German regulators resolve to discourage speculation in financial markets
Having just graduated from the William School of Business, with concentrations in Management and Finance, the last four years of studying businesses and financial markets have been an extremely amazing experience.
Our graduating class got the opportunity to study the highs of 2007, the crash of 2008, the recession/recovery of 2009, and now the so-called potential “double dip” of 2010. With the help of the Business Department’s amazing faculty, we’ve been guided through the world-wind of the global economy’s recent highs and lows.
What’s been extremely interesting, for a Finance major, is the ongoing debate of a double dip of the world’s economic recovery. This “double-dip” refers to a second significant drop in global stock market value – which would lead people to sell-sell-sell in fear that the 2008 crash is still not behind us.
Most notably, with certain European countries facing bankruptcy and relying on EU bailouts, this is creating growing concern for investors around the globe.
Germany’s recent announcement to ban “naked short-selling” of Eurozone government bonds and shares for roughly ten months has caused a rapid selling spree around the world. Germany’s unforeseen announcement was engineered to curb volatility of speculators said the German Chancellor, Angela Merkel.
She goes on to say that this decision was needed to assert the “primacy of politics” in Greece’s debt crisis and reassure financial markets. This comes at a time when the country is in the midst of finalizing its $123 billion contribution to the emergency fund of countries, such as Greece, in order to reassure financial markets of EU stability.
A short sale is when a trader sells borrowed shares in hopes to profit by buying back the shares at a cheaper price. People have been making large amounts of profit off this risky method for years now. In contrast, a “naked” short-sale is when the trader neglects to borrow them in the first place. This means, people are selling stock of shares that aren’t even real or based on solid grounds.
This isn’t the first time we’ve seen this kind of ban in markets. In the wake of the 2008 global crash, regulators from the US and Britain were unsuccessful in their attempt to prop up markets after the downfall of Lehman Brothers.
“If anything, the ban in 2008 exacerbated market declines and volatility, as investors took fright and bailed out of the whole sector, and the Germans run the risk of causing the same mayhem,” said Michael Hewson, an analyst at CMC Markets.
Although the efforts were intended to ease the volatility of market activity, the question remains why go forward, knowing it wasn’t successful in the past? Perhaps regulators aimed to make a statement that this type of activity may have partially been a root of markets downfall in the first place.
Pressing on the issue of naked short-sales, wouldn’t it make perfect sense to ban these types of actions in any financial markets? The principle of selling something on a groundless basis with no factual evidence makes no sense to any logical person.
If you are sold a product, such as a car, and settle all the terms and agreements of the sale, and come the day to go pick up your new car, they tell you: “Sorry, we actually never had the car you just bought.” Wouldn’t you be upset? I know I would.
‘Naked selling’, if you will, is also seen when airlines over book flights – what a bore!
Clearly these are very different circumstances than what we see with market speculators and traders; however, I’m trying to prove that the principle of the action is not logical in any other circumstance. Therefore, why would it be reasonable for traders and not airlines, or car salesmen?
Maybe there needs to be reform under market activity of naked short-selling on a global scale and not strictly exclusive to German bonds. Wouldn’t that be an idea? I wonder, what would markets look like then?
