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> The SEC made naked short selling illegal after the 2008 financial crisis. Market makers are not allowed to naked short. Actually, they are allowed to naked s
by quickthrowman 5y ago
> The SEC made naked short selling illegal after the 2008 financial crisis. Market makers are not allowed to naked short.
Actually, they are allowed to naked short. It’s essential for them to be able to do so to hedge their exposure and provide a bid/ask at all times.
https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm
- jw1224 5y agoThanks, that’s the first I’ve heard of that. I’ll have a read, cheers.
- quickthrowman 5y agoThe reason they’re allowed to is precisely for a GME type situation, if there is a massive buy-side imbalance and there aren’t enough shares to borrow to short (aka sell to buyers), market makers are allowed to naked short to remain delta neutral. Citadel (probably[0]) isn’t going to naked short GME to take a directional position, they just want to capture the bid/ask and hedge the directional risk, which sometimes requires naked shorting. I suppose they could (and might) use synthetic shorts (long atm put, short atm call) to hedge. I’m not sure if only a designated market maker is allowed to naked short, or if supplemental liquidity providers or other types of MMs I don’t know about are also allowed to naked short. [0] I say this only because I’m not Ken Griffin and don’t know with absolute certainty, but generally a market maker aims to stay delta neutral.