[hncommenter13]

It's trivial to prove that naked short selling doesn't exist the way the author thinks it does.

a) Take my word for it. I am a former VC now working as a professional short seller (for the past eight years; my first really great short idea I found from a comment on HN). When I instruct our prime broker to short a stock, I must provide a matching locate id that corresponds to a specific block of borrowed stock. No locate id, no trade. Can't locate the stock to borrow to obtain a locate id? No trade.

Get a margin account and try it yourself.

b) Borrow costs. If I could short sell anything I wanted without having to borrow the stock, there wouldn't be such a thing as a borrow cost. I could short anything in as much size as I wanted for free. (And retail traders wouldn't get paid for lending their shares, which happens all the time.)

c) Recalls. If naked shorting were a thing, there would be no such thing as stock borrows getting recalled. Again, take my word for it, they happen.

d) Margin. Would I have to post cash collateral to our prime broker to borrow a stock if I could naked short? There's no stock I need to return, as I wouldn't have borrowed it from anyone. I mean, I guess I could still lose money short a stock and they'd want some protection against that, but I doubt we'd have Reg T margin rules if naked short selling were a thing.

And nobody could make me close the short, unless the company got sold. I could just stay short forever, as I haven't borrowed anything that ever needs to be returned.

So if interest rates were >0%, I could just naked short at no fee, let the cash from the short sale sit in my account collecting interest, and never have to cover the short. I'd also pay no dividends on the borrowed stock, as I presently must, as I hadn't actually borrowed it.

In other words, riskless profit for everybody. Let me know if you find one of those.

e) There are dozens of stocks out there that I (and lots of other people) believe will likely be worth zero one day, but it's uneconomic to make that bet as the borrow cost is 90%+. If I could naked short, I'd make a huge fortune shorting them to zero. Other people would make huge fortunes. Neither I nor other short sellers have such fortunes. If short sellers made fortunes, there'd be hundreds of short-only funds. There are barely a handful remaining.

More broadly, I've worked on hundreds of shorts over the past eight years. In some cases, the company was perfectly legitimate, just overvalued by an enthusiastic market. I've also helped expose companies that were screwing people and lying to investors, in several cases resulting in SEC investigations and criminal indictments. And I've lost money when companies got bought by other companies that later wrote off the entire investment. I've also been straight up wrong on plenty of them, and exited the position when that became clear.

An important function of the market is price discovery, and my job--like that of a long-oriented analyst--is to express the reasoned view that the current price is wrong. It's not a market if there's no way to express a contrary view.

Nothing I say or do can keep a company from raising capital or succeeding if the bull case is more convincing than the bear case. (Again, if I could destroy companies based on shorting them--even if I had to borrow the stock--I'd never lose money. So everyone would do it.) Netflix has had short interest forever and ever, and proved all the doubters wrong.

And if you don't believe that overly high prices lead to misallocated investment in nonsense projects, take a good look at the amount of money sloshign around Silicon Valley these days.

The fact is, it's a lot more fun and profitable to be a venture capitalist than it is to be a short seller, and there's a lot more VCs as a result.