Posted 30 March 2007 - 09:52 PM
"Naked" short selling of futures? It's called speculation. Someone selling something they don't intend to produce is no different than someone buying something they don't intend to use. Both are purely speculative.
All speculative selling, whether spec long liquidation or outright shorting, affects prices to some extent (if nothing else, the bid drops a tick one lot sooner if I sell one lot than if I don't.) It can turn into manipulation if enough size is involved. But that's what CFTC position size limits are designed to prevent. Whether they do or not is open to debate.
However, there's absolutely NOTHING illegal or fraudulent about so-called "naked" shorting of futures by non-commercials so long as position limits haven't been exceeded. You can't and therefore aren't required to borrow an intangible, that is, the obligation to make delivery of goods at some point in the future. No current payment to you for goods takes place, and your futures margins only assure the broker that you can pay any loss you may sustain in the meantime.
Which is wholly different than selling/shorting a share of a stock that currently exists (either as a physical stock certificate or a book entry which can be turned into a certificate) and must be currently delivered and for which you currently receive the sale price.
On another aspect of this, while (future) liquidity from short covering at some point down the road is one "benefit" of short selling, much more important is the contribution of short selling to price discovery. Legitimate short selling helps to move prices toward "real" value more rapidly. Which is why one can make a good case for the elimination of rules against trading on "inside" information. Those rules exist because legislators didn't think it "fair" that those with the inside information should benefit from it. But, of course, all market participants have differing levels of intelligence, experience and information (other than inside information) in general, so no market is ever "fair."
Restricting the use of inside information means that markets are less efficient than they could be, and has unintended consequences. For instance, shares of a failing company that might be sold down more rapidly if the insiders were free to act on their knowledge may remain aloft longer, causing some people to buy who might not have done so had the stock become a falling knife. Trying to make markets "fair" just substitutes one set of winners and losers for another. Which is close enough for government work.