Just read Robert Murphy’s article on naked short sale restrictions.
While agree with Mr. Murphy that there shouldn’t be any restrictions on short selling itself, I have a different opinion on naked short selling.
The real issue is not on whether the short seller can borrow the stock before or a few hours after. I believe there is still the flexibility of borrowing the stock before the trade settles (ie, 3 business days after the trade is made). However, I could be wrong on that.
The issue is that some traders never intend to borrow the shares at all. This is the crux of the problem. So, a trader can keep shorting shares of ABC company with no concern of borrowing it, with the intention of buying it back at a lower price. So, what’s the problem ? Effectively the trader is counterfeiting the shares of ABC. Note that, naked short selling would be impossible without actually counterfeiting the shares, if all shares were delivered as paper certificates to the shareholders.
I believe that only ABC has the rights to issue share certificates for their company. Besides, it doesn’t make sense that you can sell something that you don’t have.
The price manipulation is not necessarily effected by spreading false rumours. A trader could flood the market with massive amount of shares of ABC and drive down the price. He could buy it back at a lower price after the momentum has driven the stock down.