Naked short selling – Can anyone else see what’s going on here?

27th May 2010

Nuages0 commenting on The Motley Fool asks what exactly Germany's ban on some sorts of naked short selling changes. After all, he asks, isn't it already illegal?

"I was amazed to hear of the German ban on naked short selling.

"Why? Because I had naturally assumed that it was already illegal.

"How can you be allowed to sell something which you don't own, have not borrowed and may not even exist (if the volume of securities sold exceeds the number in issue)?"

In reply, Bob342 explained it thus: "I think it is often a bit less dodgy than it sounds. Most US stockbrokers will let you short as easy as buying.

"If you decide to sell a stock short, usually the mechanics of stock borrowing is hidden, its up to the broker to organise the borrowing, from a third party, or another client's account."

Anyone seeking clarity on the topic from the likes of Wikipedia will probably be none the wiser, as this 'explanation' demonstrates.

"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".

See what I mean?

But then maybe as Brett Owens says, the only lesson you need on it is the one from history. And that suggests the outcome for German equities won't be good. 

 

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