Something to Watch for...???...Naked/illegal shortselling...
(the Actual number of shorted shares might be a lot higher than reported...
I will defer further comment on this matter...until a later date)...
Naked Short Selling Is Technically Illegal — But It Still Happens
Though the SEC made naked short selling illegal in 2008, instances of naked short selling have occurred in the U.S since. One famous example happened fairly recently, with GameStop shares.
“The most infamous recent example of naked short selling was the GameStop saga in 2021, where traders reportedly sold short around 140% of its shares,” Turner said. “This meant that 40% more shares were sold short than existed, which is only possible with ‘phantom’ sales from naked short selling.”
What this means, essentially, is that naked short sellers deposited digital entitlements into buyers’ accounts, “which are like a promise or IOU to locate the actual shares and deliver them at some point,” Turner explained.
“However, when the short squeeze picked up steam, the lack of available shares meant that many short sellers failed to deliver these borrowed shares. This led to a parabolic rise in the share price and many trades not getting settled.”
Naked Short Selling Continues Via Loopholes
Naked short selling continues today, albeit on a much smaller scale than it did prior to 2008. Though technically illegal, the practice is able to be executed through numerous loopholes, including zero-plus agreements.
“One way that traders have been able to circumvent laws and regulations against naked short selling is by entering into ‘zero-plus’ agreements, which allow them to simultaneously enter into long and short trades,” Turner said. “This means they can offset any potential losses from naked shorting while avoiding penalties from regulators.”
Another loophole traders can exploit is called “payment for order flow.” In this scenario, brokers “receive payment for routing orders away from exchanges and into dark pools, allowing them to bypass certain rules or restrictions on their trades,” Turner explained.
“This can make it more difficult for regulators to detect cases of illegal naked shorting since trades are routed away from exchanges, thus making the transactions more difficult to trace.”
Yet another fast one traders can pull is to employ multiple entities (e.g., offshore accounts) that disguise their activities so as to not raise suspicion from regulatory agencies.
“For example,” Turner said, “if an entity enters into a complex network of contracts spread out over several countries, investigators will likely have difficulty tracing back all the interlinked accounts involved in a single transaction.”
Naked short selling, when carried out, however deviously, is a generally negative occurrence that can upset and confuse the market.
AI
