Naked short selling

Naked short selling is selling shares of a stock short without first borrowing them or confirming they can be borrowed, unlike ordinary short selling, which requires locating and arranging to borrow real shares before the sale. Because the seller never actually secures the shares, there is a real risk they cannot be delivered when the trade needs to settle, creating what is sometimes called a failure to deliver.

Regulators require brokers to satisfy a locate requirement before executing a short sale precisely to prevent this from happening, so naked short selling that circumvents that requirement is generally illegal in US markets rather than a legitimate trading strategy. It differs from a hard-to-borrow situation, where a trader has genuinely tried and failed to locate shares to borrow and is therefore blocked from shorting, naked short selling instead skips that step altogether.

The concern with naked short selling is that it can, in theory, create more sold shares in the market than actually exist, potentially adding artificial selling pressure and distorting the stock's price beyond what real supply and demand for the shares would produce. It has been a persistent topic among retail investors and companies who believe their stock has been targeted this way, though proving that illegal naked short selling, rather than a legitimate settlement delay, actually occurred in a specific case is difficult from outside information generally available to the public.