Never the twain shall meet, eh?
You don\’t like the idea? Then take a look at naked short selling. In this case sellers not only don\’t own the assets they\’re selling, they haven\’t even borrowed them. They sell a promise of shares, hope the price falls, then try to obtain the shares they\’ve sold. In the surreal traditions of modern finance they\’re effectively selling securities that don\’t yet exist (perhaps they should be called insecurities). Naked shorting may grant short sellers golden opportunities to wreck companies and economies, by flooding the market with low-cost ghosts.
Almost everyone condemns naked (also known as uncovered) short selling and wants it banned because of the huge risks it presents to the economy.
There are no huge risks to the economy from naked shorts.
There are large risks to the pockets of those who do it, for sure, but not to the wider economy.
What George really doesn\’t understand is that, as so often in finance, there are several ways to do the same thing. If you want to bet that a share or commodity or bond is going down there are, as usual, several ways of doing this.
You can buy a put option. You could buy a put future (although I\’m not certain I\’ve got the right word, \”put\” there). You could borrow and short. You could naked short. On a bond you could buy a CDS.
The only major difference between these is that a put option and buying a CDS limits your losses to the premium you pay or par for the bond (umm, usually, but not always).
A put future leaves you open to unlimited losses in exactly the same way as either covered or naked shorting does.
George is insisting that it is this unlimited possible liability which makes naked shorts so evil as needing to ban them. But if a put future leaves you with the same risk, then these should be banned to.
And if you ban put futures, then the entire futures market falls apart (you cannot have call futures without puts) and thus so does the entire options market which relies upon said futures.
So, we\’ve just outlawed all derivatives.
Err, no, this is numptiness of the highest order.
As an added bonus we get guess who in the comments to which I respond:
As to Murphy:
It could quite reasonably be argued that it was an excess of liquidity that resulted in the crisis. Too much liquidity, moving in the wrong direction, in unison….
Quite. What short selling allows you to do is move not in unison, move against the crowd, thus deflating the very bubble you\’re complaining about.
Which is exactly why Robert Shiller suggested that the solution to this crisis was to insist upon there being more speculation, more ability to short sell housing.
Blimey, complaining about people moving \”in unison\” and then trying to ban the method by which people can move against the crowd.
You have looked up the meaning of the word \”logic\” have you Richard?