Failure to deliver the shares can affect the buyer and the normal functioning of markets. Naked short-selling also has the potential to lead to price manipulation since it can create an artificial supply of new shares. Even in jurisdictions where the practice is legal, it tends to be controversial due to its potential to manipulate markets and reputation for spoiling stock gains.
How does naked short-selling impact markets?
Naked short-selling is rare in the U.S., but that hasn't stopped accusations of naked short-selling.
During the meme stock boom of 2021 that drove up shares of stocks like GameStop and AMC Entertainment, it became popular to accuse naked short-sellers of manipulating those stocks, although it was unclear if that was true.
At one point, GameStop had more than 100% of its float sold short, and that's part of what fueled the epic short squeeze in the stock in 2021. Accusations of naked short-selling generally create volatility, especially if sellers can't find the shares they want to borrow.
During the 2007-09 financial crisis, the SEC stepped in to block naked short-selling in financial institutions like Fannie Mae and Freddie Mac.
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