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The Wikipedia article on naked short selling says

It is difficult to measure how often naked short selling occurs. Fails to deliver are not necessarily indicative of naked shorting, and can result from both "long" transactions (stock purchases) and short sales.[4][16] Naked shorting can be invisible in a liquid market, as long as the short sale is eventually delivered to the buyer.

My understanding is that with normal short-selling, the share is delivered immediately. Whereas with naked short selling, the share cannot be delivered until the short-seller repurchases it.

So my question is, why doesn't this difference in timing of delivery reveal whether a short sale is naked or not? Similarly, if you take the other side of a short sale, how could you tell whether it's naked?

I'm most interested in the U.S. stock market. I hope the question is not too applied for this site.

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  • $\begingroup$ FTD (failure to deliver) is not uncommon. It is difficult to distinguish between "sorry, your shares have not been delivered because of a paperwork screw up in our back office, we will try again tomorrow" as a legitimate excuse vs a situation where the person has no intention to deliver because they don't have the shares. Those people can use the same excuses to string you along for a while, and hen deliver the shares by stiffing someone else on their delivery. (Sort of like "the check is in the mail" argument I use when I owe money ;) ). $\endgroup$
    – nbbo2
    Commented Jan 28, 2021 at 0:05
  • $\begingroup$ Thanks for this info. I have trouble understanding (since I don't have practical experience) how this can happen with any frequency in an age of seemingly-instant electronic trading. $\endgroup$
    – usul
    Commented Jan 28, 2021 at 4:26
  • $\begingroup$ There are definitely things that could be done to improve the settlement process and bring it to 21st century standards. But it is a slow process and depends on many people's desire and willingness to change. Inertia is a factor; regulators can push for change. $\endgroup$
    – nbbo2
    Commented Jan 28, 2021 at 10:38

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Since nobody has answered yet, I'll consolidate what noob2 wrote in the comments and what I've read elsewhere.

Settlement in the U.S. normally takes at least two days from the time the trade actually occurs. This is called T+2. I don't know exactly what happens during those two days, but it sounds like no details on exactly which share was sold, or if it exists, have to be provided until then (?). So if the seller can find a share within two days, their naked short sale will go undetected.

For instance, today, Michael J. Burry had a tweet about it taking multiple weeks to settle his shares last year.

May 2020, relatively sane times for $GME, I called in my lent-out GME shares. It took my brokers WEEKS to find my shares. I cannot even imagine the sh*tstorm in settlement now. They may have to extend delivery timelines. #pigsgetslaughtered #nakedshorts

https://twitter.com/michaeljburry/status/1355221824661983233

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