Zeev's Turnips Patch-No Politics (ZEEV)

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I only figured it out in the past year, after being in trading stocks for nearly two decades. LOL. Here's the fundamental problem: say you short 1000 shares of XYZ, and the broker borrows 1000 shares from my account to "lend" to you for the order execution on Monday; there is nothing proventing me from selling those same 1000 shares of XYZ on Tuesday or Wednesday, or even later on Monday. Come Thursday, your trade needs to settle, but you can't borrow from my account as I no longer have the shares, so you are naked as naked can be.

It gets worse than that: after you borrow those 1000 shares of XYZ from my account for execution, without any explicit knowledge on my part (general margin account gives broker the right to borrow shares from my account without ever informing me of such borrowing) I can not only sell my 1000 shares, but also go short myself for another 1000 shares! Where do you think the broker might borrow those 1000 shares for me? well, he may borrow those shares from your account! as you are supposed to be sitting on those shares in your account after borrowing for execution but before settlement. So now, 3000 shares are sold, all because there were 1000 shares to begin with. There is "pre-borrowing" in all the trades!

Now you see why I have been saying, attacks against "naked shorting" is diversion. The real issue is lack of enforcement against "trading for effect," which is illegal. The total number of shares sold is not nearly as important as per centage of trades taking place in a short time frame by a would be price manipulator. Market prices are decided on the margins where transactions take place, not by the holders (long or short) sitting on the sidelines. For example, look at the housing market, the transaction volume is miniscule compared to the number of houses out there; that does not however prevent the small number of transactions drive up prices in a bubble due to panic buying or the even smaller number of transactions crash down price due to panic/forced selling. Far more new houses (created out of much cheaper material) were sold in the boom years than now, that did not cause the price to crash during the boom years. In fact, easy creation of new houses help moderate the magnitude of boom and bust, contrasting with places with severe zoning rules that prevent the creation of new supply.