Check it out deeply. MMs can and do naked short. They are only to do it to make a market and cover as quickly as possible, but sometimes they get caught and can't deliver.

Failure to deliver is a naked short. That's what the RegSho was supposed to be about and stop the practice. We see how well that worked.

http://www.investopedia.com/articles/optionin...elling.asp

Another form is to sell stock that you do not own and are not borrowing from someone. Here you owe the shorted shares to the buyer but "fail to deliver." This form is called naked short selling. These short sales are almost always done only by options market makers because they allegedly need to in order to maintain liquidity in the options markets. However, these options market makers are often the brokers or large hedge funds, who abuse the options market maker exemption.