Cracking Down On Short-Selling's 'Naked' Cousin

A more sinister cousin to short selling stocks is naked short selling. The practice has been blamed for eroding the value of financial stocks. Traders who sell short place a bet that the stock will drop. But traders involved in so-called "naked shorts" add to their risk.

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STEVE INSKEEP, host:

hat term Alix just used - naked short selling - takes a moment to explain. Yes, we're spending the moment, since the practice has been blamed for eroding the value of financial stocks. Here's how it works: traders who sell short, place a bet that the stock will drop. But traders involved in these naked shorts add to the risk. They sign a contract to sell shares at a specified price - let's say, $10 a share - now they have to get some shares to sell at that price. They're hoping that as the market drops they'll find shares cheap, let's say $5. Buy low, sell high. The risk is that the naked short-seller won't find any stock. He is exposed - or naked. That situation gives the naked short-seller a huge motivation to drive down a stock price. And it is considered illegal if it is used as part of a scheme to push down stock values.

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