JimIn 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.
http://www.reuters.com/article/marketsN ... 716?rpc=44The 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.
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 canedmagellan wrote: Although this is certainly a serious move, at least they didn't go this far...JimIn 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.
Ahhh, the plunge protection team at work again - although a tad late for many financials. By the way, have any "unlawful" activities been proven?"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.
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.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.
JimWSJ 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.
Perhaps the rules could be price distorting, but it seems like they aren't expected to have much impact from what I'm reading.LH2004 wrote:The index providers should immediately drop all of the stocks subject to these price-distorting rules.
JimHeidi 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.
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.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.
I agree; and naked shorts dont even require you ever owning the shares...its a big problem.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 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.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?
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.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.
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.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 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.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.
Exactly. This is an excellent description of why short selling is important.xerty24 wrote: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.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.
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.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..........
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.btenny wrote:So the person who bought at this low price may never get his 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.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.
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.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.
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).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 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.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.?
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.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.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?
