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Naked Speculation: Selling What You Don’t Own – OpEd


The decision by France, Italy, Spain and Belgium to impose a ban on the short selling of shares will be approved by many well beyond the confines of those particular four countries. Indeed, it may even be welcomed within the financial markets themselves. It is an activity that has been responsible for driving down the share prices, most particularly in recent days of banking stocks. Germany banned the practice last year and inevitably responded instantly to the albeit temporary move by its four EU partners with a demand for a permanent Europe-wide ban.

In acting jointly with their decision, the four governments are very pointedly throwing down the gauntlet to the markets. It may well be, as some analysts are predicting, that their attack on this highly speculative financial trick is a turning point in the regulation of the financial markets, whose operations have now often lost all touch with underlying financial realities. This is clearly demonstrated in the financial maneuver of short selling itself. In essence, a speculator sells shares that he has borrowed from their owner in the expectation that the sale will drive down the share price, so that he can then buy the shares at a lower price, hand them back and thus make a handsome profit.

There are two key elements here, both of which are morally dubious. First of all, how in the real world, where most of us live, can anyone sell something that they do not already own own? Secondly, these are not isolated transactions. As the price of a share continues to tumble, the short sellers carry on selling shares they do not own, to buy them at a lower price. The cycle is almost self-perpetuating. Once short sellers have sunk their teeth into a target, they will continue to suck value out of a share.

This is not investment to create value — not in the accepted sense of value. It is naked speculation, designed to destroy value in companies in a way that lets a relatively few very rich investors become even richer.

It is right that four EU governments have decided to take on the vampire bats of the market. The pity is that first the Germans and now the French, Italians, Spaniards and Belgians have acted alone. There is not yet any sign that in the UK, the US or the main Asian markets a similar measure will be introduced on a temporary or permanent basis – although it was reported four days ago that South Korea was considering doing so.

The protests from London and New York that these bans are unworkable and would distort the markets can be dismissed as nothing more than the bleatings of a rapacious clique desperate to continue feathering their own nest at the expense of everyone else. It is poppycock, because it is this very sort of meaningless get-rich-quick behavior which has actually wrecked the markets and turned them into a criminal casino.

Governments and regulators everywhere should be acting in concert to take on these fundamentally dishonest wheeler-dealers who, one suspects, would happily sell their own grandmothers if they could find the right market instrument. Unfortunately, clamping down on criminal practice only becomes much harder when the speculators can shift their operations elsewhere. Other financial jurisdictions, therefore, need to wake up and follow suit.

In the meantime, the French can be expected to show their normal hard headedness and move swiftly against speculators and dealers who choose to ignore the ban. The sight of some slick-suited financial operators being arrested for breaching the new regulation and fined, or even jailed, for their illegality, will surely make other short-sellers think about their shenanigans. It will certainly make most sane individuals applaud loudly.

It will be interesting to see if the four countries’ ban remains temporary.

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Arab News

Arab News is Saudi Arabia's first English-language newspaper. It was founded in 1975 by Hisham and Mohammed Ali Hafiz. Today, it is one of 29 publications produced by Saudi Research & Publishing Company (SRPC), a subsidiary of Saudi Research & Marketing Group (SRMG).

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