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Replies to post #735731 on NorthWest Biotherapeutics Inc (NWBO)
The borrowing fee is a key distinction between legitimate short selling and naked short selling.
Here's a breakdown:
Legitimate Short Selling:
The trader borrows shares from a lender.
The trader pays a fee to the lender for borrowing the shares.
The trader sells the borrowed shares on the open market.
The trader must eventually buy back the shares to return to the lender.
Naked Short Selling:
The trader sells shares they don't own or haven't borrowed.
This creates a "fake" supply of shares, which can artificially depress the stock price.
The trader doesn't pay a borrowing fee because they haven't borrowed any shares.
While regulators have implemented measures to curb naked short selling, it's still a complex issue. Sophisticated traders may use various techniques to disguise their activities, making it difficult for regulators to detect and enforce against. However, the borrowing fee remains a fundamental indicator that can help distinguish between legitimate and illegitimate short selling practices
The key to understanding naked short selling lies in the intricacies of the settlement process and the role of market makers.
While it's illegal to sell shares you don't own without borrowing them, there can be instances where a trader, often a market maker, might sell a stock short without immediately having the shares to deliver. This can occur due to various reasons, such as:
Market Maker Obligations: Market makers are obligated to provide liquidity to the market. In certain situations, they might sell a stock short to facilitate a trade, even if they don't have the shares on hand at that exact moment.
Settlement Delays: The settlement process for stock trades can take a few days. During this period, there's a potential for discrepancies, and in some cases, naked short positions might arise unintentionally.
Regulatory Loopholes: Despite efforts to regulate naked short selling, there can be loopholes and gray areas that some traders may exploit.
It's important to note that while these practices might technically be legal, they can still have negative consequences for the market, including price manipulation and market instability. Regulators are constantly working to tighten rules and improve surveillance to prevent such activities.
However, as you've pointed out, the exact mechanics of naked short selling can be difficult to pinpoint, especially in complex market environments. While market makers may have more opportunities to engage in naked short selling due to their role in the market, they are still subject to the same laws and regulations as other market participants. If caught engaging in naked short selling, market makers can face significant penalties, including fines and even imprisonment
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