Okay, I’m currently reading an article from Rolling Stone by Matt Taibbi re: naked short selling. I have to claim near complete ignorance on the subject of naked short selling, but would like to educate myself. I would also be interested in an Austrian/free market interpretation as to the legitimacy of this type of transaction.
Please educate me. Thanks.
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The little I know about it, nothing wrong with it. An honest voluntary transaction, no cheating or fraud, what’s not to like?
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Gary Galles sums up the Austrian position on short selling pretty well: Don’t Sell Short Selling Short.
There is nothing illegitimate or immoral about “Naked” short selling. Now it is extraordinarily risky and unlike most derivative securities, Naked short selling comes with an exposure to an unlimited downside. What is immoral and illegitimate is giving someone elses money (normally stolen booty called taxation) to cover the losses of lenders and other financiers who fronted the money for this risk.
Uh, isn’t naked shorting where you short something… without even borrowing the shares first? So what you sell doesn’t even exist, right? How is that not fraud?
EDIT: I just read this explanation, the broker apparently acts as a middleman, making guarantees to the buyer in the naked short sale, so everything is legit. http://mises.org/daily/3066
No, it exists, and if the market price rises, you’re screwed. It’s not any more fraudulent then borrowing money you can never repay in order to make a potential fortune in some risky investment.
I don’t understand what people are afraid in all these fancy ways of buying/selling… Liberals seem to think that ‘leveraged buyout’ means you’re doing something wrong… There’s no analysis. Just fear.
I really dont care about short selling from a philosophical view…but…:
The current role short selling has on the stock market and on every other tradable commodity is just “betting”…I am sick of this casino market which is only supported by the already huge financial sector.
Try short selling your car, tv, play station, house. You find much betting.
From what I hear, short selling serves a valuable purpose. It is something for managment to fear. “If I mess up, the short sellers will ruin me.” Sadly I don’t exactly grasp how this works.
Generally I am not opposed to naked shorts, they serve as a valuable tool for a business that wishes to control risk exposure, such as an Airline and naked shorts on oil.
However when JP Morgan as custodian for the SLV etf (Silver fund obtained in Bear Stearns meltdown) consistently holds the single largest short position and has direct access to the FRB for dollars to cover all those shorts I suspect blatant manipulation & price supression.
Excellent.
B-man wrote the following post at Wed, May 26 2010 1:20 PM:
Generally I am not opposed to naked shorts, they serve as a valuable tool for a business that wishes to control risk exposure, such as an Airline and naked shorts on oil.
However when JP Morgan as custodian for the SLV etf (Silver fund obtained in Bear Stearns meltdown) consistently holds the single largest short position and has direct access to the FRB for dollars to cover all those shorts I suspect blatant manipulation & price supression.
You used to be able to do this quite easily… it’s called pawning.
Clayton -
Art Carden talked about this at Mises University: Short Selling: Explanation and Defense.
How is trying to sell something you do not own or control not fraud?
We can of course make this practice legal if everyone that enters a certain exchange explicitly agrees to allow naked short selling. But wihout an explicit aggreement between everyone involed this is fraudulent without a doubt.
Also, Don Boudreaux had an article published on the topic today: Who You Callin’ ‘Shorty’?