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Trump Can Help Investors by Banning ‘Naked Shorts’
President Trump has issued more than 150 executive orders during the first 130 days of his second term (to May 29), covering everything from new tariffs and AI (Artificial Intelligence) to “Protecting American Communities from Criminal Aliens.”
Now one of the most important of these orders may be at hand: a bold measure to curb “naked” short selling (“naked shorts”), by which market makers sell short vastly more shares in a company than are available for sale.
It’s a highly questionable practice which, oddly, has flourished.
“It is a manipulative scheme, a conspiracy between brokers and market makers to manufacture securities out of thin air and institutionalize naked shorting at scale,” says John Welborn, a senior lecturer at Dartmouth College.
He wrote an 81-page paper proposing three major fixes that anchor the new order.
It was drafted by We The Investors, founded by Welborn’s ally, Dave Lauer, a former Wall Street trader. Now sources in the Trump administration aim to get it to the Resolute Desk.
Naked shorts played a role in the collapse of Bear Stearns and Lehman Brothers in the market meltdown of 2008. In 2017, in a lawsuit over the $1.2 billion buyout of Dole Food, almost 5,000 investors claimed to own 49.1 million shares —12.3 million morethan Dole’s total shares outstanding.
This overage consisted of naked, nonexistent shares.
In recent years, naked short selling has roiled the stocks of GameStop and AMC Theatres, and dozens of smaller shops. PTPI (Petros Pharmaceuticals) has fewer than five million shares—but in one day in late March, some 1.1 billion shares were sold by 2:20 p.m.
STSS (Sharps Technology) has 16 million shares, but it traded 1.52 billion shares in a single day, on April 10, 2025, WNW (Meiwu Technology) has only 125,000 shares that trade — yet more than 40 million shares swapped hands before the market opened on April 22, 2025
Wait a minute.
How can hedge funds sell more shares than a company has issued?
Because market makers, in executing trades for hedge funds, essentially create fake electronic shares and sell them into the market.
This soaring supply artificially depresses a stock’s price, producing further gains for the short sellers.
In a short sale, an investor is betting a stock will plunge by selling shares borrowed from someone else’s account. Brokerage firms are allowed to borrow shares from client accounts under terms buried in lengthy customer agreements.
The seller collects the cash from the sale and then buys back the shares after the price falls, returning them to the account that had loaned them out and pocketing the profit.
“Think of any other asset on earth where you can sell what you don’t have and don’t own, with some promise to find it later,” Welborn says. There is none, basically. If this were nonexistent plots of land, the sellers would go to prison.
The target of the proposed order is the SEC’s Regulation SHO, imposed 20 years ago after the dotcom crash. It granted an exemption to all market makers. This let them ignore the rule’s restrictions and sell phantom shares without having to first line up real shares to back up the trades.
And get this: the exemptions were requested in 2005 by Bernie Madoff, who later was exposed as one of the biggest stock scammers of all time.
The exemptions let “a small group of participants manipulate markets for profit” and “short unlimited quantities of shares without verifying timely settlement,” the order states. It would lift the exemptions and force market makers to follow the same rules as everyone else.
The proposal also would require traders to line up a “pre-borrow” agreement ensuring that real replacement shares are available before a short sale can be made; and impose fines for “fails-to-deliver,” when a trader fails to repay the borrowed shares by a given deadline.
Reg SHO created a “threshold list” of companies with a high degree of “fails-to-deliver” in their stocks. Hundreds of companies have spent hundreds of days on this list, yet it stops short of disclosing volumes and who is in violation.
“The threshold list is a litany of failure,” says Dartmouth’s Welborn. “It’s just a list of liquor stores getting robbed, but it doesn’t tell you who’s robbing the liquor stores, or why.”
Trump Media & Technology Group (DJT) has been a target of short sellers, and it spent more than 60 days on the threshold list last year.
CEO Devin Nunes asked Congress to investigate and called out market makers that handled over 60% of the trades in DJT.
This led to little, if any, action.
President Trump now has a chance to help millions of investors with a single stroke of his Sharpie.
He should just do so!
Dennis Kneale, a former anchor at CNBC and Fox Business, is host of the “What’s Bugging Me” podcast on Ricochet and author of “The Leadership Genius of Elon Musk.” This article originally appeared at NewsMax.com.
Published in Finance, General
Well, that seems quite outrageous to me.
Thank you for the explanation. They really have a sweet deal going on Wall Street, don’t they?
It’s even worse than Dennis paints here. As he’s pointed out on the show, brokerage firms sell short on stocks owned by their clients. So they may put you in a stock, then short sell that stock and actually drive down your portfolio while enriching themselves.
“He who sells what isn’t his’n. … Must buy it back, or go to pris’n.”
It is a real problem.
Can’t like that comment because it is so despicable but thank you for the information.
I can’t say I understand all the machinations of Wall Street, but after the 2008 collapse and reading several books about it, my opinion of it tanked. So this scene in “Molly’s Game” resonated with me, especially the lines from the judge:
“This courthouse is located within spitting distance of Wall Street. I know from personal experience trying to spit at it. The men and women who work there will commit more serious crimes by lunchtime today than Molly Bloom committed in this indictment.”
It is quite mind boggling. I had a hard time getting this column published at a premiere business publication–because I did an inadequate job explaining the conundrum of how can someone sell something they simply borrow from someone else without explicitly asking.
And they do it all the time, right?
Whatever happened to fiduciary duty? Fidelity holds my IRA, and it just emailed me, offering to pay fees for my loaning out stock from my account. Loaning to hedge funds wanting to knock it down.
I’m going to read this post because I think I might learn something—thank you in advance—but first I must get over the trauma induced by finding the words “Trump,” “naked,” and “shorts” juxtaposed in a single sentence. Oh, the horror.
This is wonderfully funny. Thanks for a fun laugh to start off a glorious day. Happy Almost Friday!