Naked Shorting

30 Pages Posted: 30 Apr 2007 Last revised: 21 Dec 2014

Christopher L. Culp

Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise; Swiss Finance Institute; Compass Lexecon; Risk Management Consulting Services, Inc.

J.B. Heaton

Bartlit Beck Herman Palenchar & Scott LLP

Date Written: April 26, 2007

Abstract

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.

Keywords: Naked Shorting, Short Selling, Manipulation

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

Suggested Citation

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

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 Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Compass Lexecon ( email )

332 South Michigan Avenue
Suite 1300
Chicago, IL 60604
United States

Risk Management Consulting Services, Inc. ( email )

1501 N. State Pkwy., No. 7A
#7A
Chicago, IL Illinois 60610
United States
3125877163 (Phone)

HOME PAGE: http://www.rmcsinc.com

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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