Are specialists or market makers allowed to naked short today?

Question

Cox, SEC Chief, says he wants to end naked shorting, but if that is part of a money makers job so that shares from thin air are made availible for trading when buyers are seeking shares, how can this be?

It appears to me that market makers would have to naked short if there are no shares available?

Answer 1

I think "technically" naked short selling was never legal. What they are calling naked shorts now is that they "assume" the shares are available to cover.

But options trading has grown, and become more extreme to where that assumption is now very much in question.

When dealing with money there is always a balancing factor. If there are not shares available to be shorted then the premiums would have to rise to where it draws more shares in to be shorted since it would become more profitable.

One reason they are addressing this is because they eliminated the uptick rule that slowed option traders from driving a stock down and down.

Now that they don't have to wait for an uptick to keep shorting a falling stock it is now more important to be sure the stocks offered for a short sale actually exist.

Answer 2

Yes, they are allowed.  This allows them to provide liquidity to the marketplace, so unless they blatantly disregard or manipulate the market (as in, penny stocks), there is no problem.