Who is at fault for naked short selling?

Question

From my understanding, it is short selling shares without borrowing them. From reading the passages in Wikipedia and Investopedia, they say it is shorting shares without the intent of delivering them, therefore making it the fault of the trader.

From my understanding, would it not be the brokerage's fault because they did not make sure the shares could be borrowed from their inventories or sources? Or would it be the fault of the bank or supplier of the borrowed shares for not informing the brokerage that shares could not be borrowed (or otherwise their failure in completing the transaction?

Thanks for your help.

Answer 1

it's the fault of the trader.  you can not sell something that you do not have.  the law already stipulates that if you are going to short a stock, you need to borrow it and take possession of it before you can sell it.  since you are the one making the investment, it is your responsibility to abide by the law.

short sellers can't blame the banks for violating the law, themselves.

Answer 2

I think the way it's normally done.  The broker only locates the shares and gets a promise that he will be able to borrow these shares, before the short sale goes through.

It takes up to three days to get a physical delivery of the share certificates.  And the borrowing process can take that long.

Recently SEC has banned this practice for 19 financial companies in order to bring up their stock prices.  These companies need to raise additional capital.  And raising that capital is a lot easier for these companies when their stock prices are high.

For these 19 companies, the broker has to get a physical delivery of the share certificates, before the short-sale can go through.  Which makes shorting these companies a lot more difficult.  Because it's hard to know what the stock price will be three days into the future.  And many people wouldn't want to short like that.

But the danger of decreasing the short positions for any stock is that this takes away any support for the stock on the downside.  Short-sellers normally buy back their shares when the stock goes down in price.  And this prevents the stock price from going down too much.

But when there aren't many short sellers.  Then you can end up in a situation where everybody wants to sell.  And there are no buyers.  And in that case, the stock price decline can be absolutely huge.

Answer 3

Actually the government should be held accountable for not enforcing the rules. Delivery should happen within 3 days. The problem with the system is the shares never get delivered and the true float of the stock is being fraudulently manipulated upward. So really the short gets an unlimited time frame and in turn really cuts down the risks to the short.

I think this major effect of this is it really kills the overall long term valuations of the small cap sector (the usual  target of the shorts).

Where I blame the hedge funds is how they pull down a stock that has risen. They pay bashers who make up negative commentary that in most cases are false.

Looking at a reg sho list  will give you an idea of how many firms that meet this requirement of failed delivery.