Germany to ban certain short-selling

The smell of desperation.

Naked short selling SHOULD be illeagal everywhere.

Explain.

IOW, don’t bet against the government...............

More from Business Insider:

http://www.businessinsider.com/selling-in-stocks-and-euro-intensifies-as-rumors-of-german-government-short-selling-ban-spreads-2010-5

And Zero Hedge:

http://www.zerohedge.com/article/germany-ban-short-selling-midnight

I hereby decree that from this day forward, the market must only move up!

Oh, and every child should have a pony.

Heads ve Vin, Tails yoo Lose, Ja?

Naked short selling should be illegal. Hedge funds should be illegal or regulated. They were outlawed (investment pools) aftre the 1929 crash.

I agree, but there must be real panic behind this decision.

Wonder who the “certain stocks” are?

Fascism at its finest.

A naked short sale is a sale without having the stock in hand. So they BORROW the stock, sell it, then promise to replace it.

Or to put it in other words, I think X is going to tank. I borrow X from a 3rd party and promise to replace X in 3 days, I sell the stock, obtain the cash now, and then have 3 days to buy X from someone else to pay off my borrow.

The “bet” is that the price will be lower within 3 days and I can get X at a lower price and use the money you paid me to cover the position. This only works if X goes negative. If it goes sideways, it is a slight loss as there are fees and if it goes positive, the it can be a SIGNIFICANT loss.

This creates a situation where the sum of all sellers exceeds the available (market willing to sell) asset for X. It also means that the person may not be able to cover the short sale and will default to the lender of X.

I agree with banning this naked short sales as it creates 1) risk to the market 2) creates unnecessary volatility and 3) serves little in the way of advancing the economy

Naked short selling is shorting without acquiring the underlying asset first, and it is generally illegal. It tends to happen when the asset, in this case Euro-denominated bonds, are difficult to acquire. And of course, the reason that they are difficult to acquire is that anyone who has them is shorting them already.

http://en.wikipedia.org/wiki/Naked_short_selling

Yes it should be.

I don’t know the details but the SEC and markets here have allowed certain categories of market makers to naked short with a ‘promise’ to reconcile within a certain time frame. The problem was and is that there is no enforcement if these market makers don’t deliver.

It’s a scam and the government watchdogs look the other way.

For those interested, there is a difference between ‘shorting’ and ‘naked shorting’. Shorting is where you locate and borrow the security to sell, whereas naked shorting is you just sell it electronically without first locating and borrowing it.

Many naked short sellers will sell shares they have not borrowed, meaning they are selling something which may not have existence, akin to counterfeiting or unauthorized dilution.

There was a case presented in a Bloomberg News expose of a small company that was bought entirely by one investor on an open exchange, all shares were owned by this one investor only, yet this investor noted that millions of shares were trading on exhanges for this stock that he owned every share of. So he had evidence of naked shorting (selling of shares that did not exist for sale).

Nice explanation noting the difference in "shorting" and "naked shorting." One is speculating, the other is closer to pure gambling.

Many years ago I remember reading a little book called "How to Buy Stock." In the edition I read, the value of stock was somehow linked to things like the product, company management, sales, competing market and the economy. Even the "greed" of the '80's Wall Street movie was predicated on taking over companies whose assets exceeded the market value and breaking it up to sell off the assets. At least they were still looking at actual assets. The dot.com '90's and even the real estate bubble have been based on hype and illusion and predicated mostly on the "greater fool" theory. Wall Street may as well install slot machines on the trading floors.

He doesn’t want there to be fluid markets in the stock of mid-cap companies.

Pardon this perhaps obvious question, but how is it then different from buying a put option on an individual stock? The fact that the option’s execution is optional?

It's really not any different, except that with a put you usually have to make your decision within a certain window of time.

Oftimes with these naked shorts, the shorter is supposed to borrow the asset within a certain window, but then doesn't, or can't. At that point, naked shorting is more akin to counterfeiting, although there is scant enforcement against naked shorters who fail to borrow the assets they're shorting.

Naked shorting becomes a problem when market pressures become so bearish that everyone wants to get in on the action whether they can legitimately short with borrowed shares or not. The problem with banning naked shorts is that policy makers only reinforce the bearish sentiments they're trying to alleviate.

Well naked shorting is more than pure gambling.

For example, if a company has 100 million shares to sell and they are all owned by partners who do not want to sell, then a naked shorter can, via electronic means, sell shares that do not exist and do not have authorization to sell.

What happens when shares are offered on an exchange? In general if there are not many buyers, the share price will go down, the naked short seller can place large amounts of downward pressure on a stock.

Suppose there is a buyer for the naked short seller. That buyer will expect delivery of the stock within a few days, and sooner with electronic exchanges.

So what does a naked short seller do if there are many buyers? They sell more amd more and more until there is more selling than buying, hence the shareprice falls and they buy back at a lower price and book a profit.

But the key is to understand there is theoretically no limit to how much stock a naked short seller can sell, because there are no shares to begin with.

So going back to the company with 100 million shares tied up by partners who do not want to sell, a naked short seller could sell 1 billion shares, 10 billion shares, 1 trillion shares whatever the naked short seller thinks they can get away with.

It is not so much pure gambling as it is pure fraud.

The SEC here allows short term naked short selling by market makers because a) the SEC is controlled by the Street b) market makers often sell shares not knowing where the shares are because they think they can go find them later and so they whine to the SEC that they need to naked short on occasion to keep the transaction flow going and add liquidity to their market. These are tired old arguments between the Street and the SEC.

But then there are large hedge funds run by huge investment banks (for example, Goldman), and these large hedge funds can naked short all they want. They can drive a stock to ruin, make it a penny stock, force liquidation of shareowners and bankrupt companies. They profit from this toxic naked shorting because the shareholders will sell for pennies back to them for stock that the hedge fund never had in the first place and that never existed.

The problem with prosecuting naked short sellers is they can run a naked short campaign over months and months, being in and out, and it is hard to pin down when they were naked and when they were not because hedge funds are to a large degree unregulated, especially the large ones owned by the Big Dogs.

Once one is aware of how this all works, it starts to reveal what went down in the market collapses of late 2008. It’s a very serious matter with high crimes and both Bush and Obama administrations did and are doing nothing about it. The Street is too big to fail and too powerful to go up against because the Street is the center for the investment banks who are like a fraternity chartered by the Federal Reserve, the private central bank of the United States. So a fight over how the Street operates (for example, naked shorting) will ultimately boil down to a fight between Treasury and the Central Bank. And right now the Treasury Department needs the investment banks to buy its bonds and bills and those investment banks, being member banks of the Federal Reserve, get the funds to buy treasuries from the Federal Reserve. So the government can’t fight the organizations that are funding it.

An option does not “move” an instrument. The owner retains the instrument and sells the right to buy the instrument at a fixed price. If the option expires, then the person taking the position is out the price of the option. All money is paid up front ... no one “owes” anyone.

In a naked short, the actor borrows from one person, then sells on the open market to obtain cash. They then have 3 days to deliver that instrument to cover the position. This is then done by buying the product from someone else and then “paying off” the person they borrowed from.

Now imagine a situation where thousands of people execute a naked short on a stock. Stock price goes down, due to the artificial pressure of the sales and then people start buying back. But lets say that the company announces at the close of the day new a new product or something. People decide the stock is going to go up and decide to hang on to their stocks. Now the naked shorts are in a bind. They might not even be able to cover their positions. This puts more demand into the market and drives the stock price up. People see the stock go up and jump on the band wagon.

Ultimately, the stock whips down and then up on naked short sales. This has no VALUE. It does not adjust the price to a new support level, it does not bring clarity of volume or market direction. It is not even a hedge position against a future price (options). It is volatility for volatility sake.

The real danger is if the person can not close their position. Now the original lender is also hurt from this action. Taking a risk that hurts your portfolio ... no problem. Taking a risk that hurts others ... that is different.