Is "Naked Short" Investing Sinful?

[Neil_Anthony]

Germany made ‘naked short’ investing against the value of sovereign bonds illegal during Greece’s debt crisis. Naked short means an investment designed to profit when an asset thing loses value (hence the word ‘short’), when the investor has no position in that asset that would make it reasonable for the investor to hedge his position (hence the term ‘naked’).

Is it immoral to use naked short selling to make money in investments? Why would it be immoral? Well, we’re profiting from the loss of value of an asset. Is this seeking to profit from a bad thing, and is that immoral?

 

[BillP]

Actually the issue with “naked” shorting is not so much related to hedging the asset, after all almost everyone who is shorting a stock “borrows” it rather than short selling something they own. The point is that “naked shorting” has histrionically been used to manipulate the price of shares on the market.

 

[Texas_Roofer]

I do believe “naked shorts” are immoral and frankly illegal but this is an area where law enforcement has failed the US citizen. “Naked” is a term I have always read to be selling something you do not own, and thus the immoral aspect. The sin is compound as one can sell naked shorts which they cannot cover. So if someone sold a million dollars worth of Greek government bonds for deliver on 1/1/2012 which they do not own; thus betting they can buy these bonds for less between now and then, that person if they are wrong may not be able to cover the 1.2 million needed to purchase the bonds on the date the delivery.

Short selling is supposedly barrowing the same bonds from the owner to sell same as above. But has anyone ever seen bonds borrowed? My guess is this is again insiders manipulating 401k accounts in an immoral manner. Options which are a moral way to do the same, because options are just that an option to buy or sell from another party and options usually have an option premium paid up front. Unfortunately options share the same problem of if you “buy” the option for one million dollars and it becomes worth 1.2 million the “seller” has to deliver the $200,000 which he may not have! I think there is an internal insurance system in the options market for this. But again we do not jail people for selling things they do not own when they sell/work on Wall Street.

So at the end of the day you end up with crooks in charge of your retirement accounts

 

[Neil_Anthony]

I do believe “naked shorts” are immoral and frankly illegal but this is an area where law enforcement has failed the US citizen. “Naked” is a term I have always read to be selling something you do not own, and thus the immoral aspect. The sin is compound as one can sell naked shorts which they cannot cover.

I hadn’t even thought of that. How about just investing in a fund that shorts something. For example, an exchange traded fund that shorts the price of 30-year treasuries, because you expect their value to go down? I’m not really selling anything I don’t own, just buying shares in a fund.

 

[Texas_Roofer]

I hadn’t even thought of that. How about just investing in a fund that shorts something. For example, an exchange traded fund that shorts the price of 30-year treasuries, because you expect their value to go down? I’m not really selling anything I don’t own, just buying shares in a fund.

I am not sure such a fund exists. When a company advertises a fund involved in high risk activities most 401k contributors run for the hills. So these behaviors are usually not allowed by fund perspectives. My gut says shorts are money managers “borrowing” from grandpa’s 401k to gamble, and grandpa takes the losses while the manager personally accepts any winnings. So why does grandpa do this? …he doesn’t it is done by the money manager on grandpa’s behalf.

Now again from whom would your fund “borrow” these 30-year treasuries from? Who would buy treasuries (ultra conservative) and then gamble them by loaning to a gambler??

 

[edwest2]

Whoever came up with this idea should be punished. I have nothing but I borrow something in the hope the value will go down? And I can manipulate the market? I was very happy to hear the German government did this. Someone is playing a game with our money instead of acting responsibly. That is completely wrong.

But, of course, if the price goes up and I don’t have the money to cover the difference, I’ll just let the taxpayers pay it.

Is it a sin? Not if it’s legal and if it’s not used to drive down the price of a company. On the other hand, I think stocks should only be involved in getting actual money from actual profits and not betting and gaining money on credit and on prices going down.

God bless,
Ed

 

[JohnDamian]

Economic trading based upon supply is moral insofar as it does not elicit *extortion *of those in demand. Ordinatio Oxoniense AD1301.

There is nothing wrong with such investing; or infact investing in general.

 

[Texas_Roofer]

Economic trading based upon supply is moral insofar as it does not elicit *extortion *of those in demand. Ordinatio Oxoniense AD1301.

There is nothing wrong with such investing; or infact investing in general.

What do you see being “invested”?

What do you see being “supplied”?

Naked selling is :

*What Does Naked Shorting Mean?
The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen. -
investopedia.com/terms/n/nakedshorting.asp

Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “fail to deliver”. - en.wikipedia.org/wiki/Naked_short_selling*

 

[didymus]

It’s no more immoral than any other kind of investment but many folks seems to focus on it as if it were the original serpent in an otherwise Eden-like Wall St.
“Naked” in this context refers to not having the borrowed stock to cover your bet. If you lack the stock but have the cash, no problem. I’m more concerned with banks, investment houses, hedge funds, &c that are leveraged 20:1 or more.

 

[Neil_Anthony]

I am not sure such a fund exists. When a company advertises a fund involved in high risk activities most 401k contributors run for the hills. So these behaviors are usually not allowed by fund perspectives. My gut says shorts are money managers “borrowing” from grandpa’s 401k to gamble, and grandpa takes the losses while the manager personally accepts any winnings. So why does grandpa do this? …he doesn’t it is done by the money manager on grandpa’s behalf.

Now again from whom would your fund “borrow” these 30-year treasuries from? Who would buy treasuries (ultra conservative) and then gamble them by loaning to a gambler??

Here’s a description of it if you want to read more about how they achieve it:

hbpetfs.com/pub/en/etfs/?etf=HTD&r=o

HBP US 30 Year Bond Bull+ & Bear+ ETF (HTU / HTD) - Overview

Investment Objective

The Horizons BetaPro U.S. 30-Year Bond Bull Plus ETF (HBP U.S. 30-Year Bond Bull+ ETF) and the Horizons BetaPro U.S. 30-Year Bond Bear Plus ETF (HBP U.S. 30-Year Bond Bear+ ETF) seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the U.S. 30-Year Bond futures contract for the next delivery month. The HBP U.S. 30-Year Bond Bull+ and Bear+ ETFs are denominated in Canadian dollars, as the U.S. dollar exposure of the underlying index is hedged daily.

Principal Investment Strategy

The HBP U.S. 30-Year Bond Bull+ ETF and the HBP U.S. 30-Year Bond Bear+ ETF take positions in financial instruments and/or equity securities to seek daily investment results, before fees and expenses, that correspond to twice the daily performance or inverse performance of the U.S. 30-Year Bond futures contract for the next delivery month. HBP ETFs are rebalanced daily, so risk is limited to the initial invested capital. As a result, 200%/-200% benchmark tracking over a longer period is dependent upon the extent of compounding and the underlying benchmark volatility.

 

[Neil_Anthony]

It’s no more immoral than any other kind of investment but many folks seems to focus on it as if it were the original serpent in an otherwise Eden-like Wall St.

One reason that I wonder if shorting is immoral is that it isn’t really an investment IN anything… e.g. I’m not investing in a company that provides jobs or real products that real people need, I’m not buying some goods that I can trade with for other goods, or put aside for later. I’m not lending my money to someone else to use until I need it. I’m basically just buying insurance that pays off when something bad happens to other people.

For example, I’m buying something that gives me money if someone else’s bonds go down in value. It doesn’t seem to do anything good for anyone, from what I can tell.

 

[Texas_Roofer]

Here’s a description of it if you want to read more about how they achieve it:

hbpetfs.com/pub/en/etfs/?etf=HTD&r=o

I am not seeing where this fund “shorts” or “naked shorts” the fund seems to say it is a bet= 2.0. To be a beta =2.0 all one has to do is place the original investment at full margin.

i.e. $1,000 investment is used to buy $2,000 of bonds for 24 hrs. Then the bonds are sold thus the gain or loss is 2 times. Today Yahoo says that bond dropped 2.94% so the $1000 came back as $941.20 minus fees, minus interest (on the margins). So the invester who bet bull would lose about $65 dollars but the guy who bought (and thus put up money on the Bear side made about $45 ( $58.80 minus fees, minus interest (on the margins)). But is that shorting? These funds trade to each other. They are less than zero sum. The winner gets part of the loser’s money but the fund collects off both sides so long term both sides lose!!!

 

[Neil_Anthony]

I am not seeing where this fund “shorts” or “naked shorts” the fund seems to say it is a bet= 2.0. To be a beta =2.0 all one has to do is place the original investment at full margin.

i.e. $1,000 investment is used to buy $2,000 of bonds for 24 hrs. Then the bonds are sold thus the gain or loss is 2 times. Today Yahoo says that bond dropped 2.94% so the $1000 came back as $941.20 minus fees, minus interest (on the margins). So the invester who bet bull would lose about $65 dollars but the guy who bought (and thus put up money on the Bear side made about $45 ( $58.80 minus fees, minus interest (on the margins)). But is that shorting? These funds trade to each other. They are less than zero sum. The winner gets part of the loser’s money but the fund collects off both sides so long term both sides lose!!!

I believe that the bear fund must short futures contracts on the 30-year treasuries. How else would they achieve the inverse of the price of the treasuries?

I.e. they short-sell the next month’s futures for the US Treasury 30-year bond. To achieve 200%, they would have to short-sell double the amount of money invested in the ETF.

 

[Texas_Roofer]

I believe that the bear fund **must **short futures contracts on the 30-year treasuries. How else would they achieve the inverse of the price of the treasuries?

I.e. they short-sell the next month’s futures for the US Treasury 30-year bond. To achieve 200%, they would have to short-sell double the amount of money invested in the ETF.

The inverse betting could be achieved in this fund without shorting. That does not mean they are not shorting. The “house” could buy 10,000 bonds which they hold (24/7) and thus they would normally gain or lose based on bond yield. However they could allow their customers to bet at beta 2.0 on the daily loss or gain. So for an example:

The house holds 10,000 bonds of that ten thousand 5,000 are covered today by the “bear” traders, 4,000 are covered by the “bull” traders. But in this case bulls plus bears do not equal 9,000! the lower number (4,000) is covered both directions. So on that day the bulls own 4,000 bonds which 4,000 bears are betting against. An additional 1,000 bonds are owned by the fund and bet against by the bears. (Note: the house defaults to bulls only to allow customers to bet). A third group is 5,000 bonds not covered by the bears nor the bulls so on these bonds the house has normal gains or losses. This type fund guarantees a long term win for the house. The house gets bond yeild + 1.5% fee on all bets + margin interest. As long as the fund owns equal or more bonds than it accepts in bets there is no need to short, also the fund can simply buy more bonds.