Control through settlement

Author: | Published: 1 Dec 2008

Aggressive forms of short selling have recently been blamed as one of the principal reasons for the collapse of Lehman Brothers and with it the subsequent convulsion and extreme volatility of the financial markets. Spain has suffered little from this problem, in part because of a particular approach to settlement.

Shorting v naked shorting

Short selling is generally seen in Spain as a type of speculative transaction whereby a seller is permitted to bet on the downward movement of the share price of a company and therefore adopt a negative position on it. Otherwise, in a non-speculative environment, in Spain shorting trades are seen as defensive transactions in order to hedge long positions (which are expected to rise) and thus ensure partial coverage if there is an undesired drop in the share price.

In Spain, short selling is permitted to the extent that before entering into a trade the seller...