Naked shorting is generally prohibited by the locate-requirement, with a narrow exception for genuine market making. It is distinct from a delivery failure caused by ordinary settlement friction, though it shows up in the same statistic: a persistent fail-to-deliver balance.
The practical significance is contested. Fails are usually small, short-lived, and caused by mundane plumbing, but concentrated and persistent fails are exactly what regulation-sho close-out rules and the threshold-securities-list exist to catch.
Example: 900,000 shares are sold short with locates covering 400,000. If 500,000 shares fail to deliver on t-plus-one, the fails persist until the clearing firm buys them in.
Related: fail-to-deliver, regulation-sho, locate-requirement, threshold-securities-list, buy-in