How to Fight Naked Shorts in the Stock Market 

Jorge Olson

June 2, 2023

How did AMC, GameStop, and Overstock Fight the Naked Shorts? 

What are Naked Shorts? 


As a stock market investor, you may have heard of the term “naked shorts.” But what exactly are naked shorts, and why do they matter? In this article, we will delve into the controversial practice of naked shorting and explore its implications for investors and companies. 

Naked shorts are a form of short selling in which a trader sells shares without first borrowing or locating them. This practice is illegal in the United States but can be challenging to enforce. Naked short selling can artificially drive down the price of a stock, leading to financial harm for investors who own that stock. It can also make it challenging for companies to raise capital. 

To understand how naked short-selling works, let’s take an example. Imagine a trader who wants to profit from a company’s declining stock price. The trader sells shares in that company without actually owning them. The trader hopes that the company’s share price will fall so they can purchase those shares at a lower price and make a profit. However, if the share price does not drop as expected, the naked short seller will have to buy those shares at their current market value to cover their position. This could result in significant losses for the seller. 

The Securities and Exchange Commission (SEC) is responsible for enforcing rules against naked short selling in the U.S. Still, it’s challenging to prove this activity is taking place because traders can use complex trading strategies that make it difficult for regulators to detect. If you suspect that you have been affected by naked shorts as an investor or shareholder, you have recourse: file a complaint with your local SEC office or state securities regulator. 

The controversy surrounding naked shorts has come into sharp focus recently with notable cases involving GameStop and AMC Entertainment Holdings Inc., both of which experienced dramatic swings in their respective stock prices due mainly to social media-fueled buying frenzies by individual investors. Here we will explore how naked shorts can impact a company’s stock price and what steps investors can take to protect themselves from this controversial practice. 

But for now, it is essential to understand that naked shorting is a harmful trading practice that has significant consequences for investors and companies. As an investor in the stock market, it is crucial to stay vigilant and informed about potential naked short-selling activity in your portfolio or stocks of interest. 

How do Naked Shorts Impact the Price of a Stock? 

 Naked shorts, a controversial and illegal trading practice, are known to impact a stock’s price significantly. The artificial oversupply created by naked shorting can create downward pressure on the stock’s price. This is because naked shorting involves selling shares without borrowing or locating them, resulting in an oversupply of the stock in the market. When more shares are available than buyers are willing to purchase, it can lead to a decrease in demand and subsequently cause the price to drop. 

 In addition to artificial oversupply, naked short sellers can manipulate the stock’s price by flooding the market with additional shares. This increased selling pressure can drive down prices, potentially causing losses for long-term investors who may be forced to sell their shares at lower prices. 

 Moreover, naked shorts can introduce volatility into the market and trigger panic selling as sudden drops in stock prices due to naked shorting may lead to further price declines and increased market instability. The presence of naked shorts also erodes investor confidence in a stock, as perceptions of market manipulation and unfair practices can deter potential investors from investing in that company. This decreased demand further leads to reduced prices. 

 Companies targeted by naked shorts may experience difficulties raising capital or executing their growth strategies. Depressed stock prices resulting from naked shorting can limit their access to funding, hindering their expansion plans. It is important to note that various factors impact how much impact naked shorts have on stocks, such as overall market conditions, level of short interest present, and resilience of investor’s confidence but still, regulatory measures exist which aim towards promoting transparency and reducing manipulation practices while ensuring a fair trading environment for all participants. 

 Regulatory measures must be in place to monitor and address naked shorting practices to maintain market integrity and protect investors’ interests while reducing negative impacts on companies’ access to funds.  

Naked shorts have a significant impact on the price of a stock as they create an artificial oversupply of shares, manipulate prices and introduce volatility into the market. They also erode investor confidence and negatively impact companies. Therefore, regulatory measures are crucial in monitoring and addressing these practices while promoting transparency, reducing market manipulation, and ensuring a fair trading environment for all participants. 

 Naked Shorts vs. Shorting Stocks 

 As we delve deeper into the trading world, it is essential to understand the difference between naked shorts and shorting stocks. While these two concepts may seem similar, they have distinct differences that every investor must know. 

 Shorting stocks is a legitimate trading strategy employed by investors. It involves borrowing shares from a broker or another party with the intention of selling them on the market. The goal here is to profit from a decline in the stock’s price. After selling borrowed shares, investors plan to repurchase them at a lower price, return the borrowed shares, and keep the difference as profit. 

 Before shorting a stock, an investor must locate and borrow the shares to ensure the transaction is executed correctly. This process involves finding shares available for borrowing or arranging an agreement with a lender. Short selling has regulations imposed by regulatory bodies and exchanges to maintain market integrity and protect investors. It is essential to follow these regulations while short-selling stocks. 

On the other hand, naked shorts are considered controversial trading practices that deviate from shorting stock rules. Naked shorting involves selling shares without actually borrowing or locating them; traders essentially create a temporary oversupply of stock in the market without possessing it. 

 Naked shorts are often criticized for their potential to distort market dynamics and manipulate stock prices since they can introduce artificial selling pressure and drive down prices artificially. It’s important to note that naked shorting violates regulations due to its lack of proper borrowing and locating of shares; regulators aim to address this practice and promote fair and transparent market conditions. 

 While both strategies may seem similar at first glance, there are significant differences between naked shorts vs. short-selling stocks that every investor should know about before implementing any trading strategy in their portfolio. 

 As an investor seeking success in today’s complex financial landscape, it’s crucial always adheres to regulations and ethical practices when investing in the stock market. By doing so, we can maintain market integrity and protect the interests of all participants. 

Naked Shorts vs. Buying Stocks 

 As we dive deeper into the world of stock market trading, it’s essential to grasp the fundamental differences between buying stocks and naked shorts. These two approaches are at opposite ends of the spectrum, and understanding their distinctions is crucial to navigating the market successfully. 

 Buying stocks, also known as investing or going long, involves purchasing shares in a company with the intention of becoming a shareholder. Investors acquire ownership in the company by buying shares, giving them rights to receive dividends, participate in voting and potentially benefit from capital appreciation. Buying stocks is often considered a long-term investment strategy where investors hold onto their shares for years or even decades. 

In contrast, naked shorts are a controversial trading practice that involves selling shares without actually borrowing or locating them. This approach does not involve acquiring ownership in the company and seeks to profit from price declines by selling shares traders do not possess. Naked shorts are typically associated with short-term trading strategies as positions are closed relatively quickly to capitalize on anticipated price declines. 

 Investors need to understand each approach’s risks and implications before buying stocks or naked shorts. While buying stocks is viewed as an ethical investment strategy that adheres to regulatory guidelines, naked shorting raises concerns about market manipulation distorting stock prices and market dynamics. 

Naked shorts raise eyebrows because traders sell shares they don’t possess or haven’t borrowed, creating a temporary oversupply of the stock in the market. Short sellers aim to profit from a price decline by selling shares with an expectation that they can repurchase them at a lower price than their initial sale value, thus retaining the difference as profit. It is viewed as a violation of regulations due to its lack of proper borrowing or locating of shares. 

 On the other hand, when buying stocks, investors contribute towards demand which potentially drives up stock prices based on supply-demand dynamics; buyers anticipate that stock value will rise over time, thereby profiting from an increase in stock’s price by selling it at a higher value than their initial purchase price. Buying stocks is considered a long-term investment strategy, with investors holding onto their shares for an extended period of time. 

 The battle between naked shorts and buying stocks persists in the stock market world. It raises many ethical concerns about market manipulation that regulators must address continuously. Traders must research thoroughly before investing in either approach to make informed decisions based on their risk tolerance levels. 

Naked Shorts vs. Options 

In the world of stock market trading, there are countless financial instruments that investors can use to make their fortunes. Two such instruments are naked shorts and options, both of which have distinct characteristics and benefits. In this chapter, we’ll explore the key differences between these two approaches to trading and how they can be leveraged to fight back against market manipulators. 

Naked Shorts: A Risky Game 

 Naked shorts are a type of trading strategy that involves selling shares without actually owning or borrowing them first. This creates an oversupply of the stock in the market, which can lead to price declines, allowing the seller to repurchase the shares at a lower price. This practice is highly controversial as it has been known to distort market dynamics and raise regulatory concerns due to its potential for manipulation. Naked shorts are often associated with short-term trading strategies that aim to capitalize on anticipated price declines. 

 The lack of ownership in naked short selling makes it a risky game for traders who engage in this activity. Investors need to understand the potential risks involved before considering this approach. 

 Options: A Flexible Approach 

 Unlike naked shorts, options provide contractual rights for investors who wish to buy or sell an underlying asset at a predetermined price within a specified period. These contracts offer flexibility and limited-risk exposure compared to naked shorts, making them more attractive for many traders. 

 Options can be used as speculative tools or as part of hedging strategies to protect against potential losses in existing positions. The holder has the choice of whether or not they want to exercise their rights depending on market conditions and investment objectives. 

Understanding The Differences 

 The primary difference between naked shorts and options lies in their underlying mechanics: Naked shorts involve selling shares without ownership or borrowing. Options provide contractual rights for buying or selling an underlying asset. While naked shorts focus solely on profiting from price declines without ever owning any shares, options provide a contractual framework for investors to leverage price movements and manage risk. 

 Traders need to understand the specific characteristics, risks, and regulations associated with each approach before engaging in these trading strategies. The use of naked shorts is often viewed as a violation of rules due to its potential for market manipulation. On the other hand, options are more flexible and offer limited-risk exposure but require careful consideration of market conditions and investment objectives. 

Fighting Back Against Market Manipulators 

One of the most significant dangers posed by naked short selling is its potential to distort market dynamics through price manipulation. This can have severe consequences for individual investors counting on stable investment pricing. 

 To fight back against this type of market manipulation, it’s crucial to stay informed about the latest regulatory changes and understand how they impact different trading strategies. By keeping up-to-date with changes in the market landscape, investors can position themselves more effectively against manipulative practices like naked short selling. 

AMC’s Fight Against Naked Shorts 

The stock market can be a volatile and unpredictable place, where fortunes are made and lost in the blink of an eye. One issue that has plagued investors for years is naked short selling, a practice that can artificially depress stock prices and harm companies. How did AMC Entertainment Holdings (AMC) fight against naked shorts to protect its stock price and mobilize its retail investor base?

  1. Engaging with Investors:  To combat naked shorts, AMC recognized the importance of engaging with its retail investor base. The company leveraged social media platforms like Twitter and Reddit’s WallStreetBets subreddit to communicate with individual investors and rally support against short sellers. By acknowledging the significance of its retail shareholder base, AMC sought to mobilize them against short sellers attempting to drive down the stock price. 
  2. Leveraging Market Dynamics:  AMC also recognized the potential influence of retail investor sentiment on its stock price. By encouraging shareholders to hold onto their shares and resist selling, the company aimed to create a supply-demand imbalance that could squeeze short sellers out of their positions. This strategy successfully created significant volatility in AMC’s stock price as retail investors banded together to support it. 
  3. Stock Issuances:  To take advantage of heightened interest in its stock, AMC conducted several stock offerings, raising additional capital by issuing new shares. This capital infusion aimed to strengthen the company’s financial position while simultaneously supporting long-term growth plans. 
  4. Public Awareness Campaign:  AMC launched a public awareness campaign highlighting the impact of short selling and naked shorts on the stock market. The company sought to educate investors about these practices while mobilizing them against short sellers manipulating prices for their own gain. 
  5. Legal and Regulatory Actions:  In addition to these proactive measures, AMC also pursued legal and regulatory actions against market manipulation concerns related to naked shorts. The company sought investigations into potential violations while collaborating with regulatory bodies to ensure fair and transparent trading practices. 

The impact of AMC’s actions on naked shorts is subject to ongoing discussions and debates. However, the company’s strategy successfully created significant volatility in its stock price as retail investors banded together to support it. By engaging with its retail investor base, leveraging market dynamics, conducting stock issuances, launching a public awareness campaign, and pursuing legal and regulatory actions, AMC fought back against naked shorts and protected its stock price. 

Overstock’s Battle Against Naked Shorts was not content to sit idly by while naked short sellers were manipulating its stock. The company took significant steps to combat this nefarious practice and address the impact on its stock. In this chapter, we will examine some notable actions Overstock took in its fight against naked shorts. 

First and foremost, Overstock filed a lawsuit against several prime brokers and market makers, accusing them of engaging in illegal naked short selling and market manipulation. The company sought to hold these entities accountable for their actions and recover damages caused by their practices. This bold move demonstrated Overstock’s commitment to protecting its shareholders from the harmful effects of naked shorts. 

In addition to legal action, Overstock increased its transparency efforts by providing detailed information about short interest in its stock. The company regularly disclosed the number of shares sold short, enabling investors and market participants to monitor the level of shorting activity. By doing so, Overstock aimed to provide greater clarity around the actual value of its stock and reduce opportunities for manipulation. 

Of course, educating shareholders was also critical to Overstock’s strategy. The company actively engaged with investors and the broader investment community to raise awareness about naked short selling. By doing so, they aimed to educate investors on the impact of naked shorts and the potential consequences for stock prices and market dynamics. 

Collaboration with regulatory bodies was also vital in fighting against naked shorts. Overstock worked closely with regulatory bodies such as the Securities and Exchange Commission (SEC) to address concerns related to this practice. They provided information and insights that supported regulatory investigations while advocating for stricter regulations and enforcement. 

Finally, blockchain technology became a focus for Overstock as they embraced it, becoming pioneers in the field through their subsidiary tZERO platform for trading digital securities and exploring blockchain-based solutions that could potentially reduce risks associated with naked shorts through greater transparency. 

It is important to note that the impact of Overstock’s actions on naked shorts may vary, and the outcomes are subject to ongoing developments and discussions within the market and regulatory landscape. However, Overstock demonstrated its commitment to fighting naked shorts and addressing potential market manipulation by actively pursuing legal action, promoting transparency, educating shareholders, collaborating with regulatory bodies, and embracing blockchain technology. 

Overstock’s battle against naked shorts is an inspiring story of a company that refused to be victimized by illicit practices. Their proactive approach highlights the importance of transparency and collaboration in protecting investors from financial wrongdoing. As we continue to navigate a complex global economy, it is more important than ever that we remain vigilant in our efforts to expose these harmful practices and hold those responsible for their actions. 

GameStop’s Strategies Against Naked Shorts 

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GameStop Corporation was under siege from naked shorts in early 2021, but the company did not go down without a fight. In this chapter, we will explore some of the key steps GameStop took to combat naked shorts and address their impact on the company’s stock. 

Firstly, GameStop actively engaged with its retail investor base through social media platforms like Reddit’s WallStreetBets subreddit. The company recognized the influence of its retail shareholders and sought to mobilize them against short sellers. By rallying support from individual investors, GameStop aimed to counteract short-selling pressures and reduce their impact on its stock. 

Secondly, the company made significant changes to its board of directors by bringing in new members with expertise in digital transformation and e-commerce. This strategic move aimed to align the company with evolving market trends and enhance its long-term prospects. By reducing vulnerability to short-selling pressures, GameStop hoped to increase resilience and minimize its impact. 

Thirdly, GameStop pursued capital raise initiatives such as stock offerings to strengthen its financial position and reduce debt. The company aimed to increase resilience against short-selling activities by improving its financial standing. 

Fourthly, GameStop explored strategic partnerships and initiatives that would diversify its business beyond traditional brick-and-mortar retail outlets. The company aimed to leverage evolving market trends by expanding into the digital gaming and e-commerce sectors. By demonstrating an ability to adapt to changing consumer preferences, GameStop hoped to reduce vulnerability against future short-selling attacks. 

Finally, as a result of this unique situation that unfolded in early 2021 involving a naked shorts attack on GME stocks; GME became a catalyst for discussions on market reform; advocating for increased transparency, regulatory scrutiny, and fair trading practices. 

Gamestop’s strategies against naked shorts were multifaceted, incorporating measures aimed at reducing vulnerability while simultaneously mobilizing support from retail investors through social media platforms. The company’s restructuring of its board, capital raise initiatives, strategic partnerships, and business expansion all aimed to improve its financial standing and reduce vulnerability to short-selling activities. 

GameStop’s situation brought attention to market practices, including short selling and potential market manipulation. The company became a catalyst for discussions on market reform, advocating for increased transparency, regulatory scrutiny, and fair trading practices. As we move forward in the stock market world, companies must learn from GameStop’s example and take proactive measures to combat naked shorts attacks on their stocks. 

What can a company do to fight naked shorts on its stock? 

The stock market can be a wild and unpredictable place. With the rise of naked shorts, companies must take proactive measures to safeguard their stocks. A company’s response to naked shorting can significantly impact its financial performance and reputation.  

The first strategy is maintaining solid fundamentals. A company must focus on delivering positive results, executing a clear growth strategy, and demonstrating transparent communication with investors. By doing so, the company makes its stock less attractive to short sellers who target weak or struggling stocks. Investors are more likely to invest in a company that demonstrates consistent growth and profitability. 

Another effective strategy is engaging with shareholders. Companies must establish strong relationships with shareholders by actively communicating with them, providing regular updates on the company’s progress, and addressing investor concerns promptly. This fosters loyalty among investors and creates support for the company’s goals. Short sellers may be deterred from targeting stocks with loyal shareholders who believe in the stock’s potential. 

Investor relations play a crucial role in countering naked shorts effectively. Developing an investor relations program includes organizing investor conferences, hosting earnings calls, and participating in industry events to provide accurate and timely company performance information. Effective investor relations practices can enhance visibility within investor communities and create positive perceptions of both the company and its stock. 

Monitoring short positions is another valuable strategy for combating naked shorts. Companies must report short positions through regulatory filings, such as disclosure of significant short positions required by law regularly. This increased transparency provides market participants with information about short interest levels in the company’s stock, discouraging potential naked shorting activities. 

Collaboration between regulators, exchanges, and companies plays an essential role in combating naked shorts’ impact on stocks’ value. Working closely together helps implement stricter regulations, enhance surveillance mechanisms, and advocate for increased market integrity. Companies can contribute to a fairer trading environment by collaborating with regulators and exchanges effectively. 

Legal measures are the final strategy companies can pursue against naked short sellers. If the company believes there have been violations of securities laws or market manipulation, legal recourse is an option. Legal action serves as a deterrent and protects the company’s stock and shareholders from potential damages. 

Protecting Against Naked Shorts 

As a stockholder, protecting against the impact of naked shorts can be daunting. However, there are several steps you can take to mitigate the risks associated with this practice. In this chapter, we will delve into some strategies you can consider to help protect your investments. 

First and foremost, it is essential to stay informed about the company you have invested in. Keep track of news updates and financial reports to understand the stock’s fundamental value. Being well-informed can help you make informed decisions and better assess the impact of any short-selling activities. 

Secondly, staying updated on the level of short interest in the stock is crucial. Short interest data can provide insights into market sentiment and potential vulnerability to naked shorts. This information can be obtained from public sources or brokerage platforms. 

Thirdly, engaging with fellow shareholders and advocating for measures that protect against naked shorts is highly recommended. This involves participating in shareholder meetings, voting on important matters, and voicing concerns related to short-selling practices. Intense shareholder activism encourages companies to take action and raises awareness among regulators. 

Supporting regulatory reforms is another strategy one should consider when it comes to protecting against naked shorts. Staying informed about regulatory initiatives and supporting measures that enhance transparency and market integrity will ensure fair dealing practices. 

Taking a long-term investment approach is another way to reduce the impact of short-term fluctuations caused by naked shorts on their investments. Focusing on the underlying fundamentals of a company’s long-term prospects could ride out short-term volatility while benefitting from growth potential over time. 

Lastly, seeking advice from financial professionals such as investment advisors or brokers who offer guidance on strategies to mitigate the impacts of naked shorts on your investments tailored towards specific goals is critical for every investor interested in protecting their investments from unnecessary losses. 

Remember that protecting against naked shorts requires individual actions and collective efforts from shareholders, regulators, and market participants. By staying informed, engaging actively, and supporting measures for market integrity, you can contribute to a more transparent and fair trading environment. 

It is imperative to invest in companies that have strong corporate governance structures. Companies with strong corporate governance are less likely to be targeted by naked short sellers. Buying stocks that are not heavily shorted is another strategy one could employ since such stocks are less likely to be manipulated by naked short sellers. 

Being aware of the signs of naked short selling is critical. Some indicators include a sharp decline in stock price that any news or events cannot justify; a large number of shares being sold short when few shares are available for borrowing; and high levels of short interest, which refers to the number of shares sold short but not yet covered. 

If you believe naked short-sellers are targeting a company, you can report it to the Securities and Exchange Commission (SEC). The SEC has various tools to investigate and prosecute naked short-sellers. 

Protecting oneself from naked shorts requires patience and research into the company’s business prospects which will help identify potential red flags indicating naked short-sellers may target the company. Investing in different companies across diverse sectors will reduce your risk of losing money if one stock falls victim to this practice. 

Jorge Olson, Co-Founder and CMO of Hempacco, authored this article.
“In case you’re unaware, I’m the co-founder and CMO of Hempacco, ticker symbol HPCO, a Nasdaq stock. Like others here on our company blog, this article started as my research into the practice of naked shorts. Our company, Hempacco, has been the target of this unlawful practice of naked shorting, and we have initiated an action plan to stop the illegal naked shorting of our stock.”  





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