Naked

Finance is not my forte, so sometimes I hear things that in my world cannot possibly exist, but out there in the real world they’re happening.

There’s the stock exchange for example. People trade in stocks, make a profit or lose money. I’ve never understood what stocks are, but I can understand the stock market as long as I force myself to think of stocks as a commodity like cars, houses or pets.

Once you think of stocks as a commodity, it’s easy to imagine that rising and falling prices create opportunities for the bungee jumpers among us to speculate. Buying stocks at a low price and selling them once their value has risen obviously delivers a profit, easy. But the other way round can also work: selling stocks at a high price and then buying them back after they value has fallen. There doesn’t seem to be much point in buying them back, why would you? Profit’s already been taken.

Well, this is what short selling is all about. The stocks you sell at a high price and buy back after a while at a low one aren’t yours, they’re borrowed. Hence the need to buy them back, otherwise you have a problem with the owner. Basically, you speculate with someone else’s property, counting on a fall in price. If the price doesn’t fall, you’re in trouble. Risky business.

But not risky enough for some. Those who prefer a real ride on a rollercoaster have invented naked short selling. It’s the same as short selling, but without borrowing the stocks you trade in. The owner simply doesn’t know you’re buying and selling his stocks. Naked short selling is a good tool to influence the stock exchange, because it can be used to drive the price down of a targeted stock.

In my world this is fraud. In the real world governments are trying to put laws in place that regulate the practice and forbid it in specific circumstances. For reasons I cannot fathom, ordinary anti-fraud laws aren’t sufficient and a downright prohibition isn’t feasible. Supposedly naked short selling can also have positive effects on ‘market liquidity’, a phrase that holds no meaning to me.

But this post is not about whether practices like naked short selling are wrong or not, it’s about their other worldliness. That’s what baffles me. If the stock exchange manages to organise buying and selling stock based on mere concepts like ‘price’, ‘rise’ and ‘fall’, then thinks of trading in borrowed items and subsequently invents trade in stuff that’s someone else’s without them knowing, why hasn’t the stock market ever thought of trading in stocks that aren’t there? What’s keeping them from trading in stocks that do not exist?