The reason they’re allowed to is precisely for a GME type situation, if there is a massive buy-side imbalance and there aren’t enough shares to borrow to short (aka sell to buyers), market makers are allowed to naked short to remain delta neutral.
Citadel (probably[0]) isn’t going to naked short GME to take a directional position, they just want to capture the bid/ask and hedge the directional risk, which sometimes requires naked shorting. I suppose they could (and might) use synthetic shorts (long atm put, short atm call) to hedge. I’m not sure if only a designated market maker is allowed to naked short, or if supplemental liquidity providers or other types of MMs I don’t know about are also allowed to naked short.
[0] I say this only because I’m not Ken Griffin and don’t know with absolute certainty, but generally a market maker aims to stay delta neutral.
Citadel (probably[0]) isn’t going to naked short GME to take a directional position, they just want to capture the bid/ask and hedge the directional risk, which sometimes requires naked shorting. I suppose they could (and might) use synthetic shorts (long atm put, short atm call) to hedge. I’m not sure if only a designated market maker is allowed to naked short, or if supplemental liquidity providers or other types of MMs I don’t know about are also allowed to naked short.
[0] I say this only because I’m not Ken Griffin and don’t know with absolute certainty, but generally a market maker aims to stay delta neutral.