The rule is that you have to be able to deliver the stock within 3 days. So you can naked short a stock if you have to make a market in it by selling it when everyone else is buying. Then after the frenzy subsides, you simply correct the imbalance and make the position whole.
But hedge funds don't do that. They can take a stock like OSTK and keep selling it down giving the false impression that it's under major selling pressure when it's not. That's the problem with naked shorting. If there was truly no stock to borrow to short, then the OSTK CEO is correct, stocks like his wouldn't be where they are.
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