SEC rules state that an audit trail must be made for every trade. Where any given block of shares comes from and who it goes to is a matter of recorded data. An audit trail is mandatory. It would show instantly any such 'naked shorting'.
And, short volume is not a negative thing - it simply shows how many shares are being bought and sold.
Why Short Volume is Important
Daily short volume, as reported by FINRA, is very misunderstood. Most people think daily short volume is just that — the volume that bearish investors put on to add to their short positions. A short glance at the change for total short positions reported bimonthly to the NASDAQ debunks that belief. Short volume isn’t the same as short interest.
In truth, much of the short volume is due to market makers selling into the market a few fractions of a second/minute/hour before they close their position by executing a broker order. Due to the fact that market makers cover many of their positions seconds later, much of the short volume isn’t necessarily an indication of useful bearishness. The fact that a market maker is willing to sell and cover seconds later doesn’t do an investor holding the stock for the long term any good. The market maker could be bullish on the stock long term, and still be willing to short temporarily to satisfy a client request. Similarly, many market makers often have to go short in a fast market in order to fulfill their job of providing liquidity. Other market makers will widen their bid ask prices enough to get out of that scenario.
Nevertheless, short volume data is important — market makers are some of the most informed investors out there and they know the supply and demand equation of a stock better than almost everyone. Some do trade for their personal accounts and their shorting shows up in the short volume. Like other technical indicators, if enough people believe in something, that something can happen. It is also true that when factoring in the trend and potential randomness, a market maker could be potentially bearish if the short percent is substantially higher than average. The market maker could be potentially bullish if the short percent is lower than average.
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