Investment info sites seem to be skeptical that there's anything wrong with naked shorts. They became illegal after the 2008 crisis, but they're bad in the sense of being extremely risky, not that they're fraudulent.
It's also unclear if naked shorting is actually happening here. It's entirely possible for the short interest to be far above 100%. Consider this setup:
- WidgetCo floats exactly one stock
- Alice buys the one stock (short interest = 0%)
- Alice lends the stock to Bob
- Bob sells the stock to Carol (short interest = 100%)
- Carol lends the stock to Dave
- Dave sells the stock to Eve (short interest = 200%)
- Repeat until short interest reaches the moon
Bob and Dave both legitimately borrowed a shared and sold it, so there's no naked shorting going on.
I suspect what's happening with GameStop is that the stock price is just so absurdly overvalued that short interest has reached a level that people previously thought was impossible.
It's also unclear if naked shorting is actually happening here. It's entirely possible for the short interest to be far above 100%. Consider this setup:
- WidgetCo floats exactly one stock - Alice buys the one stock (short interest = 0%) - Alice lends the stock to Bob - Bob sells the stock to Carol (short interest = 100%) - Carol lends the stock to Dave - Dave sells the stock to Eve (short interest = 200%) - Repeat until short interest reaches the moon
Bob and Dave both legitimately borrowed a shared and sold it, so there's no naked shorting going on.
I suspect what's happening with GameStop is that the stock price is just so absurdly overvalued that short interest has reached a level that people previously thought was impossible.