This is the Cato Daily Podcast for Thursday, May 1st, 2008. I'm Caleb Brown.

It's been illegal since the 1930s, but is naked short selling really a phantom shares menace.

J.B. Heaton, co-author of an article in the new regulation magazine,

The Economics of Naked Short selling.

As the rationale for keeping it illegal is suffering from a lack of evidence one way or another.

Very quickly, what is short selling?

Short selling to what I would call traditional short selling is the practice of agreeing to sell

something, usually a share of stock, agreeing to sell something that you don't currently own and so in order to satisfy your

obligation to deliver it to the person you agreed to sell it to you go out and

you essentially borrow it from someone else.

So I would agree to sell you a share of Google stock at $600, but I don't actually own Google

stock today. Three days later, you've got the obligation to come up with your $600 and I've got the obligation to deliver you a share. If I don't have that share, I need to go out to someone and say, I'd like to borrow your share of Google and effectively what I'm really

doing is I'm not really borrowing and I'm getting it from them and I'm promising to give them

a share back later that I come to you and I deliver that share to you.

That's a simplified short sale.

It's a sale of something that you don't own

and that you're going to have to go out and borrow

in order to make delivery.

Naked short selling is different.

How different is it?

In naked short selling, what you do is you fail to deliver that share.

So I would go to you and I would say I'll sell you a share of Google for $600 and we have a settlement date three days later.

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