Bali Randhawa's  Instablog

It is Day 4 since Angela Merkel's Germany temporarily banned the perfidious market practice of naked short selling on some government securities and financial stocks.  In the intervening days all that has been heard from critics are hollow denunciations and sky-is-falling rhetoric, but they have provided not one single good reason to justify why this practice of securities counterfeiting should be legal.

The critics come in two types:

1) bank toadies who unintentionally conflate straight shorting with naked shorting because they do not understand the difference.  The former is a legitimate market practice that no one advocates banning; the latter is fraud, which if it were done not by a $500k a year refined huckster but by a two-bit hustler would bring about a visit from the Secret Service.  If you are a banker and do not comprehend the difference you're not worth a warm bucket of piss.

2) bank toadies who intentionally conflate the two.  To this set I say that if you believe naked shorting is not market manipulation, then set me up with an account at your firm and allow me to naked buy all the stock I can on your credit.  It sounds absurd, doesn't it?, when you flip the mirror and look at the situation from the angle every layman can relate, instead of cloaking the issue in industry jargon, feigned complexity and deceitful technical rationalizations.

Many of the critics insist that banning naked shorting removes trading liquidity, but then liquidity dries up during periods of volatility exactly when it's needed anyway.  So this is really about liquidity during non-panic markets?....it seems to me that if banning naked shorting introduces friction in the trading process by prompting a small increase in bid/ask spreads, that might not be so terrible if it dampened speculative trading somewhat.  Buy and hold types have little reason to protest, and maybe some day traders will pack it in and go do something else that is more useful.  Even market-makers should not be allowed a loophole - they should have to hold inventory (which means take a risk) to meet the orderly buying and selling rather than operating on the "just-in-time" model they are using now.  The absurdity of the Big Swinging Dicks is that they need the Cialis of free money to put their balls on the line.

Mainstream reporting is accepting and regurgitating this "Company" line without question.  However, it's more worrisome that many who are otherwise strong proponents of financial regulatory reform are also relegating this important decision only to Germany's panic.  It may as much be a symbol that Germany is getting into the game in a big way.  While their policy actions started out clumsy, it appears Germany is engaging and intent on leading financial regulatory overhaul in the buildup to next month's G20 meeting in Canada.  And that is a good thing.  A German source I read but can no longer find stated that this was about showing who is master: governments or the bankers.

As I stated in earlier posts on the ban (Germans Ban Naked Shorts: More Reaction and Germans Bank Naked Short Selling; Wall Street Has Spasm) the financial industry has long dismissed naked shorting as a very limited problem, even in the face of lawsuits by victim companies.  Information on the issue is difficult to come by because there is very little transparency in the trade settlement and clearing system, even more so for bonds than stocks - it is closely guarded by industry owned clearing organizations such as Depository Trust and Clearing Corporation (DTCC).  Where the information is available you have to be a near Kremlinologist to decipher and aggregate it across the disjointed clearing systems for various types of bonds and equities and trading activities.  I am not an expert in clearing systems, but have had enough dealings with parts of the system, including DTCC, to know the information barrier is attributable to deliberate intention.

I had hoped to present some figures showing how much profit the financial industry takes from naked shorting, but it will have to wait as I'm waiting to hear back from a professor whose covered the issue.  Whether that figure is $20 billion annually or $200 billion matters not - naked shorting is one among several Wall Street money siphons that need to be made illegal.

Subscribe in a reader or your home page

Other Options:

Click Here to Subscribe by Email

OR