Current Naked Short Selling Rules & Fines

Image: Adam Aron CNBC

Naked short selling is a controversial trading practice that involves selling shares of a stock without first borrowing or locating the shares. This creates a situation where the seller does not actually own the shares they are selling, and therefore cannot deliver them to the buyer on settlement day. Naked short selling is illegal in many countries, including the United States, and is often viewed as a form of market manipulation.

In recent years, regulators have increased their focus on naked short selling and have implemented stricter punishments for those who engage in this practice. The Securities and Exchange Commission (SEC) in the United States has been particularly active in pursuing cases of naked short selling and has imposed significant fines and penalties on those found guilty.

One recent example of the SEC’s crackdown on naked short selling occurred in 2021, when the agency fined several individuals and companies a total of $67 million for engaging in the illegal practice. The SEC alleged that these individuals and companies engaged in naked short selling of microcap stocks, which are often more susceptible to market manipulation due to their low liquidity.

In addition to fines, regulators have also implemented other punishments for those found guilty of naked short selling. These can include suspensions or revocations of trading licenses, as well as criminal charges and prison time in extreme cases.

One reason for the increase in regulatory action against naked short selling is the potential harm it can cause to the broader market. When traders engage in naked short selling, they can artificially drive down the price of a stock, which can harm investors who own shares in the company. Additionally, naked short selling can create a situation where there are more shares being sold than actually exist, which can cause confusion and volatility in the market.

Regulators have also implemented new rules and regulations designed to prevent naked short selling from occurring in the first place. For example, the SEC has implemented a rule requiring brokers to deliver shares they sell to buyers within two days of the trade, which makes it more difficult for traders to engage in naked short selling.

Despite these efforts, naked short selling continues to be a problem in some markets, and regulators are likely to continue to pursue cases of this illegal practice. As investors become more aware of the potential harm caused by naked short selling, they are likely to demand stronger action from regulators to prevent it from occurring in the future.

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