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CBOE Settles With the SEC Over “Systemic Breakdowns” in Regulating Naked Shorting

“The Securities and Exchange Commission widened its crackdown on a controversial practice known as “naked shorting” by charging the Chicago Board Options Exchange with “systemic breakdowns” in the exchange’s regulatory and compliance functions.

The CBOE agreed to pay a $6 million fine and implement major reforms to settle the SEC’s charges. This is the first time an exchange has been assessed a fine for violations related to its regulatory oversight role, according to the SEC. (You can read the SEC’s press release here.)

The settlement follows a decision Monday by an SEC judge to fine a former Maryland banker accused by the SEC of engaging in billions of dollars in naked short trades. The Charles Schwab owned brokerage optionsXpress and its former chief financial officer were also penalized for violating laws aimed at banning naked shorting.

A naked short trade occurs when a trader sells a stock he does not own and does not intend to borrow to deliver to the buyer. An SEC rule known as Reg SHO is meant to ban the practice, which the SEC regards as abusive and harmful to markets….”

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