Report: Germany unilaterally bans naked short-selling
Image by World Economic Forum via Flickr
German Chancellor Angela Merkel (pictured) is set to announce the ban tomorrow morning, the wires are reporting.
What is naked short-selling? First, let's take on short-selling. If you're a short-seller, you're betting that the price of a stock will go down in the long run. In order to short sell, you borrow stock and then assume you'll be able to buy it back at a lower price. Short-selling is a legitimate part of all markets; it's for pros only and it adds crucial liquidity to the system.
Naked short-selling, or naked shorting, is another matter entirely. In naked shorting, you never actually take possession of the shares you say you intend to buy back at a lower price. You take advantage of the three-day stock settlement window to make your money, then get out. There is no risk for the traders because they have no skin in the game. But naked shorting can destroy companies. It exists for one reason only: to drive down stock prices. That's why it's illegal in the U.S., made so in 2007.
Now Germany is doing the same. At first blush, this looks like a positive move by the government. But remember: 16 nations, including Germany, are linked by a common currency. Autonomous moves by one of the eurozone nations -- especially the strongest, Germany -- could cause distortions that could harm the weaker ones.
This news has already further driven down the euro, which has been falling all day, and it now sits at about 1.2 against the dollar.
This seems like a good opportunity to send you, if you haven't been, to my piece "5 reasons why Europe is sick".
May 18, 2010; 2:10 PM ET
Categories: Deficit/debt | Tags: Business, Credit default swap, Germany, Investing, Naked short selling, Short, Stocks and Bonds, United States
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