Part II of Banning "Naked" Short Sales in Germany - What it is, and Why You Should Care
Early May 19, 2010, the German "authorities" banned naked short-selling of financial institutions, euro debt instruments, and cds's.
For details on what this high-finance heist is and how it will affect the markets, read on.
Part II Why Ban Naked Short-Selling? Since short-selling (naked or otherwise) is a standard, well-understood and beneficial process, why would it be banned? It goes back to the creation of selling pressures without buying pressures and the desire of those in power to make the market look good.
In theory, it would be possible for sufficiently rich financial players to short a company to death.
They could keep selling more and more shares short, driving down the price and creating a rush to the exits.
Anybody looking at that process would be reluctant to help finance the company because of its plummeting share price, and the company's ability to raise capital by selling shares would likewise be damaged.
It can happen, and it does happen sometimes, especially when national banks around the world have been irresponsibly creating huge oceans of "hot" money.
But it almost never happens for large, healthy companies, and the thought of naked short-selling having any real impact on the ultimate health of a currency is ludicrous.
The currency markets are enormously too large for that to happen.
However.
When you have a declining market or shares, shorting can hasten that process, and this is actually good since it reduces the amount of time that the market is uncertain about the value of the asset in question.
That allows people to pick up the pieces and start making things better.
On the other hand you can somewhat slow the decline by making it harder to get out of the market.
You can make it easier for bank officials to sell their shares to suckers so the bank officials don't have to take the losses, and if you're a political leader you can slow down things long enough either to come up with another flim-flam or to survive an election.
That is really what is going on in Germany.
Any restriction on short-selling is in actuality a way of locking people into the markets and perpetuating false market signals by interfering with the price.
Again, that is what is happening in Germany.
By banning naked short sales of the euro, protected financial institutions, or credit default swaps, the German government requires a person who (rightly) believes these things are far over-valued by the market to waste money buying options they don't want (increasing the price of the transaction as a whole) and to create an off-setting buying pressure to negate the effect of the trade on the market.
This is all designed to slow the downward movement of the stock or asset price.
It is gross interference in the free market in an attempt to manipulate the price of the assets in question.
For details on what this high-finance heist is and how it will affect the markets, read on.
Part II Why Ban Naked Short-Selling? Since short-selling (naked or otherwise) is a standard, well-understood and beneficial process, why would it be banned? It goes back to the creation of selling pressures without buying pressures and the desire of those in power to make the market look good.
In theory, it would be possible for sufficiently rich financial players to short a company to death.
They could keep selling more and more shares short, driving down the price and creating a rush to the exits.
Anybody looking at that process would be reluctant to help finance the company because of its plummeting share price, and the company's ability to raise capital by selling shares would likewise be damaged.
It can happen, and it does happen sometimes, especially when national banks around the world have been irresponsibly creating huge oceans of "hot" money.
But it almost never happens for large, healthy companies, and the thought of naked short-selling having any real impact on the ultimate health of a currency is ludicrous.
The currency markets are enormously too large for that to happen.
However.
When you have a declining market or shares, shorting can hasten that process, and this is actually good since it reduces the amount of time that the market is uncertain about the value of the asset in question.
That allows people to pick up the pieces and start making things better.
On the other hand you can somewhat slow the decline by making it harder to get out of the market.
You can make it easier for bank officials to sell their shares to suckers so the bank officials don't have to take the losses, and if you're a political leader you can slow down things long enough either to come up with another flim-flam or to survive an election.
That is really what is going on in Germany.
Any restriction on short-selling is in actuality a way of locking people into the markets and perpetuating false market signals by interfering with the price.
Again, that is what is happening in Germany.
By banning naked short sales of the euro, protected financial institutions, or credit default swaps, the German government requires a person who (rightly) believes these things are far over-valued by the market to waste money buying options they don't want (increasing the price of the transaction as a whole) and to create an off-setting buying pressure to negate the effect of the trade on the market.
This is all designed to slow the downward movement of the stock or asset price.
It is gross interference in the free market in an attempt to manipulate the price of the assets in question.