Short sellers bet against a stock. They borrow a company’s shares – sell them – and then buy them when the stock falls and return the shares to the lender while pocketing the difference in price.
“Naked” Short Selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale. Naked Short Selling has put out of business 6000 small public companies in the past 15 years. Naked Short Selling has been a loophole regulators (SEC) Market Makers, Hedge Funds and brokerage houses have been allowed to take advantage of.
The SEC Rule includes a requirement that brokers must Buy or Borrow securities to deliver on a short sale within four days or be subject to penalties. Another option would prohibit short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the Uptick Rule is to prevent selling sprees that feed upon themselves and batter a stocks share price.
An alternative approach would ban short selling for the remainder of a trading session in a stock that declines by 10 percent or more. The SEC could decide on a final course of action by years end.