Naked short selling occurs when a seller sells a share of stock, and then fails to deliver it.
In a legitimate short sale, the seller first borrows a share of stock, and THEN sells it, hoping to buy it at a lower price before he returns it to the lender, his profit being the difference between the sale price, and his later buy price. It is a bet on a price decline, and legal as described. Sell high, buy low.
A naked short sale is a manipulative trading technique. It takes advantage of a structural deficiency in the system that allows a transaction to occur, and all moneys to be paid, before delivery occurs.
So a transaction goes by on the tape - a sale - and it is processed, and has an effect on the price of the stock, but the delivery portion of the transaction is left for days later. Meanwhile, the depressive effect of thousands of these sales extracts it toll on the price - the naked sales are still sales, and are treated as legitimate by the system.
At some point after the checks have been cashed and the commissions distributed and the fees paid, the share never shows up.
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