Naked short selling should be banned. It's not just a regulatory issue.
When you short a stock, you have to borrow the stock first, and then sell it. Obviously at some point you will buy back the stock, hopefully at a lower price so you make a profit, and then return the stock to the original owner.
When you naked short sell, you don't borrow the stock first, you just claim you do. Everybody trades pieces of paper without settling the trade. This might seem convenient but someone can abuse this.
For example, sell a billion shares in a stock which you don't own / have not borrowed, at a fire-sale price, thereby causing the share price of a company to crash because people start panicking once they see huge volumes being traded at a low price.
If one is a libertarian, wouldn't the assumption be that the market will handle this scenario? When someone takes the other end of your short, it's up to them to do appropriate due diligence on the counterparty risk. Maybe they want to demand you own the underlying security; maybe they don't want to demand it. As long as it's free individuals entering into contracts, I don't see the case for banning them from a libertarian perspective specifically.
To naked short sell, someone has to be willing to buy from you a stock you neither own nor have borrowed. I think if they want to do that, they should be allowed to. Despite what a dumb idea that is.
When you issue a buy order to an exchange, you don't get to specify that the seller needs to have the stock; you will only find out when the seller fails to deliver.
When you short a stock, you have to borrow the stock first, and then sell it. Obviously at some point you will buy back the stock, hopefully at a lower price so you make a profit, and then return the stock to the original owner.
When you naked short sell, you don't borrow the stock first, you just claim you do. Everybody trades pieces of paper without settling the trade. This might seem convenient but someone can abuse this.
For example, sell a billion shares in a stock which you don't own / have not borrowed, at a fire-sale price, thereby causing the share price of a company to crash because people start panicking once they see huge volumes being traded at a low price.