Selling shares that have not been borrowed or confirmed to exist, creating phantom stock
Naked short selling is the practice of selling shares of a stock without first borrowing or confirming the availability of those shares to deliver to the buyer. In a normal short sale, a seller borrows shares, sells them, and later buys them back to return to the lender — profiting if the price drops. In a naked short sale, the seller sells shares they have not borrowed and may not even exist, effectively creating phantom stock that dilutes the value of real shares.
While naked short selling is nominally prohibited by SEC Regulation SHO, enforcement has been criticized as inadequate. "Failures to deliver" — instances where sold shares are not delivered within the required settlement period — have persisted at significant levels, suggesting ongoing naked short selling activity. The SEC's own data shows millions of shares in "failure to deliver" status daily across various securities.
The GameStop episode in early 2021 brought naked short selling into public consciousness. Retail investors discovered that short interest in GameStop exceeded 100% of available shares — a mathematical impossibility without naked short selling or similar practices creating synthetic shares. The incident revealed to a mainstream audience what financial reform advocates had argued for years: that the market infrastructure enables forms of manipulation that systematically disadvantage retail investors.
