Are professional traders/brokers allowed to short penny stocks?
Answer Jerry, Sure, shorting penny stocks is allowable. The question is, what kind of shorting is allowable? Legally, you must first borrow shares to be able to short them since you need to be able to deliver the shares whenever you sell. Shorting without actually borrowing the shares is called naked shorting and is technically illegal. I say “technically” because, as a practice, naked shorting happens often and is, for the most part, overlooked by regulatory agencies. It has lately been a topic of controversy however. The issue with penny stocks is that procuring borrowed shares can be very difficult. So that in itself makes shorting unavailable with many penny stocks (usually a broker will not allow such shorting to retail clients if the broker does not carry inventory of those stocks). Nevertheless, naked shorting still happens on more actively traded penny stocks.
