[foomarks]

Ahh, ok, so blind speculation about even positive outcomes is dangerous (and I can see how this can be just as abused as shorting). So, I can see why paying attention to who is shorting and why they are shorting it is equally important.

Personally: I'm by no means a financial person — just super curious about the usury and trading world and the recent blow up that occurred.

I'm also super curious to see how economics will change from this point forward.

(That article that I posted says that germany wants to ban naked short selling.)

[hga]

"Blind speculation" on positive outcomes is I'm pretty sure fantastically worse, that's a cause of the worst sort of bubbles, the ones that destroy money wholesale (deflation), with sobering examples like the Great Depression and Japan's two Lost Decades (and counting ... and only WWII broke us out of the Great Depression).

Whereas covered short selling pretty much by definition has limited effects; for the purposes of the below, A > B > C

It works by someone borrowing (I don't remember the details so I'll accept Daniel_Newby's calling it renting) something and selling it at current price B. The short seller hopes that the price drops, so that he can buy it back at price C and make a profit on B - C - transaction costs etc.

One limiting factor is that unlike normal investing there is no theoretical limit to the short seller's losses. If the price goes up, he has to buy it at A and he loses A - B - etc. So you need to exercise greater care in taking a short position.

Short positions must be reported in the US and that sends information to the rest of the market. As Daniel_Newby points out, covered shorts make markets more "efficient", an important term of art and an important goal.

I've never come across a defense of deliberate naked short selling that made sense to me (it can also happen in "oops" situations, or so people say); as far as I can tell the only legitimate debates WRT it is how extensive the non-accidental type is and how hard should the latter be cracked down on.

[SkyMarshal]

The CEO of Overstock.com, Patrick Byrne, has been crusading against Naked Short Selling for most of the past decade, and with good reason. Among other socially undesirable uses, it is used by the mob to make fortunes by destroying small public companies. Everything you could possibly want to know about it here:

http://www.deepcapture.com/

Regular short selling is fine, and provides information, liquidity, a mechanism to enable Put options, and a much-needed reality check to sometimes irrationally exuberant markets.

The difference is that with regular short selling, the stocks you're borrowing to sell and then buy back later (hopefully at a lower price than you sold them) actually exist, and haven't also been simultaneously loaned to other short sellers.

Naked Short Selling is where some nefarious market participants exploit flaws in the DTCC to short sell many times more shares than are available for loan. This creates enormous, artificial downward pressure on the stock price of the company being naked shorted, which can destroy the company and turn its stock into penny stocks, while providing immense profits for the naked short sellers. It should be illegal everywhere.