SEC questioning the practice of naked shorting
The SEC is finally giving some input on the practice of naked short selling but only in the realm of some desperate financial companies. The rest of the market is still available to short to the death as often happens with small cap stocks.
Naked shorting is selling shares before it is known that any shares can be bought back. Often this is done well past the companies float and to such an extent that share prices simple have to drop. The downward pressure that billion dollar firms can put on shares with naked shorts is tremendous, the SEC should jump in and stop this practice now.
Smaller traders will never be able to hold naked shorts as only large institutions are given the power to naked short. Naked shorting is obviously very profitable, consider the possibilities of shorting a stock like Bear Stearns which you knew was going to fail so you sold every share you possible could. Who cares about buying it back later, you can make good eventually.
The problem of naked shorting is that the market can be shorted faster than it can be bought. Imagine if the entire Dow was shorted to 150% of its float. There would be no chance that the index could go higher, institutions would be able to hold it down for however long they wanted. Past that, they would be able to bring a huge turnaround in prices when the shares are bought back. A vicious cycle occurs when institutions have the power to kill shares then stage a huge rebound when the short squeeze occurs.
The SECs involvement in the market finally works out to the advantage of the average trader. The reigns on naked shorting need to be pulled back and the market should work within its bounds. Lets hope a ban on naked shorts is on its way.