Old news, I know. However, I’ve read rather muted reactions and pretty fantastical reactions to this development. Some are saying that it will essentially be a raincloud over the markets today (judging by the futures that seems correct) and some are saying this will make the German markets dysfunctional and cause ‘the most volatile trading day in memory.’ I think that short selling plays a role in the markets staying relatively efficient. With Germany doing this it will be interesting to see how it affects their sovereign debt markets. I’m going to the Bloomberg to look at their CDS spreads. Be back soon.
I think people should wear some clothes if they are going to try to sell stuff. Perhaps even their own gear- wouldn’t that be a better way to promote your merchandise?
^ Especially germans. I don’t want to see their schnitzels and kraut while they make it rain.
Personally I think all forms of short selling should be banned. I also think there needs to be a clamp down on a huge portion of the electronic trading going on. There’s way too much computer-computer trading with little to no value except for bilking the average investor and increasing risk in the market (as we saw last week). As for the people who defend short-selling as the opposite of buying. The opposite of owning is either selling what you own or not buying. It isn’t borrowing what somebody else owns and then selling it to later buy it back. There’s too many “innovations” in finance that have gone way beyond the physical market and it’s actually increased the risk within the market. I saw yesterday that the future/physical ratio for most commodities used to be 2:1, now it’s 12:1.
Shouldn’t naked short selling be disallowed to begin with?? Why is the market interpreting this as such a weakness?
King_Tut Wrote: ------------------------------------------------------- > Shouldn’t naked short selling be disallowed to > begin with?? Why is the market interpreting this > as such a weakness? Because financial firms won’t be able to make as much money driving stocks down. After all, it’s only logical that you can create infinite amounts of downward pressure on a stock by selling something that doesn’t even exist. If only the US would enforce their own naked short selling rules.
I don’t have an issue with short selling, but naked short selling is a problem. It’s like buying something when there isn’t any to buy, except that it’s selling something when you can’t get your hands on something to sell. In both cases, you can push the price up and down without actually having to own or owe anything, and that detaches prices from any kind of reality. Short selling in general (clothed short selling) does help price discovery, but more importantly, if the market crashes, and some people have short positions, then there is actually more money left in the economy in the recovery. Remember also that short selling is riskier than being long. You can lose more than your initial position size, most assets trend upwards over time, you pay margin costs, and if you are taxable, it is always taxed as a short-term gain.
“All forms of short selling should be banned”, that’s a little extreme spierce, and by a little extreme I mean that is completely nuts
Reggie Wrote: ------------------------------------------------------- > “All forms of short selling should be banned”, > that’s a little extreme spierce, and by a little > extreme I mean that is completely nuts Why exactly is it “completely nuts”? How many markets for goods are there in this world that allow short selling? The financial markets are about the only one and its prolific use is a more recent trend and not a very good one. Beyond “price discovery” or profits there isn’t a single benefit to short selling and profit is the only one that can be definitely proven to benefit anybody.
Short selling works because securities are basically commodities. Share #246 is equivalent to Share #7621. So whoever lends the security won’t care if they get back the exact same share ID or not. One of the reasons you can’t do this so much with other items is because once the owner takes ownership, what they own tends to become individualized. I can’t sell my neighbors’ Mercedes over the summer and buy it back when they return from vacation and pocket the depreciation difference, because my neighbor loves HIS Mercedes, even if the replaced one is the same color, and has the same leather seats, etc. Remember that the securities lender gets paid short interest for participating in the transaction, so both sides perceive some sort of benefit. And “price discovery” helps long investors by reducing the chance that a long buyer will overpay for an asset. There is a real issue with how high frequency trading (HFT) may warp markets, but I don’t see that as a problem specific to shorting, and I suspect spierce’s objection is more linked to how short selling enables risky HFT systems.
As far as I am aware, the Germans are only banning naked short selling up until Q111…and it only applies to Euro govies, CDSs relating thereto, and a handful of financial stocks. Granted, further changes may be and are most likely on the way.
How is naked short selling “selling something that doesn’t exist” ? You borrow it and you sell it, but you also have to buy it back, so it does exist. How about the use of leverage ? If you buy something on margin, you are also moving more than what you paid for. I see this as a purely political move. German tax payers are going to fund the PIGS, so in exchange they get to trash short-sellers, i.e. mean speculators. I’m sure the common citizen sees speculators as some mean guys in front of a screen attacking a map of Europe in some kind of 80’s videogame interface, and have very little understanding of what a short sale actually is. Just a question: assuming that securities prices will climb where the short ban is effective, how are these securities protected by the ban going to remain competitive for an international investor ? Aren’t they going to become comparatively very expensive compared with similar securities you can short ?
Reggie Wrote: ------------------------------------------------------- > “All forms of short selling should be banned”, > that’s a little extreme spierce, and by a little > extreme I mean that is completely nuts +10 lol
Viceroy Wrote: ------------------------------------------------------- > How is naked short selling “selling something that > doesn’t exist” ? > > You borrow it and you sell it, but you also have > to buy it back, so it does exist. Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “fail to deliver”. The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker, allowing the trade to be settled.[1] Naked short selling can be used to fraudulently manipulate the price of securities by driving their price down, and its use in this way is illegal.
@ Viceroy: I don’t think this is a true statement You borrow it and you sell it, but you also have to buy it back, so it does exist. There is no initial borrowing…
You agree to sell Joe 10,000 shares of IBM, but haven’t bothered to check if you can actually get ahold of IBM. You look around, and no one is lending IBM, but have 3 days to deliver 10,000 shares to Joe or you get a fail to deliver, and both you and Joe are screwed. Your choices are 1) spend 10,000*IBM_Price to acquire shares for Joe, thus closing your position at little or no profit (or possible loss). or 2) if you don’t have 10,000*IBM_Price to acquire the stock, you fail to deliver, and get sued for damages. Joe’s investment plan is also screwed up. The risk of buying IBM is now higher, because someone might buy IBM and not get it delivered, which also pushes down the IBM price. Meanwhile the rest of the market has noticed that IBM got sold and the price has gone down, even though all that has happened is that you sold 10,000 of IBM to Joe and can’t deliver. I think a lot of naked short selling comes about because a day trader figures that they can cover their position before they actually have to deliver anything. That puts basically no natural limits on how much one can short, except perhaps margin requirements, and that means you can short many many more times the stock in a naked situation than you can in a borrowed short position.
Thank you for info. I was wrong then. I thought something had to be borrowed first to be short-sold in all cases.
Spierce – People sell things that don’t exist, or things they don’t posses, in markets all over the world. Some online retailers sell items they don’t have in stock. Have you ever bought a made-to-measure suit? That doesn’t exist at purchase. Many other transactions involve a promise to deliver, rather than actual delivery, at the time cash is exchanged.
When you short a stock your broker is going out in the market to find shares that are available to short (persons allowing their shares to be loaned out for shorting by their broker). Naked Short Selling occurs when the broker cannot find available shares to short but gives them to you anyway. Sometimes there are no available shares to short i.e. When GM tanked there literally were not any more shares available to short. I tried. If you can make money long why shouldn’t you be able to make money by going short?
bchadwick Wrote: ------------------------------------------------------- > I think a lot of naked short selling comes about > because a day trader figures that they can cover > their position before they actually have to > deliver anything. That puts basically no natural > limits on how much one can short, except perhaps > margin requirements, and that means you can short > many many more times the stock in a naked > situation than you can in a borrowed short > position. I think that is part of it. I honestly think the majority is just that security lenders lend the same shares multiple times because they do not think they will be caught out on it. I think we often see shorter A borrow from mutual fund B, sell the shares, to mutual fund C who in turn lends them out again. I mean, we see sustained levels of 200% short on the IWM at certain times. There has to be something structural for that to occur.