Naked Short Selling

[nickinto]

Can someone explain the concept?

How can one offer to sell shares it doens't own?

[Coolisme]

Your broker borrows shares from someone else and sell it on your behalf. But of course you got to pay that guy back.

You make money by buying the shares back at a lower price than you sold it at.

[nickinto]

Your broker borrows shares from someone else and sell it on your behalf. But of course you got to pay that guy back.

You make money by buying the shares back at a lower price than you sold it at.

That's short selling.

What about naked short selling though? anyone?

[pitz]

What about naked short selling though? anyone?

Naked short selling is when the broker doesn't even bother borrowing the shares to complete the sale.

Essentially, the broker is creating shares out of thin air.

Theoretically, the DTC or CDS is supposed to stop this by blocking a trade of non-existent shares from occurring.

[Just Confused]

You're mixing two concepts. There is no such thing as naked shorting. The previous post describes shorting.

The "naked" part comes from Options Trading... "naked" is the opposite of "covered". When you write a call, if you actually own the underlying security, it is covered. Meaning the buyer of your contract can call away your position and you don't have to go to the open market to get the shares to "cover" it. On the other hand, a naked call writer would be trading only the income from the sale of option with no intention of being exercised... a risky proposition at best. Let the market makers do that instead.

I haven't traded options for awhile (1980's) and if I recall correctly brokerages have since put a lot of restrictions around naked writing. Mainly to protect themselves from the risk. It may not even be allowed at the retail level?? Someone more knowledgeable with current practice can comment

Rather than writing a call (or put), the less risky approach would be for you to buy a put (or call).

So if you want to extend the analogy... all shorting is naked because you don't own the underlying security. If you experience a short squeeze your brokerage will force you to go to market to replace the shares they loaned you to establish your short position in the first place.

[urban1]

this is a decent description.

google reg sho for info on how its been abused in the past and the crack down on abuse.

Naked short selling is when the broker doesn't even bother borrowing the shares to complete the sale.

Essentially, the broker is creating shares out of thin air.

Theoretically, the DTC or CDS is supposed to stop this by blocking a trade of non-existent shares from occurring.

[urban1]

plain wrong.

dont post info that your going to mislead someone with.

There is no such thing as naked shorting.

[Just Confused]

Naked short selling is when the broker doesn't even bother borrowing the shares to complete the sale.

Essentially, the broker is creating shares out of thin air.

Theoretically, the DTC or CDS is supposed to stop this by blocking a trade of non-existent shares from occurring.

I stand corrected. You can't even trust your brokerage firm anymore!

[pitz]

I stand corrected. You can't even trust your brokerage firm anymore!

Yeah some dude in the United States was able to buy twice the shares outstanding in a business from the stock market, and have them credited to his brokerage account.

Oops! :( Somebody committed fraud there.