THE WORST IDEA SINCE THE BERLIN WALL

I was wondering that myself (and I don't pretend to know or work in this space) - how can you tell if a trade is 'covered', or when it is naked?

Seems like Banks have been lending money they don't actually have for years.  And when one source to get the money folded, the whole chain ground to a halt.  Seems like naked shorting is selling shares/stock you don't have too.  And so in fact you may never be able to get hold of what you just sold?  If you don't have it covered/borrowed or whatever, what actually happens if you need to find some and none are available?  What if you don't have a hold or an option on the stock and there simply isn't any when everyone needs it?  OK, eventually some will  be available and you will pay a lot more and lose a lot more - which is why its a reckless trading technique.

So from a layman perspective - Merkel seems to have a valid point and I don't see that its such a bad thing - provided you can identify when it is, and isn't, naked.  Why is it different to saying a bank needs a certain level of deposits to be able to lend virtual money.

Many thanks for yr comment and for yr interest in my blog. This is how it works:

For dealers to be able to sell (hence deliver) something hey haven't bought, their brokers borrow the security. The market known as security lending provides additional yields to long-only holders of securities (insurance, funds) who are willing to lend. The broker is only a market maker. You are right to say that there is a risk of not being able to find what you are short of. In such case, prices would soar when you cover and you will be punished. But more often than not market makers and custodians do their job properly; moreover only a share of the outstanding capital is available for short selling (typically 1/3). With bonds, it's a similar process. 

Now short selling is not purely for greedy blood sucking speculators to earn even more and profit out of other people's misery -as some politicians want people to believe. Short selling is a necessary feature of the fair market. Markets need to have safeguards in case of irrational exuberance, flawed valuations, or if unethical practices corner the prices.

Moreover, many "multilegged strategies" have a short sale as part of the combination. Capital protected structured products, convertible bonds, option market making and many other strategies are simply no longer possible if you can't go short one asset while being long another one. It will be difficult to qualify to which extent shorts are "naked" or "covered" since they are supposed to cover some exposure not necessarily positions and often cross-asset class.

Finally, what I believe is a very bad idea is to go against the markets when they turn unfavourable. The EU enjoyed a capital inflow from carry trades for the last 18 months at least. Many had warned against that bubble, hot money that could destabilise the currency if any tail event would come change the outlook. To rule against the sales is a very lose reaction. It gives the whole region a bad name in terms of market efficiency, openness and fairness.

Besides, the minute you forbid a trade on-shore, you open a market off-shore. By definition.

I hope that clarifies. Again thank you. P

Thanks to Phillipe Carrel for his very good description of the view on the world apparently prevailing among a number of people who make their living in and around financial markets.

But please remember that the vast majority of people worldwide do make their living in the real economy, performing hard work to produce tangible goods and services. Their view on the world may be somewhat different but at least as reasonable ...

This vast majority of people is paying taxes to support the duties and responsibilities of the gouvernments of their respective countries. At an increasing pace and with growing volumes, governments now have to step in to repair serious aberrations produced by deregulated financial markets. 

Taxpayers and voters do expect their governments to protect them from being held responsible for actions done by others, often being driven by greed. Why should a righteous worker in Germany suffer from serious tax increases and the resulting decrease in his standard of living, just because someone else somewhere else speculated and did fail ? But governments - quite rightly - say they can't let those failed institutions go down as this would take world's economy down the drain too.

So there is the clear need to reintroduce some regulation into markets that obviously have shown not to be able to regulate themselves in an orderly fashion. That's not more against democracy as having speed limits on roads to control the damage done by reckless drivers. Responsible drivers will obey those rules (at least, kind of ...) to the benefit of all.

Comparing such cautious attempts to introduce some reasonable rules with the Berlin Wall is certainly a gross exaggeration. Rather, you might compare those with a garden fence that probably won't protect you against criminal burglars - but at least it helps to keep away some people you would not like to see next to your home, and to remind that there is no such thing like unlimited freedom. Freedom of markets is not the only value on earth that overrules anything else, and in democratic societies it is accepted that governments have the duty to provide rules for a sound balance between those various values (like justice and fairness etc.) that are agreed on by society.