if when you buy there's no counterpart but it's reasonably expected, you receive this "right to a real share" to be filled with a real share as soon as the market-market can buy a real one. You'll never notice however. This mechanism works like oil in an engine and is almost neutral to the market dynamics, and they receive a fee to keep the engine oiled. The problem is when market-makers abuse this ability, and shorting nakedly too much sends wrong signals to the market, pushing it down and self-fullfilling the profecy. In the same way that pump-and-dump is illegal, this works in reverse (short-and-distort).
- delaaxe 6y agoThe buyer does receive a share, but the seller didn't have it beforehand nor borrow it from anyone