Naked Short Selling
Selling short without first borrowing or locating the shares.
What is Naked Short Selling?
Shorting a security without having borrowed it or confirmed it can be borrowed. Regulation SHO's locate requirement makes this generally prohibited in US equity markets because it can create phantom supply and lead to failures to deliver.
Naked Short Selling: a worked example
A trader sells 10,000 shares short with no borrow arranged and cannot deliver at settlement.
More terms in Positions & Trade Mechanics
Long Position
You own the asset and profit when its price rises.
Short Position (Short Selling)
You borrow shares, sell them, and profit if the price falls.
Margin
Borrowing from your broker to buy securities, using the account as collateral.
Cash Account
An account where every purchase is paid for in full, no borrowing.
Leverage
Using borrowed money to increase exposure relative to your own capital.
Initial Margin (Reg T)
The equity you must put up to open a margin position - generally 50%.
Maintenance Margin
The minimum equity percentage you must keep in a margin account.
Margin Call
A demand to add cash or securities after equity falls below maintenance.