Naked Short Selling

In a naked short sale the seller enters a sell order for stock it neither owns nor has arranged to borrow, intending to source the shares later — or to buy them back intraday and never deliver at all. The trade creates a delivery obligation with nothing behind it. If the seller cannot obtain shares before settlement, the trade fails.

Australia prohibits the practice for listed securities. Section 1020B of the Corporations Act 2001 requires a seller to have a presently exercisable and unconditional right to vest the products in the buyer at the time of sale, which in practice means a securities lending arrangement confirmed as a locate. ASIC Regulatory Guide 196 sets out the guidance around the prohibition and the related disclosure regime. Limited exceptions exist, principally for market makers meeting defined obligations, and these are narrowly drawn.

The concern is not that naked shorting is bearish. It is that an uncovered sale creates a claim to shares that may not exist, which can depress a price beyond what the available supply would support and leaves the buyer exposed to settlement failure. Repeated or systemic fails also erode confidence in the settlement system itself.

Persistent fails to deliver are the usual footprint. The ASX operates a settlement discipline regime with close-out requirements and fail fees, and publishes settlement fail statistics; ASIC investigates suspected breaches and has pursued enforcement action for uncovered short selling. Because a fail can also arise from ordinary administrative error or a recall going wrong, a single fail is not itself evidence of naked shorting.

None of this appears in the short position data. What ASIC publishes is the aggregated net short position of participants who have complied with their reporting obligations, all of which relate to covered positions. Claims that a heavily shorted stock is being naked-shorted cannot be tested with the public dataset, which is one reason the numbers on this site should be read as disclosed positioning rather than as a complete account of every trade.