Unintended Consequences of SEC ban on short selling

Um, it appears that Hedge funds have been shot in the head (not allowed to hedge, you see). Options are out, which has a rather bigger impact as it means no-one can hedge…
bloomberg.com/apps/news?pid= … refer=home

It’s becoming a big game of whack-a-mole. Hammer down one problem, and the solution causes another problem to appear.

Someone else who like “MARKET VALUE” of stocks,

(Actually on PO.COM, SPG is one of the more lucid poster)

GreyGhost wrote:
What’s the big deal about this? Why should you have the right to sell something you don’t even own?

The reason it’s important is that the markets are supposed to be about price discovery for companies as much as anything. It’s a see-saw between bears and bulls. Some think it’s worth more, and they buy the stock. Some think it’s worth less and they short the stock. Between them, they establish a fair value for the stock.
If a company has value, then they aren’t particularly susceptible to short selling and the short sellers end up pumping free money into the market. Short selling only works, when a stock is over-bought and the stock price exceeds company’s value.

This is a typical Bush administration kind of move. “If you won’t tell us what we want to hear, then you can’t participate in the process.” It’s the roach motel approach to building stock prices. If nobody can push prices down, then they have to go up. Right? Well certainly they will for a while, but the stock price will become(even more) disconnected from the actual value of the company. The more disconnected the prices become from the actual value of the companies, the greater the potential for nasty corrections and panics becomes. These companies are all going to eventually become bankrupt. They are heavily invested in an asset class that is dropping like a stone. There is no evidence of a bottom in the housing market. That reality is unpleasant, but it’s real. This whole week has been one huge denial process. Everyone is scrambling to figure out how we can deny reality for another day. Every move we make to deny reality makes the eventual outcome that much worse. Every time we try to bail one of these companies out, we make the problem worse. Playing make-believe with the stock markets makes the problem worse. It doesn’t make it go away, it just gives it longer to fester. You can try to cover over your termite infested wall with wallpaper and make it look pretty, but eventually your house will fall down. Ripping open the wall, cleaning out the rotted material, and replacing the structure makes a big mess, but it’s the only way you end up with a sound place to live.

This is a historic day. September 19, 2008 will end up in a history book somewhere as the day the SEC banned short selling to try to stem the stock crash of 2008.

More like a McCarthy style witchhunt; if it’s not the communists, the drug dealers or Al-Quaeda, it’s the god damn short sellers that are out to destroy America.

God damn short sellers - they took our jobs!

From Business & Finance 4 Nov 1929
via the big picture:
bigpicture.typepad.com/comments/ … and.html

(emphasis added)

As soon as this ban was announced bloggers, journalists and even pin members were pointing out supposedly “unforeseen” consequences. Someone on the pin pointed out that Hedge funds need to be able to short.

It doesn’t fill me with much confidence that people blogging in their underwear seem to have a better grasp of consequences than the people in charge of global markets.

Would things really be any worse if Ted and Dougal were in charge?



With no short selling the next time a share takes a huge plunge I wonder will the realisation that it has nothing to do with short sellers cause a greater panic and capitulation? Short sellers covering are often the cause of a bounce. So with no short sellers …

Short selling actually lessens declines rather than accelerating them, as shorts create natural bid demand on the way down (as the short sellers cover their positions). What’s going to frighten people is the next time they go to sell a bank stock and there are simply no bidders creating a vacuum and a huge gap down to finally catch a bid.

It’s hard to believe people are practically cheering on the death of capitalism.

First post btw, cheers, great site (long time listener, first time caller and all that).

Most shorts are put on by managers of long/short portfolios. Without the ability to go short, long/short investors won’t be able to go long either. So by reducing selling pressure on bad companies, the SEC will be simultaneously reducing buying of good companies. How can a strategy that reduces support for good companies be good policy?

If it didn’t make me so incandescent with rage reading all this shite about shorts causing all the problems it would be laughable,apart from the obvious flaws in the argument and the fact that the options markets rely on shorting to function it begs the question as to who will they blame on the next leg down when there are no shorts to take the can?

telegraph.co.uk/money/main.j … nds121.xml

Here is something to ponder.

Good point. If you cannot hedge your long exposure to financials then you will have to reduce your long exposure.

What a pile of rubbish.

The reason for the stock market crash of 1929 was due to speculation and people borrowing money to purchase stocks. Wikipedia tells us that price to earnings ratios were on average 32.6, which is about twice as much as they are for DJIA stocks listed today.

I have a question for any broker/dealers out there about the state of the Irish market right now.
I am involved in markets but US based so not that familiar with workings of the Irish Stock exchange.
Is it a case that the order books in these financial stocks are so illiquid now on the bid that the moves lower appear to be so aggressive ?
What sort of volume is changing hands today higher or lower than average ?

You have got to think that if the US indices sell off today the ISEQ will go another 2-3% ?