I've been learning more about how the stock market works and I'm amazed that naked shorting legal, and that financial firms have mechanisms which permit it to happen.
I hear that "market makers" have special privileges to naked short sell, and these privileges exist in order to "provide liquidity".
Why is providing liquidity considered to be a good thing?
In my mind, in an illiquid market, there might be a massive spread between the bid and ask and (without market makers able to nakedly short sell) this might mean that no trade occurs for a long time until one side cracks and changes their price to close the spread.
But... why would that be a bad thing?
So there's a big spread for a while and no trading occurs? So what? What's the problem? Since naked shorting is so transparently an opportunity for market manipulation and fraud, there must be some rationale for why it exists, right?
What's the worst that could happen if market makers were not able to nakedly short?
Submitted June 06, 2021 at 03:56AM by greyzcale https://ift.tt/3ikSPlP
