July 18, 2008
There are two reasons naked shorting is improper and hurts markets. I am not opposed to short sales, as they do provide liquidity to the market and help expose over valued stocks.
REASON 1: From my own experience, it is clear that the average investor must get brokerage firm approval to short, based on shares being available. This apparently is not the case for some large investors. The clearly means that some investors are playing by different rules, which makes the markets (at least) appear to be unfair.
REASON 2: The basis for pricing, from Economics 102 is supply and demand. This applies to shares.
Allowing naked shorts provides an unlimited supply of shares for sale. This is a clear distortion of the pricing mechanism. The counter-balancing mechanism of supply and demand is canceled.
Please make naked short selling completely illegal. Even if you provide a three day window after the trade in which to actually borrow the shares and deliver, with disgorgement should the shares not be borrowable.