Part 3
Extent of naked shorting
The reasons for naked shorting, and the extent of it, have been disputed for several years before the SEC's 2008 action to prohibit the practice. What is generally recognized is that naked shorting tends to happen when shares are difficult to borrow. Studies have shown that naked short selling also increases with the cost of borrowing[reference needed].
In recent years, a number of companies have been accused[by whom?] of using naked shorts in aggressive efforts to drive down share prices, sometimes with no intention of ever delivering the shares.[13] These claims argue that, at least in theory, the practice allows an unlimited number of shares to be sold short. A Los Angeles Times editorial in July 2008 said that naked short selling "enables speculators to drive down a company's stock by offering an overwhelming number of shares for sale."[16]
The SEC has stated that naked shorting is sometimes falsely asserted as a reason for a share price decline, when, often, "the price decrease is a result of the company's poor financial situation rather than the reasons provided by the insiders or promoters."[4]
Before 2008, regulators had generally downplayed the extent of naked shorting in the US. At a North American Securities Administrators Association (NASAA) conference on naked short selling in November 2005, an official of the New York Stock Exchange stated that NYSE had not found evidence of widespread naked short selling. In 2006, an official of the SEC said that "While there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident."[17] Of all those that do not, 85% are resolved within 10 business days and 90% within 20.[17] That means that about 1% of shares that change hands daily, or about $1 billion per day, are subject to delivery failures,[5] although the SEC has stated that "fails-to-deliver can occur for a number of reasons on both long and short sales," and accordingly that they do not necessarily indicate naked short selling.[4][14]
In 2008, SEC chairman Christopher Cox said that the SEC "has zero tolerance for abusive naked short-selling" while implementing new regulations to prohibit the practice, culminating in the September 2008 action following the failures of Bear Sterns and Lehman Brothers amidst speculation that naked short selling had played a contributory role.[9][18] Cox said that "the rule would be designed to ensure transparency in short-selling in general, beyond the practice of naked short-selling."[9]
