Naked Short Selling

Definition: The most basic form of short selling is where you sell stock that you borrow from an owner and do not own. You have delivered the borrowed shares. Another form of short selling is when you do not own the stock and do not borrow them from someone else. In this type of transaction,  you owe the shorted shares but “fail to deliver them to the owner.”

Explanation: These naked short sales are typically done by market makers because they tentatively need to in order to maintain liquidity in the options markets. These options market makers are often brokers of large hedge funds, who abuse the options market maker exemption.