What Naked Short Selling Is
In a standard short sale, a seller borrows shares before selling them short, with the obligation to return the borrowed shares later. In a 'naked' short sale, shares are sold short without first locating or borrowing them. This can artificially increase the supply of a stock in the market, potentially depressing its price. Persistent naked short selling can result in failure-to-deliver positions.
Regulation SHO Requirements
Reg SHO requires broker-dealers to locate securities before executing short sales (the 'locate' requirement) and to close out failure-to-deliver positions within specified time frames (the 'close-out' requirement). Firms that allow customers or proprietary traders to sell short without a locate, or that fail to close out FTDs on threshold securities, violate Reg SHO.
Market-Maker Exception
Reg SHO includes a limited exception for bona fide market-making activity, allowing market makers to sell short without a locate in certain circumstances to facilitate customer orders and provide liquidity. This exception is subject to limits and cannot be used to engage in persistent naked short selling or to take directional positions. The scope of the market-maker exception has been debated in regulatory and academic circles.
Citadel's 2020 Short Sale Findings
Citadel Securities' 2020 regulatory record, according to public sources, includes findings related to short-sale indicator reporting accuracy and failure to close failure-to-deliver positions. These are documented regulatory findings. The specific details of each finding are available in public FINRA records.