Going Naked

By Marcus Wilson 22/05/2010 6


I’ve been reading about Naked Short Selling, following Germany’s decision this week to ban it. What the financial world gets up to is rather interesting, to say the least.  For those who don’t wish to read about it themselves, my summary is this:  Short-selling is where you borrow something, then sell it, buy it back later at a lower price (you hope) and return it to its owner, and you pocket the difference; Naked Short Selling is when you are so keen you sell something before you’ve even borrowed it.

Hmm.  Short selling kind of reminds me of what electrons can do in Quantum Electrodynamics (QED).  They can ‘borrow’ energy, for a short time, use it (e.g. for creating electron/positron pairs), so long as they give it back again later. I’m not sure whether there is an equivalent to the naked version – i.e. using the energy before they’ve borrowed it. It all gets rather complicated, which is why I steer well clear of QED.


6 Responses to “Going Naked”

  • Why leave it at Naked Short Selling? Physicists seem to be big players in the financial world. Why not a few articles on why?

    Todays Sunday Times has an excellent article on the back page of the business section how poker is the new hiring tool for traders in NY. Note the wee mention of “buying or selling a split second before their rivals”. Who would have thought that National Time Standards would be used for THAT!!!

  • Yes – certainly many physicists get snaffled by the financial institutions. One might even hope they do some good in terms of global finances.

    I have done a couple of articles before on financial things, but I’ll take your suggestion on board and look to do some more.

  • Selling something before you actually own it… reminds me of the pork futures warehouse in Pratchett’s Men at Arms :-)

  • If your calculus is up to it, the formula for valuing options is related the formula for calculating heat flux off a cylinder. See:
    http://en.wikipedia.org/wiki/Black%E2%80%93Scholes

    It is a lot cheaper to buy an option to buy an asset at a specified future time and specified future price than it is to buy the asset (usually a share). But the profit if the price rises the way you expected it to can be very high. Similarly, if you expect the price of the asset to fall, you could sell someone an option giving them the right to buy off you at a future specified time and price and hope to profit by buying the shares at a cheaper price later – i.e. naked short selling. BUT if the share price rises instead of falls, you stand to lose not only all the money you invested, but a whole bunch more. This is one of the reasons for the high volatility on the US share market. People URGENTLY have to buy or sell shares to close off adverse option positions. But there is a strong feeling that the more investors there are in a market, the fairer the asset prices will be.

    The reef fish model (David Lange) is rubbish. For every buyer there is a seller. A slightly better model of a market is a flock of sheep in paddock A pusing against a Taranaki gate to get at the grass in paddock B, while the sheep in paddock B do the opposite. The share price is where the gate finishes off being located.

  • The Taranaki gate idea is pefect…. In a perfect world. Unfortunately, the point of the share market is lost once the gamblers get their hands on the shares – or more specifically – get their hands on the truly nasty options. The ONLY point of options is the gamble between the “willing” buyer and the “willing” seller. Both expect to make a profit but sorry, only one is going to make one. The BIG idea of the sharemarket was to gather capital (to share the risk – which is nowhere near the same as the options gamble in this context and is surprisingly like the insurance industry) from Joe Public so that your company can expand, After that the buying and selling should only be to realise or consolidate you long term return. It seems to me that that is the only way the damn thing will work! And now NZX is getting into derivatives! Jeez Wayne…The other real killer blow will be to put a time delay between the exercise of the option to buy or sell and the completion of the deal. If this was at least (and convince me otherwise) 24hrs, you may be able to imagine that the billions racing around the ether each day….. would …… well….. just stop. Thus instantly putting a nice low frequency filter to the whole stupid game.

    Silly me…..

Site Meter