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I'm not an economist so hopefully someone can explain this: what's the purpose or benefit to financial markets to have such a thing as naked short selling?
by mikece 3y ago
I'm not an economist so hopefully someone can explain this: what's the purpose or benefit to financial markets to have such a thing as naked short selling?
- ano-ther 3y agoShort selling is supposed to help find the right price for an asset (see here for example: https://www.investopedia.com/ask/answers/012815/how-does-short-selling-help-market-and-investors.asp https://www.investopedia.com/ask/answers/012815/how-does-sho... ) Naked short selling is not encouraged (from the OP): > Naked short selling is somewhere between unfortunate (if, say, a market maker does a short sale and can’t find borrow in time for normal settlement) and illegal (if a hedge fund shorts a stock without bothering to get a locate).
- deleted 3y ago[deleted]
- jfengel 3y agoBelieve it or not: fairness. The great thing about a naked short is that you don't have to be rich to do it. You get cash for free, which you can use in any other investment. When the short closes, you keep the profits. And if you were right about the short, you cover the short for less than the money you received. You can be rewarded for being smart. You don't need to be rich to start. You can also massively bone yourself and go from "not rich" to "destitute" in very short order. Especially those people who aren't all that smart and are looking for a get-rich-quick scheme. It's "fair" in PT Barnum's sense: it's morally wrong to allow suckers to keep their money. Still, you asked what the benefit is. The benefit is that it brings in all of the minds. Economists believe that the market functions best when you reward people for making intelligence choices, and the dumb ones filter themselves out pretty quick. This lowers the barrier to entry for a large class of smart people who aren't already rich.