Naked short selling exposure

[Petrovale]

I can see why retailers would want to commit to naked short selling, working through institutions. I can also see why institutions would be tempted to do the same, betting against different client groups, especially retailers. But what I fail to understand, is how the stock exchange cannot have checks and balances to differentiate between a normal short transaction and the naked version. I imagine that, without such differentiation, regulatory authorities can not enforce the law against such plague.

Or am I missing something?