Sep 222008

Selling short is now banned across the board on Australian stock markets.

In fact, the practice has now also been outlawed in the UK and the US. I’ve been hearing about this bizarre practice a lot lately, given that it’s one of a few such bizarre practices which have brought the US financial markets, and subsequently other world stock markets, to their knees. Never having had a great deal of interest in gambling, not the money to be even remotely interested in stock markets, I’ve ignored a lot of the jargon-driven hype about financial market crashes, preferring to concentrate on those imprudent practices that I understand.

However, my curiosity has finally defeated my ignorance, so I went looking for a definition of ‘short selling’ and ‘naked shorting’. Here’s a little of what I found:

Naked short selling, or naked shorting, is the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. When the seller does not then obtain the shares within the required time frame, the result is known as a "fail to deliver". However, the transaction generally continues to sit open until the shares are acquired by the seller or the seller’s broker, allowing a trade to occur when the order is filled. A naked short sale is selling a security short without first ascertaining that one can borrow the security.

Short selling or "shorting" is the practice of selling things the seller does not own, (often financial instruments), in the hope of repurchasing them later at a lower price. Often the seller will "borrow" or "rent" the items to be sold, and later repurchase identical items for return to the lender.

Short-sellers attempt to profit from an expected decline in price (in contrast to the ordinary investment practice, where an investor "goes long", purchasing a security in the hope the price will rise). However, the practice is risky in that prices may rise indefinitely, even beyond the net worth of the short seller. The act of repurchasing is known as "covering" a position.

Okay…curiosity satisfied, ignorance now shifting back into gear. I think it’s safer that way, where buying and selling in what is clearly a crooks marketplace is concerned. How can it possibly be, in any way, shape or form logical, not to mention ‘legal’, to sell something you don’t own, and sell that something without first ensuring that you may first ‘borrow’ that something, so that your ownership, however tenuous, can at least be seen as you having laid hands on that something, at some point in the proceedings?

It’s merely one of the signs of a greed driven financial system finally outpacing itself. A financial engine powered by avarice and the myriad of inventive ways human beings have of shafting each other within the bounds of specifically written laws permitting a pursuit of ever greater wealth for the few, at the expense of the many. I’m not the only person to believe that. There’s quite a few snake-oil salesmen, ie; economists, who feel likewise. Evidence the extraordinary lengths the US administration is currently prepared to go to in order to maintain a pretence of fiscal stability. A strangely socialistic nationalising of imprudently created debt by risk-insensitive gamblers who expect to indulge in their strange wealth creation dance, but have the American taxpayer pull them out of the shit when the piper comes a-calling. What is truly startling is that such a decision should originate from with the seat of power of capitalism itself. And it’s not over yet. No-where near it, in my estimation. Will those who have the power to make the changes necessary to prevent such stupidity occurring again, take the right actions, or will they believe the contrite re-assurances from a duly chastened fiscal market, and allow self-regulation to ramp up again? Time will tell, but my belief is that while human beings continue to be driven by materialistic wants, as opposed to needs, we’ll see repetitions of the past twelve months with slightly different flavours, but the same acrid stench, again and again.
