Derivatives play an important role in the capital markets. Selling securities short (sell what one does not posses) and cover when price drop to profit from a sell without pre arranged means to cover the shorts is naked shorting. During a time of heightened concern of the recession, maybe the impending depression, public sentiment is high to exit the capital market to save whatever of their investment is left. That negative sentiment is feeding on the naked short sellers. That activity is bringing equity prices well below the book value for reputed companies.
Naked shorting is illegal. To prevent speculative short selling, up-tick rule is designed. Under the up-tick rule, short selling can be done provided the security is sold above the current market price of the security. However, this rule has been suspended. This rule needs to be re-instated to instill confidence of public in the capital markets.
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