Detailed Analysis of Naked Short Selling in Financial Markets

This assignment delves into the concept of naked short selling, distinguishing it from traditional short selling and exploring its legality. It examines the role of Government-Sponsored Enterprises (GSEs) and the mechanics of long and short positions in stocks. The paper analyzes the destabilizing effects of naked short selling, particularly its contribution to the 2008 financial crisis, and the subsequent regulatory responses, including the SEC's ban on the practice. It further investigates the impact of the ban, such as the occurrence of short squeezes and the fluctuations in credit default swaps and GDP during the crisis. The assignment also touches upon the currency used for oil trade and discusses the U.S. dollar's continued dominance in global reserves, along with alternative currency proposals. The document references several academic sources to support its analysis.

Running head: NAKED SHORT SELLING
NAKED SHORT SELLING
Name of Student
Name of University
Author note
Word count

1NAKED SHORT SELLING
Answer to question 1
Government-sponsored enterprise or GSE is the organisation, which helps to enhance
credibility of the sectors of American economy. GSE is an organisation, which is managed
privately. However, the government supports GSE. This organisation provides financial
service to all of the sectors by providing long and short-term loans thereby facilitating the
borrowings of the individual holders (Elur, 2015).
Answer to question 2
a. Long position in stock is defined by the positive amount of investment, which the
holder of the position has to run their business. The holder of long position estimates
that the value of his financial investment will increase over time therefore it will be
profitable for them to sell the investment in future (Ahmad, 2015).
b. Short position in stock occurs when the investor’s estimates that the value of the stock
will decrease in the future.
c. Naked short selling can be defined as the sale of stock of investment or other assets.
This illegal practice occurs when the investors tries to sale their assets in the market
without borrowing its security (Niemelä, 2015). The owner does not borrow the
security of the stock, which results in naked short selling. There are many points of
contrast between short selling and naked short selling. The main point is that, the
owner of the stock in short selling owns the security of the stock before selling it in
the market whereby the owner of stock in naked short selling does not borrow the
security of the investment, which is illegal.
d. Naked short selling is not a necessary violation. However, certain traders and retail
investors are not permitted for naked short selling, as the risk of naked short selling

2NAKED SHORT SELLING
from the end of buyer is high. Further, there can be chance of decrease in the market
price of the assets, which can affect the normal flow of supply or demand pattern.
e. Naked short selling is not permissible for Freddie, Fannie and 17 other financial
institution as Federal Reserve, Secretary of the Treasury and SEC temporarily
restricted this practice for them. However, other retail and investors can naked short
sale their assets if there are no such suspension in the practice and regulations.
Answer to question 3
a. Naked short selling is an illegal practice of selling of stock without borrowing its
security. This heavily destabilised the market that resulted in the downside in the
global economy of 2007 (Bohl, Siklos and Essid, 2015). Securities and Exchange
Commission or SEC adopted a regulation in 2008, which helped to stabilize the
market of the economy. Australia, Canada and other European nations banned the
naked short selling of assets in their markets.
b. The SEC 2008 act helped other nations like Canada, Australia and other nations in
stabilising their economy. This act improved the liquidity of the market in the
following nations therefore helping the global economy.
Answer to question 4
The ban of naked short selling by SEC resulted in the short squeeze in the market.
Short squeeze is a rapid increase in the price of stock in the market, which forces the short
sellers to close their position. Short squeeze occurs when there is a lack of supply or demand
of the product in the market (Liu and Xu, 2016).
Answer to question 5
a. During the ban of naked shorting by SEC, the value of credit default swaps
was crashed and there was nothing available during this situation. The

3NAKED SHORT SELLING
estimated value of credit default swap was $62.2 trillion in 2017, which was
decreased by 38 percent in 2008, amounted to $ 38.6 trillion.
b. During the financial crisis, the GDP of U.S was $15.7 trillion in the first
quarter, $115.8 trillion in second quarter, $15.7 trillion in third quarter and
$15.3 trillion in third quarter. The collapse in the GDP occurred for the
financial crisis in 2008. However, the GDP of U.S recovered from the crisis
slowly (Blecker, 2016). The global GDP was 63.46 trillion in 2008, which was
57.86 trillion in 2007.
Answer to question 6
a. Dollar is the currency, which is required to trade oil worldwide.
b. Credit default swaps are traded throughout the world in multiple currencies.
Answer to question 7
a. The U.S dollar will remain the currency of choice, as U.S owns the most number of
global reserves.
b. Russia, China, Turkey and India proposed that their currency should be used other
than dollar in the global market as the economic growth is slowing down in the global
market.

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References
Ahmad, A., 2015. Hedging with a stock option. IOSR Journal of Business and
Management, 17(9), pp.6-11.
Blecker, R.A., 2016. The US economy since the crisis: slow recovery and secular
stagnation. European Journal of Economics and Economic Policies:
Intervention, 13(2), pp.203-214.
Bohl, M.T., Siklos, P.L. and Essid, B.O., 2015. Short-selling Bans and the Global Financial
Crisis: Are They Interconnected?. CIGI.
Elul, R., 2015. The government-sponsored enterprises: past and future. Business Review,
(Q1), pp.11-20.
Liu, B. and Xu, W., 2016. Short Squeezes. Available at SSRN 2019361.
Niemelä, T., 2015. Banning Naked Short Sales: The Case of The US 2008 Emergency Order.