blankning

Blankning is a term used in financial markets to describe the practice of taking a short position in a security by selling securities that the seller does not currently own, typically by borrowing them through a broker. The seller aims to profit from a decline in the security’s price by buying back the shares later at a lower price and returning them to the lender. The difference between the sale price and the cover price represents the profit or loss, adjusted for borrowing costs and any dividends or corporate actions incurred during the position.

There are two main forms. Covered blankning involves borrowing or otherwise securing the shares before or at the time of the short sale, so delivery can be made on settlement. Naked blankning, or naked short selling, occurs when the seller does not borrow or arrange delivery and still sells the shares. Naked blankning is prohibited or tightly restricted in many markets because it can increase the risk of settlement failures and be used to manipulate markets.

Mechanics and obligations: after selling short, the trader may owe dividends to the lender and typically incurs financing costs for the borrowed shares. Brokers must locate shares for delivery, and if a settlement failure occurs, clearinghouses may require a buy-in to cover the position.

Regulation and market effects: jurisdictions regulate short selling to preserve market integrity, often requiring disclosures of large short positions, imposing limits on naked short selling, and enforcing delivery and settlement rules. Short selling can aid price discovery and liquidity but may be controversial when used to press prices downward or during periods of market stress.

See also: short selling, naked short selling, short squeeze.