Why Settlement Timing Obscures Naked Short Selling
Summary
The document considers why naked short sales can be hard to identify from delivery timing. It explains that a trade is not necessarily settled immediately: in the U.S. settlement framework described in the answer, there is a delay between execution and the deadline for delivering shares. If a seller locates shares before settlement, an initially uncovered short sale may not be distinguishable from an ordinary short through the eventual delivery alone. The discussion also notes that fails to deliver are not conclusive evidence of naked shorting, since they may arise from other transactions or operational causes.
The answer is an informal explanation, not a detailed account of clearing, lending, or regulatory reporting. It refers to T+2, which reflects the settlement convention at the time of the source and should not be treated as current U.S. settlement timing. A cited anecdote about delayed share recall illustrates settlement friction but does not establish how common naked shorting is or provide a measurement method.
Key ideas
- A gap between trade execution and settlement can make an uncovered sale difficult to distinguish if shares arrive before delivery is due.
- A failure to deliver does not by itself establish that a naked short sale occurred.
- The answer's T+2 description is historical and should not be assumed to represent current U.S. settlement timing.
- The anecdote about delayed share recall illustrates a possible settlement problem but does not measure its prevalence.
Tags
Full text
# Why is naked short selling "difficult to measure"? # Why is naked short selling "difficult to measure"? 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. ## Answer by usul (score 2, accepted) https://quant.stackexchange.com/a/60812 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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