In a move to restore confidence into the market, the Australian government yesterday moved to ban naked short selling and require that other short sales be adequately disclosed.
Australian regulators banned covered and naked short selling in September in an immediate response to the global financial meltdown, and this ban is due to expire on Tuesday, with the exception for financial stocks, which run unti January 27 next year.
According to wikipedia, naked short selling or naked shorting is the practice of selling a stock short, without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. When the seller does not obtain the shares within the required time frame, the result is known as a 'fail to deliver'. Naked short selling can be used to manipulate the stock price by bringing it down.
Critics for short selling have savaged short selling for hurting the value of the companies/share prices. However, supporters argue that short selling facilitates better price recovery, deeper markets, closer bid/ask spreads, and over time, less volatility.
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