
SEC Plans to Temporarily Ban Short-Selling - gaika
http://online.wsj.com/article/SB122178234612954617.html
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furiouslol
This is the biggest WTF moment. Ever.

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.

~~~
mattmaroon
Are you an economist? How informed is this conjecture? Would you guess more or
less than the people who made the decision?

~~~
furiouslol
I'm totally serious. You can ask anyone who knows about the market and get
their candid opinions.

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.

~~~
mattmaroon
It's not that I disagree with you, I really don't have enough knowledge to
decide. I haven't the slightest clue how long they want to prevent short
selling for (I think the article got cut off since I don't subscribe) or what
sort of effect that short term action might have.

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.

~~~
furiouslol
I would argue that this was a political driven decision rather than an
economical one.

~~~
mattmaroon
How so?

~~~
furiouslol
It's too much of a coincidence that this move is effected a few days after
McCain publicly chastised SEC Chairman Chris Cox and said he would fire him if
he were president.

~~~
mattmaroon
Has McCain spoken out in favor of something like this? This would seem to be
pretty out of line with typical Republican doctrine. I don't see this as being
an attempt to save his job, it's clearly not going to happen if McCain is
elected.

~~~
byrneseyeview
McCain is often pretty out of line with typical Republican doctrine. I'm not
sure the ban is specifically a McCain thing, but it does seem very political.
Far fewer people complained about rich Wall Street fat cats when those fat
cats got rich by making mortgages cheap; now that a few of them have gotten
rich by betting that mortgages would be priced rationally again, folks are
upset.

~~~
mattmaroon
It goes a lot deeper than that. Short selling is actually ruining the ability
of financial institutions that aren't even exposed to the mortgage problems
(or are minimally so) to get the inflow of credit they need. Or so the
argument goes.

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.

------
atlbeer
DMV announces Friday that you are no longer allowed to turn left. You are only
allowed to turn right as of tomorrow

~~~
nostrademons
Welcome to Boston.

~~~
pchristensen
And Michigan

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rms
wtf? Do they even have the power to do this? What are they going to do,
exactly? Stop all margin trades?

Also banned in the UK.
<http://online.wsj.com/article/SB122177732212354285.html>

~~~
kingkongrevenge
It's about shutting up the short sellers, not short selling in and of itself.
People with big short stakes have been the ones going through the books and
screaming on conference calls and to the media that various companies are
toxic. Smart people have made billions in recent months. The government wants
to shut them up so it has more time to triage.

~~~
furiouslol
But if what those big mouths like Einhorn/Eckman say is true (which it is),
wouldn' that be to the benefit of the shareholders? These big mouths have
alerted the shareholders of the innate problems in MBI and Lehman months
before they capitulate.

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?

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iigs
I don't understand enough about the stock market to comprehend the possible
unintended consequences, but trying to interfere in the free market can result
in things like the 70s fuel crisis.

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. :/

------
ars
I don't see how they can legally do this. If I borrow some shares from my
friend, and sell them (which is what shorting is) - what exactly are they
supposed to do?

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?

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furiouslol
Here's a nice picture on how effective banning short selling is in curbing the
market slide, courtesy of our friends from Pakistan.

<http://i33.tinypic.com/xlzfjo.jpg>

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steveplace
I'm completely against it, but there is a theory that it was a stop-gap to
what is being called a "financial" terrorist attack.

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/>

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helveticaman
I had a premonition really bad things would happen (not that it took a
genius), but this really caught me by surprise.

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time_management
I'll echo the posts claiming that a short-sell ban is a recipe for disaster.
Short selling isn't _just_ a way of betting on the market declining. It's also
a hedging strategy used by arbitrageurs, market makers, and options traders.

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.

~~~
DabAsteroid
_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_

No. One might simply add to his position (e.g. short more). It is called
"shorting into the rise".

~~~
time_management
What I meant, and I failed to explain this properly, was that the amount of
equity you need to have in the account increases as the stock or index rises,
and eventually it can happen that the position requires more money than you
have, and you're hit with a margin call. You're correct that if you already
have enough money in the account to hold the position, you can continue to
short sell.

