Sell this: the geography of stock markets

In May 2010 the German government banned “naked short selling” of eurozone government bonds, their credit default swaps (CDS) and the shares of the country’s 10 biggest financial institutions. “Short selling” (selling shares borrowed for a fee from investors that actually own them) is a common investment strategy, in which the investor aims to sell the borrowed shares and then buy them back at a lower price, and then return them. “Naked short selling” is a variation in which the shares are not actually borrowed before being sold, with the seller relying on agreements to be able to buy the shares if necessary.

In response to the global financial crisis, government regulators in different countries have on several occasions banned naked short-selling of shares to limit speculation and possible market manipulation. Due to the interconnected nature of stock markets, particularly within Europe, this measure may not necessarily have the effects intended. For example the German naked short-selling ban in May 2010 could not affect eurozone debt traded in New York and London. As a result the German government has pushed for an EU-wide ban, although the move would be opposed by the City of London in particular.

A 2009 paper by Dariusz Wójcik surveys the literature on the relationship between stock markets and geography. Wójcik notes that in the nineteenth century stock markets were much more localised, with many cities having their own. With the adoption of the telegraph and telephone, markets became increasingly national, and since the 1970s they have become increasingly globalised, with multi-national enterprises often listed on exchanges in different countries. However despite growing globalisation and virtualisation, the importance of geography remains, with for example closer proximity to stock markets making firms more likely to raise capital in this way. One issue is that the media often treats stock prices as “neutral, benign barometers of the economy”; Wójcik warns that “stock markets do not equal transparency”. Whether it is trading through alternative systems out of reach of regulation, the risk of market manipulation by investors, or fraud or near-fraud by executives, there are many ways in which the prices of stocks (and of other financial instruments similarly traded) may be deceptive.

Wójcik, Dariusz (2009), “Geography of Stock Markets”, Geography Compass, Volume 3, Issue 4, Pages 1499-1514