SEC Plans to Temporarily Ban Short-Selling
online.wsj.com
online.wsj.com
Without the ability to short sell, the market can't even function effectively.
Convertible/Risk arbitrage people cannot do their job wihout short selling. The risk-free spread is there for the taking, but you can't take it.
Options market makers cannot hedge their PUT writes without short selling.
This is what I envision:
We'll see a massive short covering rally caused by a dry up in volumes by next week.
Option traders will stop trading as they cannot properly hedge their postions, as will all risk arbitrage, debenture, derivative and ETF traders. Traders of all financial products will not trade if they cannot hedge their positions.
Liquidity will dry up and volatility will increase drastically, which is exactly what the SEC wants to avoid.
The USA has decided to follow their Russian and Pakistani comrades in artificially controlling the market.
It's over fellas.
We've killed the banks. Now we'll kill the hedge funds and the options houses.
I don't know how long they're going to effect this ban but to give you a preview of what banning short sell can do, just take a look at the China stock market. The chart is like the Eiffel tower.
The shorts make the market effective as they provide a floor at a bottom where no one else may be willing to buy.
I'm all for a permanent ban on naked short sells but to have an outright ban of all short sells is plain stupid.
I was just wondering how you came to the decision that it's stupid. It seems you'd need a lot of knowledge to be reasonably sure of that, given that other people with a lot of knowledge made the decision.
Again, I'm not an economist, so I don't have a strong opinion here. What I do know is that people who know a hell of a lot more than me (or probably anyone who posts here) are making these decisions, so dismissing them based on some generalized knowledge (i.e. short selling is bad because my econ 101 textbook said so) seems childish.
That's why I was asking the original commenter if, perhaps, he knew enough about economics to have an informed opinion. For all I know, he has a PhD in it.
http://finance.yahoo.com/echarts?s=000001.SS#symbol=000001.S...
In econ & finance textbooks, the theoretically predicted result of this is that it exacerbates market swings. When the market is overvalued, there's no check on its upward movement caused by short-selling. When it's undervalued, there's no check on its downward movement from short covering. It's always hard to sort out causation from correlation - there could be dozens of other factors at work - but China's experience seems to support the theory.
As for your appeal to authority, it's possible for the SEC to know more than furiouslol and still do this, as long as they're incentivized to do so. Byrneseyeview's comment on another story here explains how:
If they really want to stop the carnage inflicted on the financials, the should just ban short sells on the financial sector alone.
Also banned in the UK. http://online.wsj.com/article/SB122177732212354285.html
Those crashes you've seen lately, I would argue, are the works of an efficient market. Isn't it prescient that the market drove down the price of AIG to near the fair value after the bailout ($2-5), well before it was actually bailed out?
I'm not sure where we are on the "people never learn / we're screwed enough to need this" continuum, but I definitely don't get warm fuzzies from this. :/
Prevent me from borrowing shares? Prevent selling shares?
It's between me and my friend about returning the shares to him later.
The only thing I can see is preventing naked shorts - i.e. sell the shares without borrowing them first, and promise to make good on it later.
But covered shorting? Unless you repeal capitalism, I just don't see how it's legal. Or even possible - I could make a website where people can borrow shares for a small fee. What could they do about it?
Can they make a law making it illegal to loan someone shares?
Most of the short sales put on this month were from overseas, mainly coming out of London and Dubai. It's still a longshot conspiracy theory.
Even so, the broker/dealers and the SEC have been far too complicit in naked short selling. The rules against this have been in place for years, just never enforced.
Sources: http://bigpicture.typepad.com/
Actually, as far as speculative short-selling goes, one can argue that it doesn't do enough in bringing prices to fair values. Here's why. With most stocks, it's possible to sell them short and make near-fair interest on the cash. For example, your clearing firm might charge you 3.8% on money borrowed for long positions, but give you 3.4% on cash held in short positions-- a 40bp spread, which is costly but not a show-stopper for a skilled trader. Although you can't withdraw the money without closing the position, because you have more cash than equity, you're earning interest on the cash component. In cases where a stock becomes hard to borrow, banks will lower the interest rate on cash held, sometimes to negative values. When this happens, the stock inevitably trades higher than a fair market value, because of the penalty involved in short-selling it.
Another danger of short-selling, related to the hard-to-borrow factor, is that clearing firms (banks) can force short-sellers to close out their positions at any time. They're intrinsically limited in how much short interest their customers may hold, and will, on occasion, force less preferred customers to close out, possibly unfavorably, in order to allow preferred customers to short-sell.
In addition to "hard to borrow" securities and short squeezes, speculative short-selling is generally very dangerous, especially in a bubble, for more intrinsic reasons. If you're short a stock, and it goes up in the short term, you must put more money in the account (to build equity to a reasonable level) or close the position, early and unfavorably. There are a large number of people who bankrupted themselves by shorting Nasdaq futures at 3000 in 1999. They thought tech stocks were overvalued, and they were right, but they nonetheless were creamed when the thing shot up to 5000 before coming back down.
Arbitrageurs and market makers are good for markets. They provide a lot of liquidity, meaning that bid-ask spreads tighten and it becomes possible to buy or sell large blocks without moving the market to an unfavorable price. Essentially banning what they do is going to result in complete disaster.
No. One might simply add to his position (e.g. short more). It is called "shorting into the rise".