In the heart of Manhattan’s Financial District


In the heart of Manhattan’s Financial District

What is naked short selling, and why is it illegal?

On Behalf of | Sep 14, 2022 | White Collar Crimes |

If you want to engage in the highs and lows of the stock market, New York certainly provides ample opportunity and plenty of people willing to give advice. Both the state and federal government have enacted a number of laws designed to protect potential investors from unfair trading practices. One of the most commonly violated trading laws forbids naked short selling.

What is short selling?

Short selling involves trading or investment strategies based on speculation about a decline in stock or security. When investors engage in short selling, they attempt to profit through the stock’s decline. The steps in short selling go in this order:

• You borrow a stock you believe will fail.

• You sell your shares for the current price.

• The price suddenly declines.

• You purchase shares at a reduced price.

• Your net gain is the difference between what you paid for the reduced price and the price you sold it for originally.

Short selling can result in extreme profits but involves taking a considerable risk. By itself, short selling is not an illegal trading activity.

How is naked short selling different?

Naked short selling bypasses the step of borrowing the shares. During naked short selling, shares are sold that the seller does not own. In some cases, the stock shares may not even exist. Naked short selling became illegal and joined the list of white-collar crimes following the 2008 financial crisis.

What consequences can you face for naked short selling?

Since naked short selling is a white-collar crime, you may expect that the consequences will be less severe than those for a violent crime. However, the federal and state governments treat white-collar crimes very seriously. If charged with naked short selling by the U.S. Securities and Exchange Commission, you could face injunctions, civil penalties, incarceration, and fines.


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