Germany bans “naked” short selling of eurozone government bonds
The loonie fell as much as 1.36 cents Wednesday morning after Germany implemented a ban on so-called “naked” short selling of eurozone government bonds. It later recovered some ground after the markets opened, trading at about 95.54 cents (U.S.), down about a cent from a day earlier. Germany’s decision to ban “naked” short selling was designed to prevent big market sell-offs amid the Greek debt crisis, but traders are questioning the wisdom of the move, which some are interpreting as an act of desperation. Short selling occurs when traders borrow financial instruments and then sell them in anticipation of a price decline. They make money off the transaction through an agreement to buy back the instruments (at a lower price), and then return them to the lender at a later date, pocketing the difference. By contrast, “naked” short selling happens when traders take advantage of loopholes in the financial markets to short instruments they haven’t actually borrowed.