Naked Share Traders Banned?

Exocet

http://news.bbc.co.uk/1/hi/business/10124179.stm

I'm hoping someone can fill me in on this...

"Germany announced plans to ban naked short-selling of shares from midnight"

Who said banking was boring?

sabretoothtigger

You cant sell shares you dont own.

This might seem fairly obvious but usually people can promise to repay the shares in future, now they will have to actually borrow shares from an owner in order to sell them


Naked means without cover

Jonbvn

More info from the Torygraph.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7738144/Market-chaos-warning-after-German-ban-on-shorting.html

Key points:

Traders warned that the measures could lead to an immediate backlash from investors around the world, adding that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.

"Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."

Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What's Germany going to ban next? Rainy days, harsh words, the Macarena?

The Euro is in freefall dragging sterling with it!

Kohoutek

Why was this ever allowed? Isn't there a massive potential for abuse and manipulation if you allow people to flood the market with IOUs for securities they don't own?

Jonbvn

Kohoutek wrote: »

Why was this ever allowed? Isn't there a massive potential for abuse and manipulation if you allow people to flood the market with IOUs for securities they don't own?

It is often used to hedge a position.

kennyboy66_2

Kohoutek wrote: »

Why was this ever allowed? Isn't there a massive potential for abuse and manipulation if you allow people to flood the market with IOUs for securities they don't own?

No different than a farmer selling this years crop thats still in the ground. No guarantee that he will ever be able to harvest it if struck by blight or drought.

In theory short selling should make the market more efficient and less open to abuse.

It is the opposite of attempting to 'corner the market'.

chucky

won't this now make the premiums on options and CFD's a bit more expensive?

Kohoutek

kennyboy66 wrote: »

No different than a farmer selling this years crop thats still in the ground. No guarantee that he will ever be able to harvest it if struck by blight or drought.

Except the farmer would do that provide financial stability and to finance next year's production, and the activities that are being banned are speculation on the demise of a currency.

Degenerate

The distinction between normal short selling and naked short selling is important. The US has already made serious moves to restrict the practice of naked shorting.

1984ReturnsForReal_2

Sensible move..

Generali

Exocet wrote: »

http://news.bbc.co.uk/1/hi/business/10124179.stm

I'm hoping someone can fill me in on this...

"Germany announced plans to ban naked short-selling of shares from midnight"

Who said banking was boring?

Ha ha!

Short selling ordinarily means that you borrow shares from someone and then sell them. You hope to be able to buy them later to return them to the person you borrowed them from for less than you sold them for. Instead of buy low sell high it's sell high buy low.

However naked shorting is where you sell someone the shares and instead of borrowing them you just fail to deliver the shares. My opinion is that this is something that shouldn't be allowed as it creates the possibilty of markets being manipulated.

The reason is that you have to pay to borrow stock whereas naked shorting is free*. It's illegal in the US although it still happens there quite regularly IME. The way people** get round it is that they arrange to borrow the stock and then fail to receive the stock they borrowed.




*If a dividend is paid on the stock, the short seller will need to make good on it to the buyer.
**One big US bank used to do this regularly