How are naked shorts handled Naked short selling, which involves selling shares of a stock that the seller does not actually own, is illegal under SEC rules. However, detecting and prosecuting naked short sellers can be challenging, as it often involves complex trading strategies and transactions that can be difficult to trace.
The SEC has several tools and techniques that it can use to investigate and prosecute naked short sellers. These include:
Surveillance and monitoring: The SEC uses sophisticated technology to monitor trading activity in the stock market and identify potential cases of naked short selling. This can involve analyzing trading data, order book data, and other market data to detect patterns of suspicious trading activity.
Enforcement actions: The SEC can bring civil enforcement actions against individuals or firms that engage in naked short selling. These actions can result in fines, injunctions, and other penalties.
Criminal prosecution: In some cases, naked short selling may be prosecuted as a criminal offense, particularly if it is part of a broader fraud scheme. The Department of Justice may work with the SEC to investigate and prosecute cases of naked short selling.
Regulatory actions: The SEC can also take regulatory actions to prevent naked short selling, such as imposing short sale restrictions or requiring firms to locate and deliver shares before engaging in short sales.
Overall, investigating and prosecuting naked short sellers can be a complex and challenging process, but the SEC has a range of tools and techniques at its disposal to detect and deter this illegal activity.