Well to make the distinction between shorting and naked shorting is crucial and to your credit but you also included in the same sentence the word ‘reputable’ which is in the eye of the beholder.
Floor traders follow rules well enough to give the appearance of a well-regulated exchange but floor traders do not know if the sell order originates from a stock holder, a short seller or a naked short seller.
So ‘reputable’ means essentially nothing on the Street. You can follow all the rules and still be complicit in a crime knowingly or not.
Either Merrill Lynch is disreputable (perfectly possible) or some reputable dealers/mms do allow/encourage naked shorting.