what is naked short selling 
naked short selling is a notorious trading practice that has been largely banned in the u s and eu since the 2007 2008 crisis but that doesn t mean the practice still doesn t occur it was banned because naked short selling is when the seller sells securities they do not own or have not borrowed which leads to a lack of supply for the shorted securities and a potential drop in the price 1the aim is to profit from a decline in the asset s price by later buying the shares at a lower cost to cover the short position this is different from traditional short selling when you borrow the shares before selling them 1understanding naked short sellingyou re engaged in naked short selling when you sell shares in an asset without owning borrowing or securing the right to borrow them unlike traditional short selling when you borrow the shares before selling them in naked short selling you haven t taken on the greater risk of borrowing the asset first 1the practice is highly risky and could lead to unlimited losses the sec and other regulatory bodies such as the european securities and markets authority esma say it contributes to market volatility and is highly unethical you re distorting the regular supply and demand of a security and taking on the risk that you might try to flee from all by selling a right to something you don t have while naked short selling could offer lucrative profits the risks and ethical considerations make it highly scrutinized and illegal 112naked short selling processthe method of naked short selling involves two main steps first you sell shares without owning borrowing or securing the right to borrow them later you purchase and deliver the shares at the market price hoping for a profit if you can t afford the shares or if they aren t available the result is a failure to deliver ftd 3let s use a simplified example suppose you sell short 1 000 shares in company a you haven t borrowed the shares still you re betting on a rapid downturn in the stock price for company a which makes this not a problem the price going down should mean many sellers are looking to get out of their positions just before the deadline to deliver the shares the price moves downward and you close out the short sale for 1 000 shares at the lower price you ve essentially bet you could square up for the shares you sold that you didn t possess however if the market moved the other way you d be in a big hole trying to purchase 1 000 shares of a stock at a great loss and the shares might not even be available if there are problems in liquidity short selling in general can create declines in a company s stock price affecting its ability to raise capital it can also affect the liquidity of the security when a share isn t readily available naked short selling gives you a shortcut you can participate in the market even though you didn t borrow the share this could create false liquidity readings which could distort the share price 24naked shorting was precluded in regulatory changes in 2005 but further regulatory scrutiny jumped after the 2007 2008 financial crisis in reaction to the piling on of shorts for failing financial giants lehman brothers and bear stearns 5