Naked Shorting in Australia: Risks, Regulations & 2025 Updates

Naked shorting has returned to the spotlight in 2025 as market volatility and meme-stock mania continue to test the limits of global share trading. While Australia’s regulatory environment has traditionally stamped down on this controversial practice, renewed interest and new digital trading platforms have prompted both market participants and the Australian Securities and Investments Commission (ASIC) to revisit the rules. Here’s what every investor should know about naked shorting, its risks, and the current policy landscape.

What Is Naked Shorting—and Why Is It So Controversial?

In a typical short sale, an investor borrows shares and sells them, hoping to buy them back later at a lower price. Naked shorting takes this a step further: traders sell shares they haven’t even borrowed—or confirmed can be borrowed. This means they’re selling something they don’t actually own or control, introducing systemic risk to the market.

• Traditional short selling: Investor borrows shares, sells them, and then buys them back later.
• Naked short selling: Investor sells shares without borrowing or ensuring the shares exist.

This practice can create a flood of phantom shares, distorting supply, driving down prices, and undermining confidence in the fairness of markets. It’s especially problematic during periods of high volatility, as seen during the 2021 GameStop saga in the US.

Australia’s Regulatory Crackdown in 2025

In Australia, naked shorting is illegal for most investors, and regulators have maintained a firm stance. However, 2025 has seen a spike in enforcement actions and fresh policy reviews amid concerns about new trading platforms and the use of synthetic instruments.

Key regulatory updates in 2025:

• ASIC announced a new suite of surveillance technology to detect and trace naked short sales across digital platforms.
• Stricter reporting requirements for broker-dealers, with real-time alerts for unsettled trades.
• Major fines issued to several offshore brokers allowing Australian clients to place uncovered short sales.
• Increased cooperation with global regulators, particularly in the Asia-Pacific region, to close cross-border loopholes.

The message from ASIC is clear: while short selling itself remains legal (with disclosure and settlement requirements), naked shorting is not tolerated and will be prosecuted wherever detected. The regulator’s 2025 compliance update specifically names naked shorting as a “priority threat to market integrity.”

Real-World Impact: What Investors Should Watch For

Even with strong regulations, the risk of naked shorting can’t be dismissed. The rise of retail trading apps and synthetic exposures (like CFDs and tokenised equities) means that phantom share creation can still occur if oversight slips. For individual investors and SMSFs, understanding how short selling works—and the difference between legal and illegal forms—is crucial.

Potential risks include:

• Artificially depressed share prices due to phantom supply.
• Settlement failures, leaving buyers with delayed or cancelled trades.
• Loss of confidence in the transparency and reliability of markets.

As an example, several ASX-listed small caps in early 2025 saw dramatic price swings after suspected naked short attacks. ASIC stepped in to halt trading and investigate, ultimately penalising two international brokers. These incidents serve as a reminder that even in a well-regulated market, vigilance matters.

The Future of Short Selling in Australia

Australia’s market integrity depends on robust enforcement and investor awareness. As technology evolves, so too does the sophistication of those seeking to exploit grey areas. The 2025 policy updates put the onus on brokers and trading platforms to tighten controls, while also educating investors about the risks.

If you’re considering short selling, always check your broker’s settlement procedures and ensure you’re not inadvertently exposed to illegal practices. Stay updated with ASIC announcements and be wary of offshore platforms promising unrestricted trading. Naked shorting might seem like a shortcut to profit, but it comes with outsized risks for everyone involved.