The SEC implemented Regulation SHO in 2005 because Market Makers and Brokers were abusing Naked Shorting. Under Regulation SHO MMs can still Naked Short if under their own opinion that they are doing so to 'Make a Market'. They have 3 days to cover their Shorting and deliver the shares to the Buyer. If the MM doesn't cover their Short in 3 days there are no serious consequences until day 13.
In many volatile Penny Stocks 3 days is plenty of time 'Kill a Run' or create a 'False Dive' in a SP and cover the shorting.
The proof that Naked Short Selling is still a problem are the cases that the SEC/FINRA bring against Brokers/MMs. For every 1 that they catch there are dozens that get away with it. Most will remember the high profile Naked Shorting cases like Game Stop and Overstock. The infamous Bernie Madoff, a former chairman of the NASDAQ stock exchange, was a Broker-Dealer who was heavily into Naked Shorting before his scheme fell apart.
The organizations behind the stock market, OTC Markets, FINRA, ect., tend to down play the damage that Naked Shorting can do as they want to portray their Markets as safe for investors. Many times the illegal use of shorting continues until an insider blows the whistle.
SEC Charges Chicago-Based Broker-Dealer with Violations of Regulation SHO
ADMINISTRATIVE PROCEEDING
File No. 3-20961
August 12, 2022 - The Securities and Exchange Commission today announced settled charges against Chicago-based registered broker-dealer IMC Chicago, LLC ("IMC") for violations of Rule 203(b)(1) of Regulation SHO through its Single-Dealer Platform ("SDP").
The SEC's order finds that from approximately June 2017 through November 2020, IMC violated Regulation SHO by executing millions of short sale trades through the SDP while improperly relying on the bona-fide market making exception to the "locate requirement" for short sales in Rule 203(b)(2)(iii). The order finds that IMC did not qualify for the bona-fide market making exception to the locate requirement because it was not engaged in bona-fide market making on the SDP at the time of these short sales.
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FINRA Penalizes UBS Securities $2.5M for 73,000 ‘Naked’ Short Sales (doing it for 9 years before they got caught)
Wednesday, 05/10/2022 | 10:58 GMT by Solomon Oladipupo
The self-regulatory organization, which supervises brokerage firms in the United States, said UBS Securities violated Rule 204 of the US Securities and Exchange Commission’s Regulation SHO (Reg SHO).
Additionally, the brokerage’s supervisory failures to uphold Reg SHO rules within a period of nine years attracted the penalty, FINRA announced on Wednesday.
Reg SHO, a set of rules introduced in 2005, regulates the practice of short sales or the sale of borrowed securities in the United States.
According to FINRA, the rule “requires firms to take affirmative action to close out ‘failure to deliver’ positions resulting from short sales in equity securities by borrowing or purchasing the securities by the beginning of regular trading hours the day after the settlement date.”
However, the private regulator said it found at least 5,300 ‘failure to deliver’ positions in UBS' systems between 2009 and 2018.
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FINRA Penalties And Regulation SHO Breaches At WEDBUSH Securities[/
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2022-09-29 01:20
Wedbush Securities, Inc. violated Regulation SHO Rules 204(a), (b), and (c) and FINRA Rule 2010 by failing to timely close out 2,056 fail-to-deliver positions as required by Rule 204(a), failing to place securities in the "penalty box" as required by Rule 204(b), and failing to comply with the notice requirement of Rule 204(c).
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The Regulation SHO Daily Report is one of the few tools investors have to discern what MMs did on a given day.
