Naked short selling ban

London, England CNN -- German authorities have acted against what Berlin views as destabilizing speculation in the financial markets by implementing a partial ban on naked short-selling of certain stocks. Here is a guide to the practice and what the ban means. A Short sellers are institutions or people who bet on the price of an asset going down. What they do is borrow the share or bond or whatever it is, sell it for the current price, and then buy it back again once the price has dropped. Then they hand it back to whomever it was they borrowed it from and then pocket the difference. A Let's say you think shares in Widget Enterprises are overvalued.

Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market. Despite being made illegal after the —09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems. Naked shorting takes place when investors sell shorts associated with shares that they do not possess and have not confirmed their ability to possess. If the trade associated with the short needs to take place in order to fulfill the obligations of the position, then the trade may fail to complete within the required clearing time because the seller does not actually have access to the shares. The technique has a very high risk level but has the potential to yield high rewards.

PARIS - France, Italy, Spain and Belgium are banning short-selling on select stocks amid efforts to calm market turmoil that has sent bank shares gyrating wildly and aggravated worries about Europe's huge debts. The European Union's markets supervisor, the ESMA, announced the move late Thursday night after boosting surveillance of stormy markets earlier in the day. The move capped two days of whipsaw trading that saw French banks' market value fall and rise by billions of euros.

Germany has banned the "naked" short-selling of eurozone government bonds, their credit default swaps CDS and the shares of the country's 10 biggest financial institutions. BaFin, the German financial regulator, wants to crack down on the speculators it blames for destabilising financial markets and making the Greek debt crisis worse. The watchdog said that large-scale short-selling could have "endangered the stability of the entire financial system". Short-selling is selling borrowed shares in the hope their price will fall and that they can be bought back at a profit later on.