I see why having a coordinated response from a economic zone is key when so many nations sharing a single currency (Euro). It does water down any effectiveness on decisive action during any financial crisis when a single and important nation takes a abrupt stance on its own accord on such short notice. With that said, read below:
What troubles me is this unified stance against Germany’s decision to ban naked shorting of various financial instruments. Shorting in general, even though it is frowned upon in the mainstream press and as counter-productive, serves a very important purpose in our financial markets. If you are allow people to “go long” (bet on price appreciation) then you have to also allow someone to take the other side of the bet as well for a price decline.
The process of shorting is simple, you borrow a financial instrument at a certain price and getting the proceeds (money) from that trade right then with the promise to replace the same instrument at a future date. You make your profit if it declines in price so you can purchase the same amount for less. Conversely, if it rises in price then you would take a loss.
The problem with allowing naked shorting, is that instead of actually borrowing the asset, you just create it from thin air and then go short. This gives a negative bias when looking at different options on how to invest or speculate in a asset class. This serves no good purpose in our markets, period. Normal shorting has a nice benefit that when you cover your short (closing the transaction by repurchasing the asset), you actually increase the price because of the buying produced by the short selling. When you are naked selling, these are more likely than not, just entries on some market makers books and they just close out the transaction and dispose of the artificially financial asset or if they are then they just committing fraud by introducing a asset that didn’t actually exist normally.
A European Commission document said EU states have created problems by reacting very differently to market fluctuations in eurozone government bonds — such as Germany’s move to ban while other nations did nothing. It says different attitudes limit the effectiveness of any move.
Instead, it suggests that any ban should be coordinated with a new European markets authority, due to be set up by the end of this year, which could hold talks with all national supervisors in the EU.
It also proposes that the ban could exempt market makers and shares whose main markets are outside Europe — which could allow European investors to continue trading on U.S. markets.
It also wants traders to give regulators more information on the short positions they hold — which would allow supervisors to decide if a large build-up of financial bets could cause a risk to the entire market. Large positions could be made public, it says.
The EU is asking whether regulators should seek information on significant net short positions in EU government bonds to monitor whether they are “creating disorderly markets or systemic risks or are being used for abusive purposes.”
Analysis: These types of actions call into question what the real goal of our markets are. Naked short selling obviously serves no purpose in a fair and transparent market. Very questionable that so many experts came out against this action by Germany when it was a very sound course of action. Using the reduction of liquidity argument against fake financial instruments is a straw-man defense and does not have a sound foundation in the large scheme of things. If you want to short and take the risk in that bet, just do it the old fashion and honest way.