Short sale (also: short selling , English short sale ) is in banking and finance a sale of underlying assets (especially foreign exchange , securities or commodities ) that are to date not of entering into the sale agreement in the property are the seller, as well as a sale in which the seller borrowed the underlying assets at the time the sales agreement was entered into in order to deliver them upon settlement .
In order to be able to meet his future delivery obligation, he must cover himself by purchasing the goods or financial instruments by the time of fulfillment ( covering purchase ). However, the possibility of short selling is not limited to the financial sector .
Short sale as a cash transaction
A short sale in the form of a cash transaction does not differ in terms of completion and processing from a normal sale. In particular, this means that the short seller must deliver the sold value within the customary deadlines . In the case of securities, this is usually two to three business days, depending on the market in question. So he has to get hold of the short sold value in good time. In the case of securities, this is usually done through a securities loan or a securities repurchase agreement (in the case of foreign exchange, by analogy with a loan or a foreign exchange swap ).
Through a securities loan (correct: loan in kind) the short seller becomes the owner of the loaned security in the legal sense. However, a short sale is not defined in terms of legal ownership or non-ownership of the asset sold short. Rather, the economic point of view is decisive as to whether the sale creates a short position, i.e. whether the seller benefits economically from a decline in the price of the value sold.
To repay the loan or the repurchase agreement, the short seller must buy back the sold value at a future point in time. If the price of the value has fallen by then, the seller has to pay a lower price than what he achieved in the sale and thus makes a profit. If, on the other hand, the price has risen, the seller makes a loss because he has to stock up at a higher price.
Short sale as a forward transaction
In the case of short sales via unconditional forward transactions ( forwards and futures ), in contrast to cash transactions, delivery must only be made in the future. The short seller can close out the short sale before the expiration date by making the opposite forward purchase , or he can buy the underlying asset before the expiry date and deliver it on expiry. The opportunities for profit and loss correspond to those of the cash transaction.
The position created by the short sale as a forward transaction for the seller is called a short position. This is independent of whether the seller actually sells short or owns the underlying asset.
Conditional futures contracts ( options ) allow a position similar to short selling the underlying asset by purchasing a put option or selling a call option . In addition, a position with exactly the same profit and loss profile as a forward sale can be modeled with options: For this purpose, a put option is acquired and a call option is sold at the same time, with both options having the same exercise price.
Covered and uncovered short sales
In connection with short selling of securities, there is the practice of naked short selling (in German with “naked” or “uncovered” short selling). The concept formation is inconsistent. What they all have in common is that the short seller has not yet acquired ownership of the security sold short at the time of the sale. The Federal Financial Supervisory Authority (BaFin) has defined the term more narrowly in its general decrees, last dated May 18, 2010, and since September 2008 has understood uncovered short sales as those in which the seller neither acquires ownership nor has a right to transfer ownership.
Similar is the definition of the term used by the SEC in the United States, for which there is a naked short sale if the seller does not provide cover in time and thus runs the risk of defaulting on delivery.
Delay in delivery
In the event of a delay in delivery, the usual rules of securities trading apply to short sales, which depend on the market in question. On the German market, delivery must be made two business days after the transaction has been concluded; in the event of default, compulsory settlement can be carried out after a further one or two business days. On the Euro market under the ISMA - master agreement are delivered must after three business days. The compulsory settlement can be threatened at the earliest after two business days of delay, which can be carried out after another five business days, i.e. eight business days at the earliest after the conclusion of the transaction.
Possible uses, opportunities and risks
Similar to derivatives, there are three basic uses for short selling:
- As speculation on future price changes, in the case of short selling a price drop,
- as a hedging transaction ( hedge transaction ), for example by hedging a forward purchase of a certain good by short selling the same good,
- or to exploit price inconsistencies between the cash market and the futures market ( arbitrage ), for example in the form of reverse cash-and-carry arbitrage .
Certain forward transactions (for example, forward purchases, purchase options , writers of a sales option ) can only be hedged on the cash market with short sales. Due to this hedging function and the arbitrage option, short sales play an important role in the formation of prices on the futures markets.
Entering a short position in the form of short selling a value involves an opportunity-risk ratio ( market price risk ) that is exactly the opposite of that of buying this value. For example, when buying a share, the maximum possible loss is limited to the purchase price, while the chances of a price increase are theoretically unlimited. If this share is short sold, the chance of the income earned is limited, while the risk of a price increase is theoretically unlimited.
Particularly in the case of uncovered short sales, the short seller has a covering risk. This consists in being able to deliver the short-sold value only at an increased price or not at all due to the lack of availability (see market liquidity risk ). The buyer's risks are basically identical to those from a normal sales contract. In the event of non-fulfillment by the short seller, the buyer can withdraw from the contract and demand compensation.
Particularly problematic is the so-called short squeeze (English squeeze means scarcity, bottleneck), in which the share price rises after a short sale. Many short sellers want or need their commitments made short positions to close out , in order to limit their losses, resulting in a further price increase, thus increasing the loss on these positions. One example of this is the sharp rise in the price of Volkswagen shares to over 1,000 euros in October 2008.
Legal situation and possibility of prohibition
The short sale is not a game according to German Civil Code (BGB) , since there must be mutual intention to play; however, the buyer is not aware of the short sale situation. There is no legal definition of the term short sale. Under civil law, short sales are subject to sales contract law , which allows the possibility of a short sale. The principle of separation codified in Paragraph 1, Clause 1 of the German Civil Code for sales contracts allows the entering into an obligation that only has to be fulfilled later. Thereafter, the seller is initially only obliged to provide the buyer with property. As a pure obligation transaction, the purchase contract does not require that the seller is already able to deliver at the time when his delivery obligation is established. This also applies to short sales.
If the purchase by the seller fails, the impossibility of fulfillment by the seller does not invalidate the existing( (1) BGB). This provision describes cases of initial impossibility in which the delivery obstacle already exists at or before the conclusion of the contract. If it is impossible for the seller to his delivery obligation at the time of the conclusion of the contract according to BGB, the buyer is granted a right of withdrawal ( Paragraph 5 BGB); if the seller is aware of the obstacle to performance, the buyer is entitled to a claim for damages under Paragraph 2 BGB to.
Even short sales carried out on the cash market are, according to the explanatory memorandum to the 1989 amendment to the Stock Exchange Act, to be assigned to stock exchange futures. The reason is that a bank customer is exposed to a market price risk in the event of a short sale , which is typical for a stock exchange futures transaction. There is no forward exchange transaction if the short seller has a future right to delivery from another forward transaction on the type of security sold short and borrows the paper until then, since the risk that is usual for a forward transaction does not then arise.
Up until December 2003, the Capital Investment Company Act (KAGG) regulated in Section 9 (5) Clause 1 that sales of securities that were not part of the fund under Section 6 of the KAGG at the time of the transaction were prohibited. However, the prohibition of short sales only affected the capital investment companies established in accordance with Section 1 of the KAAG and was not applicable to other market participants. In 2004 the KAGG was replaced by the Investment Act (InvG) . This contained a provision with the same content in InvG. Since 2013 there have been regulations in the Capital Investment (including KAGB).
In addition, since July 27, 2010, WpHG has banned uncovered short sales until Regulation (EU) 236/2012, which came into force in all EU member states on November 1, 2012 , issued a Europe-wide ban on such short sales. The validity of this regulation for Germany is confirmed in (1) of the WpHG new version.(1)
In various states there is the possibility of temporarily restricting short sales or prohibiting them entirely. In Germany, BaFin can prohibit short sales in domestic shares in accordance with (1) WpHG if there is a risk of significant market disruption. There are comparable options for intervention in other countries.
In the United States, the SEC set up a special regulation, Regulation SHO, for naked short selling in 2005 and tightened these regulations in September 2008.
In the wake of the 2007 financial crisis , short sales of financial stocks were banned or restricted in Germany, Great Britain, the United States, France, Australia, Canada, Taiwan, Portugal and Ireland and in Austria.
At the end of January 2010, the ban on uncovered short sales in Germany, which affected the shares of eleven financial companies, was lifted again by BaFin, as the situation on the financial markets had eased again. With effect from March 25, 2010, BaFin introduced a transparency system for short sales that affected ten institutions. The regulation was initially valid until January 31, 2011 and was then extended to March 25, 2012.
On May 18, 2010, restrictions on short sales of government bonds from the euro zone and the ten institutes were once again issued. These bans were in effect from May 19, 2010 to March 31, 2011 and, according to BaFin, have been continuously reviewed.
In the wake of the euro crisis , short sales of financial stocks were temporarily banned in France and Italy in August 2011.
Since 2012, the European Securities and Markets Authority (ESMA) has been given the power to prohibit short selling. In January 2014, the European Court of Justice confirmed that the EU could ban short selling.
After massive speculation regarding the shares of the payment service company Wirecard , BaFin imposed a ban on short sales by a single exchange company for the first time on February 18, 2019. There was suspicion of market manipulation. The ban expired after two months, so that from April 19, 2019 it was again possible to bet on falling Wirecard prices.
Maintains a natural or legal person significant net short positions in shares or public debt securities that are traded on a trading venue of the EU, these since November 1, 2012 in accordance with EU LeerverkaufsVO the competent authority in a timely manner - specifically until 15:30 of next trading day after their creation. This may also apply to uncovered positions in credit default swaps on sovereign debt. The reporting obligations are specified in Germany by the Short Selling Notification Ordinance - LAnzV and the Net Short Selling Position Ordinance - NLPosV .
A “net short position” occurs when the number of short positions held exceeds the number of long positions held, i.e. there is a quasi-overhang of short positions.
In the case of shares, for example, there is significance if the net short position is 0.2% or more of the issued share capital (“reporting threshold”). If 0.5% or more is reached, the positions are disclosed to the public (“disclosure threshold”).
In Germany, disclosed net short positions can be found in the Federal Gazette.
Transactions by the Dutch trader Isaac Le Maire are considered the first short sale. Le Maire was a large partner in the Dutch East India Company (Dutch Vereenigde Oostindische Compagnie , abbreviated VOC). In 1602 he invested about 85,000 guilders in the VOC. In 1609 the VOC did not pay dividends and Le Maire's ships on the Baltic routes were threatened by English ships because of the trade disputes between Great Britain and the VOC. Le Maire decided to sell his shares in the VOC, more of them than he owned. The notables condemned this practice and, as the first ever regulation for stock exchange transactions, issued a ban on short sales. This ban was lifted a few years later.
In the wake of the major American stock market crisis of 1929 (see Black Thursday ) that in the United States to the Great Depression and the Great Depression led, short sales were 1,932 in the United States by the so-called uptick law ( English uptick rule ) banned or restricted. With the entry into force of the Uptick Act, short selling of stocks with falling prices was prohibited. Shorting a share was only allowed if the last transaction was above the previous price. The law was repealed in 2007, a controversial decision.
The global economy came under pressure in the wake of the COVID-19 pandemic . The FTSE 100 lost 25% in three months and hedge funds were increasingly short selling companies listed in the UK . A call by the Bank of England in mid-March 2020 to discontinue the practice was initially unheard and reports about the funds' short positions reached a new high in the week following the statement. As a result, demands were made that the Financial Conduct Authority should temporarily exclude certain values from short sales in the United Kingdom, similar to what had recently happened in Spain, Belgium, Austria and Italy and by the Autorité des marchés financiers in France.
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- Thomas Laurer: The short sale of stocks. Delimitation, forms and regulatory implications. In: Journal for the entire credit system. 61, No. 19, 2008, pp. 980-984.
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- Merens Cahannes: Short Selling - A legal and economic analysis of the regulation of short sales in Swiss financial market law with special consideration of regulatory concepts from the EU and the USA. Zurich 2019, ISBN 978-3-7255-8053-8 .
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- Thomas Laurer: The short sale of shares. Delimitation, forms and regulatory implications. In: Journal for the entire credit system. 61, No. 19, 2008, p. 984.
- Explanations of the BaFin on the general decree of the BaFin of September 19, 2008 ( memento of the original of May 23, 2010 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. , downloaded October 8, 2008.
- Key Points About Regulation SHO (English)
- sales: hedge funds gambled away almost 15 billion euros with VW shares. Der Spiegel , October 28, 2008, accessed February 6, 2014 .
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- Martin Zimmermann, Das Aktiendarlehen , 2014, pp. 161 ff.
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- , accessed on February 6, 2014
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- General the BaFin of September 19, 2008 ( Memento of the original of May 22, 2010 in the Internet Archive ) Info: The archive link was inserted automatically and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. , downloaded October 8, 2008.
- FSA introduces short-selling ban. BBC to ban short sales . In: BBC News. September 19, 2008 (English).
- Michael Tsang: Short Sellers Under Fire in US, UK After AIG Fall (Update3) Bloomberg on the ban on short sales . In: Bloomberg.com news. September 19, 2008 (English).
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- Aareal Bank AG, Allianz SE , AMB Generali Holding AG , Commerzbank AG, Deutsche Bank AG, Deutsche Börse AG, Deutsche Postbank AG , Hannover Rückversicherung AG, Hypo Real Estate AG, MLP AG and Münchener Rück AG
- BaFin: Ban on short selling expires
- BaFin report ( Memento of the original of March 13, 2010 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. . This affects shares in Aareal Bank AG, Allianz SE , Generali Deutschland Holding AG , Commerzbank AG, Deutsche Bank AG, Deutsche Börse AG, Deutsche Postbank AG , Hannover Rückversicherung AG, MLP AG and Münchener Rück AG
- The extended reporting obligation applies to shares in Allianz SE , Commerzbank AG, Deutsche Bank AG , Deutsche Börse AG , Munich Re , Hannover Re , Deutsche Postbank AG , Aareal Bank , Generali Deutschland and MLP AG . Positions from a threshold of 0.2 percent of the share capital must be reported. If more than 0.5 percent, they must also be published. BaFin press release: Duty to notify for net short positions extended ( Memento of the original from March 4, 2011 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- This affects shares in Aareal Bank AG, Allianz SE , Generali Deutschland Holding AG , Commerzbank AG, Deutsche Bank AG, Deutsche Börse AG, Deutsche Postbank AG , Hannover Rückversicherung AG, MLP AG and Münchener Rück AG
- Federal Financial Supervisory Authority : BaFin prohibits uncovered short sales and uncovered CDS on government bonds of the Eurozone ( Memento of the original from 23 May 2010 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. , accessed May 19, 2010.
- Italy also has a ban on short sales , Neue Zürcher Zeitung of August 12, 2011.
- faz.net: UK action dismissed - EU may ban short sales
- Financial supervision prohibits new short sales at Wirecard
- Wirecard short sales allowed again
- Frequently asked questions about the notification and publication obligations according to Art. 5 ff. Of the EU Short Selling Regulation. (No longer available online.) BaFin , November 7, 2012, archived from the original on February 24, 2014 ; accessed on February 6, 2014 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- Net short positions. Federal Gazette , accessed on February 6, 2014 .
- Heleen de Graaf, Egbert Kalse: 'Naakt short gaan' is een oud-Hollands kunstje. ( Page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. In: NRC Handelsblad. July 25, 2008 (Dutch: Naked short selling is an old Dutch trick )
- sellers in the crosshairs of the US Securities and Exchange Commission In: Handelsblatt. April 9, 2009 (paid article)
- SEC on repeal (PDF; 433 kB)
- Reuters on the repeal
- Ben Chu: "Hedge funds continue to short sell UK companies despite Bank of England calls to stop" The Independent of April 6, 2020
- "FCA explains stance on short selling" funds-europe.com of March 24, 2020