Shorting involves borrowing shares from a broker, then selling them in the hope they will fall in price and can then be bought back for a profit and returned to the lender.
A ‘naked’ short involves shorting shares that are not available to borrow. This can arise due to the gap in stock trades between the deal date and delivery date – typically three working days. Brokers should ensure that shares they don’t own, but plan to lend to shortsellers, will be delivered to them within that three-day window.
But some ‘easy to borrow’ US shares can be lent out without the broker finding them first. Should they not then turn up, the borrower has unintentionally sold ‘naked’. Deliberate naked selling is banned in America.
• See Tim Bennett’s video tutorial: Why a short-selling ban won’t work.