When Is Short Selling Fraudulent?
Amid the controversy over GameStop, many cynics argued that something sinister was clearly afoot because the hedge funds had shorted 138 percent of the outstanding shares. In this article I’ll review that particular claim, as well as another seemingly dubious practice, so-called naked short selling. My conclusion is that shorting more than the total outstanding shares isn’t perverse or fraudulent, whereas naked short selling depending on the context might be.
A Review of Short Selling
Before diving into the specific variants, let me first explain the basics of short selling and why it can be a healthy activity in a free market. (In this section I reproduce material I published in an earlier mises.org article.)
by Robert Murphy via Mises
Amid the controversy over GameStop, many cynics argued that something sinister was clearly afoot because the hedge funds had shorted 138 percent of the outstanding shares. In this article I’ll review that particular claim, as well as another seemingly dubious practice, so-called naked short selling. My conclusion is that shorting more than the total outstanding shares isn’t perverse or fraudulent, whereas naked short selling depending on the context might be.
A Review of Short Selling
Before diving into the specific variants, let me first explain the basics of short selling and why it can be a healthy activity in a free market. (In this section I reproduce material I published in an earlier mises.org article.)