Fails to Deliver: The Price Impact of Naked Short Sales
Stanford University, 27 September 2010
The effect of naked short selling on asset prices and trading dynamics is a prominent topic of debate among market participants, regulators, and the popular press. This paper evaluates the validity of the claim that naked shorting leads to negative excess returns by creating additional selling pressure. While data on naked short sales is not publicly available, Securities Exchange Commission data on failures to deliver is a strong proxy. Fail to deliver data for 2004 covers a period during which the prevalence of naked short selling was not public knowledge since neither the fail to deliver data nor the Regulation SHO List were publicly available. In excluding information and regulation effects, the analysis presented in this paper isolates potential microstructure price effects.