I'm at a loss to understand how naked shorting can be legal,...

I'm at a loss to understand how naked shorting can be legal, ever. It is selling an asset you don't own. If I were to sell anything else this way it would be fraud and a criminal offence.

If, however, i felt a share was on the way down, or wanted to protect an investment i have the option of buying puts. That's OK because the counter-party is fully aware of what's happening. The buyer of a counterfeit security is left in the dark.

I suspect that our CHESS system prevents the worst abuses here but in the US (and even worse in Canada) a group can criminally conspire to destroy a smaller company, in which case they never have to cover. There are millions of shares of our bigger companies traded every day so no extra "liquidity" is needed.

It's just a perk of the rich they don't want to give up. Why should they? Free money.