London-Based Trader Says Wednesday’s Trading Session Will Be “The Most Volatile in Living Memory”

BaFin’s announcement (Germany’s Financial Supervisory Authority) of banning naked short selling of certain eurozone debt and credit default swaps [CDS] has sparked concern among investors about increasing government regulation. With the ban remaining in effect through March 31, 2011, which also applies to the shares of the country’s 10 largest financial institutions, many traders are greeting the new measure by the German regulator with a mixture of anger and astonishment.

One bond trader told The Telegraph that he expected Wednesday’s trading session “to be one of the most volatile in living memory: It will be complete chaos, I really don’t know what the Germans think they are doing,” he said.

BaFin justified its new policy measure by saying that the ban was being introduced due to “extraordinary volatility” afflicting eurozone countries’ debt certificates and the rising prices of CDS for several nations.

“Against this background, massive short selling of the affected debt certificates and the conclusion of naked CDS on loan default risks of euro zone states would have as a consequence further excessive price movements,’ BaFin said in a statement.

Those could lead to “significant detriment for the financial market and could endanger the stability of the whole financial system,’ it added.

Traders however, disagree with BaFin’s actions. They say the new measure on naked short-selling is not only inadequate, but is also one that could lead to an immediate backlash from investors around the world.

The Telegraph: “They added that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.

“Without the two-way flow the German market is likely to become utterly dysfunctional,” said one London-based bond trader. “Nobody ever thought they’d do this in a million years and it raises the long-term question of who is now going to want to buy their debt.”

Analysts at Bank of America (BAC), notes the British paper, summed up the mood with a note titled “What’s Germany going to ban next? Rainy days, harsh words, the Macarena?”

Speaking to Bloomberg, Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut, said “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand.”

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