Sam Edmonds, 02 February 2010
German Chancellor Angela Merkel’s cabinet has approved a draft law widening the government’s recent temporary ban on the short sale of certain types of shares – a practice known as naked short-selling.
The draft, agreed on Wednesday, foresees a permanent ban on the naked short selling of all stocks listed on German exchanges, as well as bonds issued by eurozone governments.
The ban “concerns securities that registered on a regulated German market,” a finance ministry said.
The ban also encompasses certain trades on currencies that are not used for hedging purposes. A previous version of the draft law had envisaged a complete ban on short selling currency derivates.
Naked short is effectively a bet that a certain stock or government bond will lose value. But unlike conventional short selling whereby traders borrow securities to sell and buy them back at a profit once their price has fallen, naked short selling leapfrogs the borrowing process altogether. It is viewed as a far riskier form of trading.