SEC to Curb Short Selling - WSJ

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magellan
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SEC to Curb Short Selling - WSJ

Post by magellan »

There's an interesting (and free) article in the WSJ about SEC plans to curb short selling. For now it will just affect 17 financial firms, but it could be extended to all listed stocks.

Although this is certainly a serious move, at least they didn't go this far...
In the 1990s, Hong Kong temporarily banned short sales, and the Malaysian finance ministry proposed that anyone caught short selling should be punished by caning. Neither measure prevented those markets from falling during or after the 1998 Asian crisis.
Jim
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Ariel
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Post by Ariel »

That's a TERRIBLY written article that distorts what the SEC is doing. It is not proposing to halt short sales even in these companies, only "naked" short sales where the short seller has not found shares that it can borrow (rent) in order to sell short. Here's a much better article, although even this one requires you to get to page 2 to understand the issue at all.

Here's the most relevant excerpt:
The agency's rule change would prevent investors from making "naked" short sales of the biggest financial stocks. A "naked" short sale occurs when an investor sells stock that has not yet been borrowed.

Broker-dealers will sometimes accidentally fail to deliver stocks to investors who have arranged to borrow a stock. If it is done intentionally, it is illegal.

"Today's commission action aims to stop unlawful manipulation through naked short selling that threatens the stability of financial institutions," SEC Chairman Christopher Cox said in a statement.
http://www.reuters.com/article/marketsN ... 716?rpc=44

As seems to be their style far too often for my taste, the WSJ distorts the news to benefit a particularly sleazy "pro-business" angle. And the business world buys into this anti-all-regulation BS!
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
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Re: SEC to Curb Short Selling - WSJ

Post by baw703916 »

magellan wrote: Although this is certainly a serious move, at least they didn't go this far...
In the 1990s, Hong Kong temporarily banned short sales, and the Malaysian finance ministry proposed that anyone caught short selling should be punished by caning. Neither measure prevented those markets from falling during or after the 1998 Asian crisis.
Jim
I'd kind of like to see the (ex- in some cases) CEO's of Nationwide, Indymac, Bear Stearns, Fannie Mae, Freddie Mac, etc. get caned :twisted:
Most of my posts assume no behavioral errors.
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Random Musings
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Post by Random Musings »

"Today's commission action aims to stop unlawful manipulation through naked short selling that threatens the stability of financial institutions," SEC Chairman Christopher Cox said in a statement.
Ahhh, the plunge protection team at work again - although a tad late for many financials. By the way, have any "unlawful" activities been proven?

Here's a question for the SEC chairman. Why was the downtick rule brought back into play anyway? Perhaps special interest groups twisting the arms of the very same people grandstanding today? Funny thing is, ol' CC will probably be "consulting" for one of these investment firms for very big bucks down the road.

One can still short futures "naked" on a basket of stocks. Or buy puts on an individual equity. There are other alternatives.

RM
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Post by magellan »

Ariel wrote:That's a TERRIBLY written article that distorts what the SEC is doing. It is not proposing to halt short sales even in these companies, only "naked" short sales where the short seller has not found shares that it can borrow (rent) in order to sell short. Here's a much better article, although even this one requires you to get to page 2 to understand the issue at all.
I'm not really keen to come to the WSJ's defense, but I really didn't find much distortion in the article. Maybe a slight pro hedge fund bent, but I'm not really sure about that either. Businesses are the ones whining about the short-sellers, so you can't really say it's generically pro-business.

Anyhow, here's what the article said about the short-selling changes:
WSJ wrote:Under current rules, a short seller must first locate shares to borrow, but does not have to enter into a contract with the share lender. Often, more than one trader is able to borrow the same shares, creating a multiplier effect in the size of the total short position.

Under the emergency order, a short seller would be required to have an actual agreement to borrow the shares. The new move would effectively take shares out of the market for borrowing, which could reduce the amount of stock available for selling short.
Jim
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Post by LH2004 »

The index providers should immediately drop all of the stocks subject to these price-distorting rules.
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Post by magellan »

LH2004 wrote:The index providers should immediately drop all of the stocks subject to these price-distorting rules.
Perhaps the rules could be price distorting, but it seems like they aren't expected to have much impact from what I'm reading.

In this WSJ blog discussion, some alternatives to short selling are discussed. In particular this:
Heidi Moore at WSJ Deal Journal wrote:Consider another move in the playbook of Ackman and many others. Shorting stock isn’t the only way to make a bet on a firm’s failure. You can also go long on credit-default swaps. That’s what Ackman announced he was doing to bet that bond insurer FSA’s fortunes would suffer. CDSs, as they are known, are contracts that you can buy to insure yourself against a default in a company’s shares. The trading of CDSs –which is usually completely opaque except to insiders — often has a strong influence on a company’s stock price.
Jim
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Post by Rose21 »

Am I missing something, or is naked short selling already illegal? And isn't it the official position of the SEC that naked short selling does not exist?
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Post by Jack »

It's funny (and I don't mean funny ha ha) that the SEC never feels the need to interfere in the markets when speculators drive market prices up in huge bubbles but feels compelled to interfere if speculators drive prices down. Speculative bubbles do much more harm to the general economy than short selling. One could argue that by restricting short-selling the SEC is primarily concerned about protecting CEO stock options.
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Post by OptionAl »

Naked short selling is indeed already illegal.
The Big News Not In The WSJ: Our dynamic watchdogs at the SEC have decided to enforce the law.
The horror! It may actually cost the top dogs there future jobs at the trading firms they are now supposedly policing.
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Post by Jack »

OptionAl wrote:Naked short selling is indeed already illegal.
The Big News Not In The WSJ: Our dynamic watchdogs at the SEC have decided to enforce the law.
The horror! It may actually cost the top dogs there future jobs at the trading firms they are now supposedly policing.
As you can see here in the SEC explanation, naked shorts per se are not illegal and, to the contrary, actually serve a useful function. Naked shorts occur all the time simply because accounts cannot always be settled withing the specified three days.

From the SEC: "Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity."

The SEC also says about: "selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. Regulation SHO does not address this issue."

So illegality seems to be in the eye of the beholder. A naked short is not illegal. They have to prove that the intent of the naked short was to manipulate the market. I don't know how you go about proving intent except perhaps in the case of small, very thinly traded stocks. Certainly not the giant, highly liquid stocks of the financial sector we are talking about here.
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Post by OptionAl »

Fair enough, I stand corrected.
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Post by hello77 »

The sec states:

"it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited."

What is interesting to me is that if short sales or naked short sales done to manipulate' price of a stock are prohibited already; then why did the the SEC issue a new emergency ruling making it illegal to perform naked short sales with regard to fannie and freddie as well as other investment banks....does this mean it is legal to perform naked short sales to manipulate the price of stocks of other companies...it is apparent that the sec is not enforcing this existing rule.

In many cases, market brokerages or investment banks may have incentive to drive a stock down. For example, Lehman brothers (as well as other investtment banks) issued a large number of convertible bonds linked to various stocks such as Amd,BofA, apple, and many others. Obviously, there would be an incentive to drive any of the stock linked to an issue of convertible bonds down below the threshold limit (downside limit).

The recent mandate by the SEC to stop short-sellers from using "naked shorting" to target mortgage companies Fannie Mae and Freddie Mac as well as investment banks like Lehman Brothers does nothing to stop someone like Lehman Brothers from using its brokerage powers to short stock linked to the convertible bonds it issued.

I am uncertain if these firms are shorting the market to manipulate the market; but the incentive is there and these investment banks have been less than ethical and less than forthcoming.

The bottom line is i have little trust in the market pricing right now as the SEC is not' enforcing its existing rules. It is obvious to me that there is deliberate market manipulation going on as evidenced by the recent emergency ruling by the SEC to stop short sellers relating to investment banks. Its time to make this rule cover all of the market. Im sure other measures are also needed in addition to cover issues beyond the shorting issue.
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Post by dmcmahon »

Why not simply ban the practice of short-selling altogether? Let people who want to bet against a company do so using derivatives, betting against other punters like themselves, and not against companies and long-term shareholders.
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Post by gassert »

Basically this is all window dressing. Politics.

There's no way that shorting a huge market cap company has any impact on the stock price. No way. That would be like trying to move XOM by shorting 100 shares. Even the biggest hedge funds couldnt do it. It's absurd. There have certainly been smaller co's hurt by this in the past - no question, but not big ones.

And there have ALWAYS been regulations that prohibt ANY form of market manipulation - shorting is just one avenue. So basically they are saying - this has always been illegal, but now we're getting serious. Although too little too late.

This is just plain stupid. It's almost like suspending the gas tax for the summer to curb long term energy trends (which is not what "they're" actually saying, but good parallel.)

And there's no reason to ban shorting. None - I can't think of one. They just need to actually take action on real market manipultion (which includeds on the upside by corporate execs). BTW - short position data is also published and often used as a contrarian indicator
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Post by trom »

dmcmahon wrote:Why not simply ban the practice of short-selling altogether? Let people who want to bet against a company do so using derivatives, betting against other punters like themselves, and not against companies and long-term shareholders.
I hope you are being sarcastic. :shock:
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Post by dmcmahon »

I strongly disagree. I would turn this on it's head and say that I see no benefit to the general market to allow short selling at all. And I can see huge harm. Stock prices on all shares are set by the marginal buyer and seller. In other words, by supply and demand. As such, the entire mcap of a large company may ride on a much smaller number of shares trading hands.

The mechanism by which a short can drive a company into the ground is therefore simple - create an oversupply of the stock by ginning up phantom shares by borrowing them, driving the stock down. For extra credit, target a company that is likely to need to raise capital, such as a troubled bank, and therefore help create the conditions for failure by denying an important avenue for raising capital.

As an extreme thought experiment, suppose that a small group of long-term holders collectively own 100% of a company, and are satisfied to simply hold their positions despite some short-term troubles. Other parties may be interested in buying shares in the company at lower prices; there is always some lower price that will tempt someone without a position in the company off the sidelines. What keeps the price up is the unwillingness of the long-term holders to sell. However, along comes the short-seller, who gins up some shares to sell, and is willing to sell at a lower price - and then more ginned-up shares at a yet lower price, and lower, and lower, and lower, shorting more and more on the way down until the trend is established. At some point some of the long-term holders may start to sell, accellerating the decline. The shorts could either cover at this point, or, if it's a financial institution, sit back and let the mere fact of the stock's price decline do the rest to take the institution under as it loses its ability to raise more capital, then (if it's a bond insurer) loses its credit rating, etc.

Shorts like Bill Ackman are making billions while long-term holders are losing billions, and the US taxpayers are losing billions more. What's wrong with this picture?
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Post by cloudeleven »

China banned shorting a while ago, but that hasn't stopped their market from falling over 55% since last October.
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Post by hello77 »

dmcmahon wrote: However, along comes the short-seller, who gins up some shares to sell, and is willing to sell at a lower price - and then more ginned-up shares at a yet lower price, and lower, and lower, and lower, shorting more and more on the way down until the trend is established. At some point some of the long-term holders may start to sell, accellerating the decline. The shorts could either cover at this point, or, if it's a financial institution, sit back and let the mere fact of the stock's price decline do the rest to take the institution under as it loses its ability to raise more capital, then (if it's a bond insurer) loses its credit rating, etc.

Shorts like Bill Ackman are making billions while long-term holders are losing billions, and the US taxpayers are losing billions more. What's wrong with this picture?
I agree; and naked shorts dont even require you ever owning the shares...its a big problem.

My main problem is that it makes me not want to trust the market because market or stocks can be manipulated and most likely are as evidenced by the SEC letter making certain shorts illegal for various banking investment firms. Whats interesting is that the recent SEC letter protects Lehman Bros stock from shorts; however, Lehman Brothers has the power and the authority(and the incentive as it has issued convertible securities linked to various stock) to continue to perform shorts as well as naked shorts.

For me the issue is that it erodes my faith in the markets; and, if i dont have faith, Im not investing. I think the SEC (as well as the fed)has really dropped the ball on a lot stuff that leaves me with a feeling of uncertainty.
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Post by trom »

dmcmahon wrote:I strongly disagree. I would turn this on it's head and say that I see no benefit to the general market to allow short selling at all. And I can see huge harm. Stock prices on all shares are set by the marginal buyer and seller. In other words, by supply and demand. As such, the entire mcap of a large company may ride on a much smaller number of shares trading hands.The mechanism by which a short can drive a company into the ground is therefore simple - create an oversupply of the stock by ginning up phantom shares by borrowing them, driving the stock down. For extra credit, target a company that is likely to need to raise capital, such as a troubled bank, and therefore help create the conditions for failure by denying an important avenue for raising capital.

As an extreme thought experiment, suppose that a small group of long-term holders collectively own 100% of a company, and are satisfied to simply hold their positions despite some short-term troubles. Other parties may be interested in buying shares in the company at lower prices; there is always some lower price that will tempt someone without a position in the company off the sidelines. What keeps the price up is the unwillingness of the long-term holders to sell. However, along comes the short-seller, who gins up some shares to sell, and is willing to sell at a lower price - and then more ginned-up shares at a yet lower price, and lower, and lower, and lower, shorting more and more on the way down until the trend is established. At some point some of the long-term holders may start to sell, accellerating the decline. The shorts could either cover at this point, or, if it's a financial institution, sit back and let the mere fact of the stock's price decline do the rest to take the institution under as it loses its ability to raise more capital, then (if it's a bond insurer) loses its credit rating, etc.

Shorts like Bill Ackman are making billions while long-term holders are losing billions, and the US taxpayers are losing billions more. What's wrong with this picture?
I believe you're conflating short selling with naked short selling. I agree with you that naked short selling is an issue that needs to be addressed. However, smearing all short selling is going a bit overboard.

In a proper short sale, the short selling firm must first perform a locate for each share they wish to short. A naked short sale takes place when a firm marks a sale as a short prior to performing a proper locate. Assuming proper stock locating, your thought experiment is impossible. The 100% holders could simply refuse to lend their shares.
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Post by hello77 »

trom,

I agree that naked shorting is a bigger problem; but even non naked shorts can be used to drive down stock prices and in fact shorting (even non naked shorts) done for the purpose of manipulating is illegal...though the SEC seems to be saying this is OK other than for the investment firms on its recent letter?...Seems SEC is not enforcing anything...
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Post by xerty24 »

For those of you who don't really understand shorting, let me just say this -

Make shorting illegal and you make a bubble, time and again.

If I see a stock that I think is overpriced and shorting is allowed, I short it and now the (slightly lower) market price includes the information about my (negative) opinion, just like if I see a stock I think is cheap and buy, the (slightly higher) market price includes the information about my positive sentiment. It's pretty easy to see that if the bears aren't invited to the party, the bulls can only trade with themselves and eventually the whole thing collapses, quite dramatically at times like the recent China stock market (where shorting is not allowed).

Somehow the idiot politicians think restricting shorting will keep the market going up and everyone happy. It doesn't work that way and never has. If you believe in indexing, you should want lots of short sellers and a free market so that full price discovery means you get a "fair" price for the stocks your index fund buys. Without the short sellers, you're just buying in with the bulls in their frenzy and paying too much for everything popular. How much you overpaid will be realized when the next crash comes.
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Post by dmcmahon »

No, I understand the difference between regular shorting and naked shorting. I frankly don't see why either should be allowed. Let the price of a stock be determined by finding a price at which someone who actually owns it is willing to part with it. Just like practically everything else we buy and sell. If people want to make side bets against a company, fine, let them make such bets against someone willing to bet the other way, just like our futures markets. Shorting creates additional risks for regular shareholders in the event of a systemic collapse. I don't see any public good being served by allowing it.

As an example, a house cannot directly be shorted. Your "negative opinion" about prices is reflected in your unwillingness to bid at the seller's ask. There's no need to allow you to short a stock for your negative opinion to be counted. Lack of buying interest is sufficient.
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Post by trom »

dmcmahon wrote:No, I understand the difference between regular shorting and naked shorting. I frankly don't see why either should be allowed. Let the price of a stock be determined by finding a price at which someone who actually owns it is willing to part with it. Just like practically everything else we buy and sell. If people want to make side bets against a company, fine, let them make such bets against someone willing to bet the other way, just like our futures markets. Shorting creates additional risks for regular shareholders in the event of a systemic collapse. I don't see any public good being served by allowing it.

As an example, a house cannot directly be shorted. Your "negative opinion" about prices is reflected in your unwillingness to bid at the seller's ask. There's no need to allow you to short a stock for your negative opinion to be counted. Lack of buying interest is sufficient.
Look at the NASDAQ bubble. Shares were difficult to locate and short. I find it hard to believe you would say that those prices reflected an accurate market for many of those securities.

Also, consider unusual days that demand extra intraday liquidity, such as index rebalancing days. I'll give you a specific example from this year's Russell Reconstitution day. Ticker symbol DHIL was added to the Russell 2000 index. On the close of June 27th every fund that tracks the Russell 2000 needed to own the stock. On a typical day, the stock trades 5k-10k shares (the current Yahoo/Google average volume stats are distorted from the Russell rebalance day). Due to wide spreads and lack of liquidity, going to market with as few as 5k shares would move this stock a few dollars. On June 27, 145k shares were traded, with 80k of them being traded in the last 10 minutes. Without sufficient liquidity provided by shorts, this stock would have been driven up an absurd amount in order to satisfy the massive institutional buy orders that came in.

Every day in many, many securities similar scenarios occur.
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Post by hello77 »

Somehow the idiot politicians think restricting shorting will keep the market going up and everyone happy. It doesn't work that way and never has.
The thing you forget is that for the market to be successful, people must have confidence in the market; as long as shorting in any form can be used manipulate the price of a stock, i dont have confidence. I think the stock market right now is full of people abusing and taking away billions of dollars from hard earning people who have no idea why there losing money.

Right now i would not buy any stock that lehman bros has issued convertible bonds on. In a convertible bond; if the stock drops below a certain price, lehman will give the shares of the company back to the investor rather than the actual cash. For example, if you invested $10,000 in a 1 year convertible bond and the downside limit of the stock is 50%; it means at the end of the year that if the stock has gone down more than 50%...you get the stock back rather than your $10,000...so if stock went down 60%; you would get $4000 worth of stock back; and Lehman does not have to place your initial $10,000 investment in the stock that the convertible bond is linked to.

The problem I see with the shorts/naked shorts issue is that bank investment firms like Lehman can use its market authority to drive down stocks through shorting (naked or non naked) when it is in its interest...and it is in its interest. The incentive is there and these investment banks have been less than ethical and less than forthcoming as evidenced by the recent bank failures.

With regard to China, many people are saying that China made shorting illegal and the market still has not rebounded; this is the problem with shorting; once you drive down a stock down through a certain threshold; investors lose confidence and the stock can remain down for years before confidence is restored. If shorts were eliminated, i would at least have confidence that natural forces are moving the prices whether it be up or down...right now i have know idea if stock prices are going down because of natural forces or just being manipulated...i just have know idea if i buy a particular stock; if some investment bank or other investor might come in and start using shorting to drive down the stock price artificially.

The bottom line is that shorting is undermining my confidence in the market..if there is no confidence; then the market is further undermined.
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Post by xerty24 »

dmcmahon wrote:As an example, a house cannot directly be shorted. Your "negative opinion" about prices is reflected in your unwillingness to bid at the seller's ask. There's no need to allow you to short a stock for your negative opinion to be counted. Lack of buying interest is sufficient.
The housing market is a perfect example of why shorting should be allowed. Because people can't bet against housing prices, when the "real" price falls, the longs are often (and currently) unwilling to sell because they irrationally hold onto hope that their house is worth what it was before the crash. Of course it's not, or someone would buy it at the old listing price instead of sitting there not moving. A consequence of this lack of shorts is that liquidity dries up in the market, and people don't buy/sell their houses and can't move to arrange their lives efficiently because no one is willing to transact at a fair price. If you could short houses, someone could sell me a house I wish to buy now at a fair price and deal with taking the risk that the price falls later. Shorts provide valuable liquidity and market stability when the longs are behaving irrationally, in the same way value-seekers provide liquidity and stability during market pancies when prices are falling.
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Post by TheEternalVortex »

xerty24 wrote:
dmcmahon wrote:As an example, a house cannot directly be shorted. Your "negative opinion" about prices is reflected in your unwillingness to bid at the seller's ask. There's no need to allow you to short a stock for your negative opinion to be counted. Lack of buying interest is sufficient.
The housing market is a perfect example of why shorting should be allowed. Because people can't bet against housing prices, when the "real" price falls, the longs are often (and currently) unwilling to sell because they irrationally hold onto hope that their house is worth what it was before the crash. Of course it's not, or someone would buy it at the old listing price instead of sitting there not moving. A consequence of this lack of shorts is that liquidity dries up in the market, and people don't buy/sell their houses and can't move to arrange their lives efficiently because no one is willing to transact at a fair price. If you could short houses, someone could sell me a house I wish to buy now at a fair price and deal with taking the risk that the price falls later. Shorts provide valuable liquidity and market stability when the longs are behaving irrationally, in the same way value-seekers provide liquidity and stability during market pancies when prices are falling.
Exactly. This is an excellent description of why short selling is important.
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Post by mwgr5 »

Yeah this rule is kind of complete BS. It isn't really going to do much. It only lasts 7 days. Basically before when shorting you just needed a locate from a broker who had a reasonable assumption that you could actually borrow the shares. Now, you have to have the shares actually borrowed to short sell. This really doesn't change the process much. Borrow fees might increase a little but people can still short.
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Post by btenny »

I'm sorry your naked short house selling example reminds me of ALL IN bets on a poker hand half way thru the deal. Just a wild bet with little or no information. This is not investing. It is gambling just like naked short selling is gambling. No capital investment of real money or borrowing of real stock is required, non the less you can force a drop in the price and make a profit and devalue the whole market in turn. I think this should be illegal and punished heavily if allowed to happen..........

And if shares in a particular stock are scarce both sellers and buyers would be more careful and deal accordingly. Plus prices in these small firms would move around a lot more regularly due to this lack of liquidity and tell everyone that the stock was risky as it should be...

Bill
xerty24
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Post by xerty24 »

I hope this thread brings home a very important lesson to everyone -

People say and do really stupid and irrational things when they are losing money!

The explanations of why all short selling is Evil make me think we've been overrun by Pakistanis around here. Perhaps we should outlaw inflation too like Zimbabwe did? Most of the "anti shorting" responses should have been funny they were so irrational and ill-conceived, if only our politicians and economists at the SEC weren't falling into the same panicked mindset and passing stupid reactionary laws.
btenny wrote:No capital investment of real money or borrowing of real stock is required, non the less you can force a drop in the price and make a profit and devalue the whole market in turn. I think this should be illegal and punished heavily if allowed to happen..........
You show me the broker where no capital or "real money" is required to short a stock and I'll show you someone about to be out of business.

Short selling is legal and an important part of a functioning marketplace. Intentional naked short selling (where the shares aren't borrowed and may not exist) and market manipulation were already illegal. This is all election year posturing and economic confidence damage control - don't expect it to mean anything and just hope they don't do serious damage to the markets in the process.
btenny
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Post by btenny »

XERTY24 and others. Please read the news release again. It clearly says naked shorting is legal according to current SEC rules. They are just stopping it for a while for a few stocks only. Otherwise it is fine for brokers and other large traders and hedge funds to sell something they do not have or have any plan to get. So the person who bought at this low price may never get his stock and the "price" he supposedly paid and that is now on the ticker and advertised around the world is TOTALLY FALSE. It was a fake trade designed to fake the market.

So if you love naked shorting and feel it is so great lets set up a test. We will run an ad in the newspaper and on the interent and Yahoo web sites telling the whole world that I just bought your house and the four others on your street for $10 each and we will close escrow in 3 days.

Then let's see how this effects the real estate prices and sales in your town!!!! Think we can get some people to sell us their homes at a big discount from the current price that way. I do.......

For a real example of this look at the ETF called BIL. This stock is a 1-3 month treasury bill etf. It never changes price much because it is directly liked to hard T-bills. It sells for $45.8 or so, always. That is a firm price. But someone set up a naked sale (I suspect) on purpose or by accident last year and sold some shares at $53.1 which would have been a complete dumb move by the buyer and probably never occured and most certainly never closed. But none the less this is the recorded high for the year on this stock. So now we have FABRICATED TRUTH as a perminant record all over the world showing this price as the recorded high absolute real number for the year. When the real fact is this is really a total LIE......

This kind of thing (when done intentionaly) is NO different than the CRIMINAL act of lying to congress or lying to a grand jury. It is a criminal ACT and can be and is punished by prison time.......

Bill

PS. Remember what happened last year in China (Hong Kong exchange I think) when a trader accidently entered a 1M share trade at 300 points below the market on one stock at closing time. Well the market went down something like 1000 points the next morning on this fake trade.....
xerty24
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Post by xerty24 »

btenny wrote:So the person who bought at this low price may never get his stock
This just isn't true. If there's a problem with too much shorting and shares become hard to find/borrow, the shorts may be required to cover/buy and this fixes the problem. In no case is the buyer stuck with fake or fraudulent shares.
For a real example of this look at the ETF called BIL. This stock is a 1-3 month treasury bill etf. It never changes price much because it is directly liked to hard T-bills. It sells for $45.8 or so, always. That is a firm price. But someone set up a naked sale (I suspect) on purpose or by accident last year and sold some shares at $53.1 which would have been a complete dumb move by the buyer and probably never occured and most certainly never closed. But none the less this is the recorded high for the year on this stock.
There's no reason to think that the seller was shorting, naked or otherwise, in this case. Maybe he just had a limit order at $53 in hopes some idiot would put in a big market order for BIL and move the market. In any case, trades more than $1 away from the best market will get broken by the exchange so it's not like this really happened (or if it did, it got undone). I don't see how having some glitchy data in the "record high" for a stock price matters much - if you were actually buying this stock and did even the least amount of superficial research, you would realize it's just one of many errors out there in historical financial data.
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dmcmahon
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Post by dmcmahon »

Lack of ability to "short" housing had less to do with the price bubble that the fact that people could buy housing on 100% margin. Require some reasonable downpayment and any bubble will ultimately be self-limiting.

Shorts borrowing shares from people expose them to extra risk (that, for example, the short seller's gambling schemes go awry and he goes bust, unable to buy back the shares). Also, shorted shares would seem to create more people who'll think they "own" a stock - how then do their votes count for shareholder proxies etc.?

I don't think it's possible to sell US treasuries (or any bonds?) short, and yet we have markets for them that function perfectly well. People who want to bet against the price of treasuries can do so on the futures exchange, where their short bet is matched to someone who wants to make the opposite bet, and that too functions perfectly well. Perhaps I'm wrong about bonds (in which case, now I'm really worried, as even my treasuries are potentially suspect!) - anyone know for sure?
xerty24
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Post by xerty24 »

dmcmahon wrote:Lack of ability to "short" housing had less to do with the price bubble that the fact that people could buy housing on 100% margin. Require some reasonable downpayment and any bubble will ultimately be self-limiting.
Well sure, easy 100%+ financing (together with non-recourse mortgages in some places) was most of it. But if the market starts getting "too high" and no one's allowed to short there's no self-limiting process to check the bubble until the whole thing collapses. In that case if you think the housing stocks are too high, all you can do is not buy (which doesn't help to push the price towards its fair price), where as if you can short this will help keep prices near the consensus fair value.
Shorts borrowing shares from people expose them to extra risk (that, for example, the short seller's gambling schemes go awry and he goes bust, unable to buy back the shares).
This risk is with the brokers I think, who have a very strong incentive to force a short position to cover (buy) if their equity is getting too low (just like you get margin calls if you're long and they liquidate your position before the brokerage starts losing money).
Also, shorted shares would seem to create more people who'll think they "own" a stock - how then do their votes count for shareholder proxies etc.?
This does get taken care of. If your shares are in a margin account and were borrowed during a voting period, you don't get to vote. If you care a lot about your vote, you can look into registering your stock in a way that ensure you get to vote the shares.
I don't think it's possible to sell US treasuries (or any bonds?) short, and yet we have markets for them that function perfectly well. People who want to bet against the price of treasuries can do so on the futures exchange, where their short bet is matched to someone who wants to make the opposite bet, and that too functions perfectly well. Perhaps I'm wrong about bonds (in which case, now I'm really worried, as even my treasuries are potentially suspect!) - anyone know for sure?
You can short both treasury bonds and treasury futures, although the latter is more accessible to individual investors. There are plenty of people shorting bonds just like there are stocks, and as you say, the markets works fine.
trom
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Post by trom »

dmcmahon wrote:Lack of ability to "short" housing had less to do with the price bubble that the fact that people could buy housing on 100% margin. Require some reasonable downpayment and any bubble will ultimately be self-limiting.

Shorts borrowing shares from people expose them to extra risk (that, for example, the short seller's gambling schemes go awry and he goes bust, unable to buy back the shares). Also, shorted shares would seem to create more people who'll think they "own" a stock - how then do their votes count for shareholder proxies etc.?

I don't think it's possible to sell US treasuries (or any bonds?) short, and yet we have markets for them that function perfectly well. People who want to bet against the price of treasuries can do so on the futures exchange, where their short bet is matched to someone who wants to make the opposite bet, and that too functions perfectly well. Perhaps I'm wrong about bonds (in which case, now I'm really worried, as even my treasuries are potentially suspect!) - anyone know for sure?
Xerty24 is correct. The US treasury market is the most liquid market in the world - if memory serves. There might be an Asian index futures market that is more liquid in terms of notational value, but I'm not 100% sure. There are futures trading firms in Chicago that exist only to trade the US yield curve. They will trade the spread amongst the various maturities of treasury futures, as well as cash markets. The arbitrage trades these types of firms make by taking positions both long and short play a part in providing efficient price discovery. Taking away the ability to short, and thus hedge, would only be detrimental to the market.

I also would not be worried about shorts in the cash treasuries. If someone were to be exposed short in the treasury futures market at the time of contract expiration, they would have to make delivery on the underlying. There they can't maintain a short without making delivery.
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magellan
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Post by magellan »

The SEC has announced tonight that market makers will be exempt from the new short selling rules.

So it looks like the bigger players won't have to play by these new rules after all...

Here's a link to the story (from Forbes this time because it's free):

http://www.forbes.com/2008/07/18/sec-sh ... d=rss_news

Jim
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