Naked Short Selling Ban

Naked Short Selling Ban.

The UK has lost a European Court Judgement in an attempt to block the EU banning certain financial actions.

One practice high on the agenda is that of “naked short selling”.

What is “short selling”?

Short selling, in its very basic form is selling a stock before you own it. The practice was widely used when markets were falling in the credit crunch with investment houses, professional investors and traders selling stocks at a lower price, this driving the market down before they even owned it.

For example: A stock valued at a £1 at open of business. You as the trader, do not own it yet. You enter into a contract to sell the same stock at £0.95. This then drives the market price down and by lunchtime, the stock is priced at £0.90. You then buy it. At close of business when all settlements are required, you own the stock, you have sold the stock, but you have a made a profit of £0.05p per share. 5% in a day is an unbelievable return on a stock you never really owned or held.

The UK Government contested the rule change, allowing short selling to be banned as it felt that this was an attack on the City and its ability to trade in a free market.

Comment

Naked short selling is seen as a practice that de-stabilises markets and we totally agree. In the middle of the credit-crunch, naked short selling was banned in many western markets and instantly bought stability to the markets.

The UK does not have any ability to veto any EU ban on financial transactions and cannot opt out. We believe this is a good thing for financial stability although no doubt many traders will worry about the effect of how far EU powers could go. The powers now to be granted are much larger than just naked short selling, but for the greater good, stability of small investors pensions and investment funds, we believe that ability to ban certain types of trading is a good thing.