How does short selling help banks?

Beginner Questions
1

Hi all,

I know this isn’t strictly on topic however is certainly relevant to currencies (euro especially). With the ban on short selling now imposed in 4 of the EZ members many people think that it will now prevent stocks tanking however, analysts are saying that in fact short selling actually helps banks as it allows them to hedge their risk.

Could someone briefly run through that logic (or point me in the right direction)? I’ve scoured google however couldn’t find anything.

Much appreciated!

2

I wonder which analysts were saying… lol

Anyway, do you mean selling stocks or currencies? If it’s about currencies, since it is “paired” and measured by relative value to each other, selling euro meaning buying us dollars (in fiber). So, if somebody sells eur/usd, banks who wanted buy us dollar at the price level appreciate the selling euro for usd, right?

If you are talking about investing banks; then, they’ll appreciate such trading transactions because that’s exactly how they get money as a investing banks (i.e. spread). In other words, they don’t care if people are selling or buying as long as those transactions are taken with the bank.

Let me know if I haven’t answer yous question :slight_smile:

3

Thanks Sasa!

I was referring to stocks but more so the banks. I remember hearing about banks shorting other banks to offer protection/hedge.

Thanks for the info though!

4

I think that hedging is total rubbish, it’s a just a term that is used to make Joe public think that he is investing in a nice safe investment, I mean if you are holding a stock that you expect to make a profit from why on earth would you want to reduce your profits by putting a hedged trade on, I know the idea is to limit any losses, but why not just limit those losses by using appropriate money management and reduce the initial holding accordingly.

5

Because it’s about keeping a risk to something within a certain limit. I.e maybe, the company investing has a heavy exposure to a certain currency (aka currency risk) and therefore to ensure more ‘stable’ projections and results, they hedge the amount at which they are at risk to. There are many hedging strategies employed in the business world for this purpose.

To the OP. TBH I haven’t looked further into the stories but I think you’ll find bans on short selling financial institutions are normally put in place, in effect, to stop the share prices for them tumbling as rapidly and being as volatile.