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Naked Shorting

Christopher L. Culp

Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise; Swiss Finance Institute; Compass Lexecon

J.B. Heaton

Bartlit Beck Herman Palenchar & Scott LLP

April 26, 2007

Regulation, 2008

A "naked short sale" is a short sale of stock in which the seller does not own the shares and essentially has no plans to acquire the stock by the settlement date. We review the standard economic arguments for and against the speculative short sale of equities and explain the strong economic similarities between permissible short selling and impermissible naked short selling. Despite the legal prohibitions on the latter, we show that, from an economic perspective, naked shorting is not fundamentally different from traditional short selling and is unlikely to have detrimental effects on capital markets. Nevertheless, we explain how naked shorting can provide the basis for securities manipulation lawsuits under the federal securities laws for long sellers and, in some circumstances, for issuers.

Number of Pages in PDF File: 30

Keywords: Naked Shorting, Short Selling, Manipulation

JEL Classification: G12, G21, G28, G32, K22, K42

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Date posted: April 30, 2007 ; Last revised: December 21, 2014

Suggested Citation

Culp, Christopher L. and Heaton, J.B., Naked Shorting (April 26, 2007). Regulation, 2008. Available at SSRN: http://ssrn.com/abstract=982898 or http://dx.doi.org/10.2139/ssrn.982898

Contact Information

Christopher L. Culp
Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise ( email )
3400 N. Charles Street
Baltimore, MD 21218
United States
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Compass Lexecon ( email )
332 South Michigan Avenue
Suite 1300
Chicago, IL 60604
United States
J.B. Heaton (Contact Author)
Bartlit Beck Herman Palenchar & Scott LLP ( email )
Courthouse Place
54 West Hubbard Street
Chicago, IL 60610
United States
312-494-4425 (Phone)
312-494-4440 (Fax)
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