Short Selling: Can't Stop, Won't Stop
One of the toughest things about faith is sticking to it in tough times. I am not talking about Christianity, Judaism or Islam. I am talking about capitalism and markets. We are all members of the church, we all worship at the altar of money, ambition and power. So it is pretty damn tough for any of us to consider that perhaps a crucial element of speculation, may best be abandoned for the time being.
There come times in our lives when we have to let go of what we believe in, for what we need in order to survive. It is probably the toughest part of growing up; trading dreams for reality. This is precisely why I like hearing words of reason like the following, which reaffirm my faith and belief in the basics:
France, Spain, Italy and Belgium’s bans on short-selling may fail to reverse the fall in financial stocks and instead may concentrate bets against banks elsewhere in Europe.
I am happy to hear a little good reason if it is dispersed far away from riots and between messages of populist banter and fear mongering. I genuinely don't like to take the conversation to such a banal level, but where the fuck would the European economy have been after World War 2 had it not been for precisely those elements of Free Market capitalism her politicians and populists now seek to extinguish? Why is it that every single time some jack ass breaks a window or lights a trash can on fire, you can count on short selling being the real reason?
No. You cannot have markets without short selling. No. Short sellers are not the problem. No. As much as I hate the Fed, the world is not run by fat pig faced bankers in pinstripe suits and blood sucking traders who sweat Crisco. No. It ain't them burning, looting and acting a fool... it is you.
I understand that markets are in turmoil and that people are nervous. The world got fat and happy off the benefits markets provided and now an over leveraged planet doesn't know which way to turn. So sloppy, flabby and dripping with debt have we become that any chair we sit in, can easily end up cracking. This, however, does not require the murder of the best system on record. Saving a few pennies today is not worth bleeding out tons of bills tomorrow.
We have clearly seen what global Keynesian protectionism means for a functional market. It is the dietary effect of starving yourself for days and then eating a tub of lard, deep fried in bacon fat. If these anti-short selling sentimental idiots can at least come up with some semblance of logic to their degenerate agenda I would be fine with it. But since they can't, I have to wonder if we've really advanced much at all since the cavemen.
How much longer will I hear about boogey men and wicked witches?
Short selling stays, or it really will be the end of days.
Why not just pass a law that makes it illegal for the stock market to go down.
More important than worshipping at the church of Capitalism is worshipping at the Church of Democracy. And the fact is that while mob rule is a horrible form of government, it is the only form that works.
Irrespective of the merits of short-selling and margin, it's possible to have capitalism without them. The country functioned just fine for its first ~130 years before the practice of borrowing money against stock and lending out stock started. And I think that when a majority of the country doesn't like the idea of short-selling, it's perfectly acceptable to ban or limit the practice.
The story that hasn't been told here is the short-runs after 1929, where a number of investors got together, shorted a stock, hammered it into the ground, triggered panic selling, screwed a lot of mom-and-pop investors and exited their short positions at a profit. These market manipulations got banned in the Securities and Exchange acts of 1933 and 1934 and prompted the NYSE to implement the uptick rule. For us to allow short-sellers to start a stock panic and profit off of it is to make it legal to invite a bunch of people to a crowded theater, shout "FIRE", then block the exit and charge $200 for the privilege of exiting. Most people would call that fraud.
Oh well, other countries will either allow this short selling and see the focus moved to them, or they will also make it illegal. Then, at the very least, stock movements will be driven by folks who own the stock panicking for reasons driven by the fundamentals rather than short-sellers trying to inspire panic.
During a panic, investors and traders should be rooting for businesses to succeed or for currencies to go up, rather than for others to fail. While short-selling can help keep prices from getting too high in greedy and complacent markets, it generates negative externalities in a panic and causes people to get more cynical unnecessarily. A short-selling ban must be infuriating for a small number of over-leveraged people betting against a recovery and trying to inspire panic, but it's good for the rest of us during a panic. On with the short-selling ban! Down with the short pools!
Agreed, evil pink faced pigs shouldn't rape good ol' ma and pa. As you so eloquently put it, however, they are no longer simply able to bid up and down to their evil hearts' delight. The country did just fine in it's first ~130 years without a FEDERAL RESERVE. Let's agree to disagree, you can take short sales off the table if I get to behead Ben...deal? My point isn't the perfection of the system or the altruistic existence of short sales; as neither would be true. All I am saying is that before we firebomb the current set up, let's at least come to the negotiation table with a better alternative. The argument that holding a stock is the only legitimate way to speculate on its fluctuations is ridiculous. The notion of rooting for a business to succeed during a panic is only logical if the business is legitimate. Unfortunately, in the reality of markets it is only the short seller who can shine the light on ponzi schemes and dubious corporations. His/her ultimate clearance function is really that which the regulators incompetence leaves available for the unscrupulous. Without him/her around to "police the price" it is the centralist red faced Keynesian who gets the free pass to carve reality in the image of his interests.
They need to get rid of the up tick rule. There is nothing wrong traders calling bullshit on company earning.
Oh, and the stock market was never meant for mom and pops. Sick of people crying because there position gets blown out of the water 50% +, do more research lazy fucks.
Midas, you are speaking in caricatures about "pig faced bankers" to hide how feeble your argument really is when it comes down to it. You are using inflated rhetoric and gross generalizations because the logic just isn't there behind you and precision would expose your folly. You write like Glenn Beck or Rush Limbaugh speaks.
You implied that proposals to ban short selling are tantamount to proposals that we "firebomb the current set-up". And you said that we "should at least come to the table with alternatives" if we are going to firebomb the current set-up. But a proposal to ban short-selling is not a firebombing of the current set-up. Short-selling is of at best dubious value to equity markets and is not in any way elemental to the current organization of financial markets. You say that "you cannot have markets without short-selling". Why not? Have France, Spain, or Italy's financial markets evaporated now that they have banned short-selling? Can you point to one argument in favor of short-selling that does not refer to back to "efficiency", that vague notion that you would struggle to define in words that are anything but abstractions, meaningless on their own terms?
You also compare proposals to ban short-selling to proposals to abolish the Federal Reserve. Let us then return to your original criterion of proposing an alternative to the status quo at the same time as we propose a change in it. I propose a ban on short-selling. My alternative is a stock market without short-selling. I think this a fine alternative. Imagine somebody intelligent proposes the abolition of the Federal Reserve. What's the alternative? The gold standard? Even a Reagan-commissioned panel found to be an utterly horrible idea, and arguments in favor if it are based on distorted views of economic history.
And for the record, the "semblance of logic behind the degenerate idea" is as follows: certain aspects of financial markets as they exist are beneficial to the real economy, the part of the economy that produces real goods and services. Certain aspects are not. Buying stocks and buying bonds provides capital to businesses that would otherwise not be available. This is a beneficial aspect of financial markets. Short-selling stocks, however, is not beneficial to anybody besides those employed in certain fields of the financial industry. Therefore short-selling should be banned, since all it does enrich a limited number of financiers and detrimentally affect businesses.
The argument in favor of short-selling, of course, is that short-selling somehow exposes deficient businesses and therefore increases the "efficiency" of financial markets. Because a bunch of people sitting in a hedge fund conference room are omniscient, benevolent social planners and know which businesses will provide the greatest benefit to the economy and which are doomed to fail. So when they decide to short a stock and cause further panic-selling, this thinking goes, they are in fact doing a service to the economy. Of course they are not choosing a vulnerable target and shorting it to cause a panic that arises due largely to the fact that they have sold short so many shares. They are merely exposing "weak" companies.
But if these companies are so weak and unhelpful to the economy, wouldn't they fail anyway, without the aggressive short-selling? Why is short-selling necessary in the first-place if all it is doing is exposing the weak links in the chain, so to speak? And if short-selling merely represents the generation of profits from an inevitable event bound to happen anyway, on the surface this seems as if would represent an argument in favor of short-selling. However, when we weigh this against the fact that a good many short-sales have caused panics detrimental to markets, we have a situation in which short-selling has a neutral effect at best and a negative effect at worst. And in this light, short-selling still seems like something that would be better banned.
Also, you throw around the phrase "Keynesian protectionism". What the hell is that? Do you really think you are referring to a real idea that somebody else has? Have you ever read a page of anything Keynes wrote? He was never a protectionist and his views on the role of financial markets are far more sophisticated in their conception than anything you have written here. You are just jumbling together phrases you've read somewhere in the Wall Street journal in an argument that is on the whole flimsy, full of the inflationary rhetoric one finds in writing that obfuscates rather than clarifies in order to conceal the deep flaws in its logic.
Good argument!
It is a known fact short sellers are generally smarter than those who just do buy and holds.
@SlyGuy Sounds like you need a fucking nap. As a short seller, I can tell you that I definitely make the market more efficient by profiting from the downfall of bullshit companies. Trust me, there won't be another content farm like Demand Studios coming public anytime soon, and if it's because of short sellers like me then we've done the public a favor.
I'm normally much more verbose, but because I'm wasted to beat the band and it's taken me no less than 6 times to make this comment, I'll leave this argument to my more sober counterparts. BTW, Germany rocks. Anyway, if my fellow short sellers fuck this up, be assured that I'll come back sober to teach all of you the error of your ways.
One other advantage of banning short-selling in a panic is that short-sellers who make the mistake of shorting a "BS company" down 40% from their 200 dma don't wind up getting creamed.
What the SEC should have done back in 1934 was prohibit people from entering short positions below some daily moving average. Shorts are supposed to get us out of complacency, not inspire panic.
All these silly bans do is stop retail mom and pop from short selling. Big institutional clients have multitudes of ways around such a rule.
This is what I assumed...does a ban REALLY stop the huge institutional clients from short selling. It's just like gun control law abiding citizens can't get guns but the criminals can...not sure how useful that law is..
Or most pension-funds or the funds you'll find through most high-street "stocks and shares funds"? Going by their performance charts I don't think they use short sales or at least don't know how to - their performance tends to proceed downturns in the market indices and lag behind any upturns.
And here-in lies the reason people don't like short-sales: the "good-guys" can't/won't use them and so it's perceived as cheating.
if your company is legit, shorting wont matter.. you will be safe. Only people who get scared of shorters are the ones who have alot of skeletons in their financials/management/etc.
Although to quote keynes, 'the market can stay irrational longer than you can stay solvent' (or something).
Banning short selling will not solve Europes fundamental issue. This is just reactionary and a stop gap measure. Democracy is horrible, that is why we have a constitutional republic. You need to limit the power of the masses because they are sometimes irrational and dangerous.
@slyguy - your little retort bored the fuck out of me and inspired nothing. MMM's "vague" rant was not only entertaining, but inspired a discussion. Maybe that is why he is a blogger here and you just have a stick up your ass.
I completely agree illini. Short selling can be banned and regulated. My position is that this will do more harm than good and people will find another way around it. If you think banning short selling is goingmto magically help European banks you are drinking populace coolaid. Not direct at you IP, but just saying in general.
Banning short selling just means big money will buy swaps on corporate debt which will cause even worse panic.
Let's be honest the only reason why people want shorts banned is because they need some one to blame for there mistakes on trades.
Good synopsis blast
Short-selling is such an important tool for risk management. How is one supposed to cover his positions if he isn't allowed go short?
During a panic, traditional hedging kinda goes out the window, doesn't it? IIRC, the SEC had an exception for market-makers hedging their short put positions up to the black-scholes implied net delta of all their positions opened before the short sale rule. Regardless, puts have always carried this illiquidity risk due to the uptick rule; this is nothing new.
What is going on in Europe is not a panic, it is the market realizing the dire situation. Banning short selling didn't save Lehman and it won't save the banks.
C'mon. If I was a CEO and my company was perfectly fine and shorts were destroying my stock, I would simply buy back shares. I think shorts rarely kill a truly healthy company, they just temporarily distort the price.
And this mom and pop investors being hurt crap is silly. If you are not prepared for market volatility you shouldn't be investing. Anyone who complains about short sellers is simply crying sour grapes.
If a company is illiquid it should have large cash reserves and a way out. A liquidity crisis is not so out of the normal that a company can just cry about it.
Once again, if a company is on solid footing and prepared, things should be fine. I would consider this a buying opportunity and that would bring a floor to the price.
Banning short-selling can't save an insolvent company, but we can show demonstrably that banning short-selling probably saved a number of companies being forced into liquidity crunches by short-sellers. Shorts were out telling everyone that there was a run on the bank as they were shorting stocks and buying CDSs on them. Nervous lenders lined up to collect on an (illiquid but solvent) bank, and had those firms run out of money, the economic crisis could have been much worse.
What if you had $1 Billion worth of farmland that you knew was worth something but you couldn't sell it overnight and nobody could lend you money against it? Banks are in a particularly bad situation because they're often levered 10 to 1 rather than 2-4:1 like most companies. Sure. But the fact is that hedge funds weren't prepared for market volatility back in 2008 either. They were getting margin called left and right. Shorts were front-running all of this, to boot. I made a huge killing buying MLPs at 14% yields thanks to those shorts, but a lot of professional investors lost everything because people were playing games with the markets rather than tracking fundamentals. A corrolary to smoothing out variations in the economy is that people like me should have only been able to buy at 9% and those hedge funds shouldn't have been forced out at 14% while a bunch of otherwise intelligent managers lost their jobs. The most efficient way of doing this to have smarter regulations for short activity in panics.If we are going to allow investors and companies to employ leverage, then we need to block short activity in panics.
Honestly, it sounds like the European shorts are crying sour grapes because they got forced out of their positions. That's not what I'm advocating- I'm simply advocating a standstill once the VIX hits 30 or 40 or some other benchmark. Sure, but the employees, clients, and suppliers of those firms really don't have any control over that, and in order for the economy to keep working, perhaps it is best to prevent shorts from sniping companies for their balance sheets rather than their economic condition beyond some point. Exactly. Of course, the converse to a panic is a short-squeeze. If we are going to allow shorts to send a company into a panic, we should allow someone else to buy up 110% of the stock in the bankrupt company and claim the bankrupt firm trading at $10M immediately after the BK is worth $10 Trillion. Oh wait, that is illegal market manipulation.Or, we can just eliminate this excess and unnecessary vol and limit short economic interests beyond a certain point in a panic. You can buy CDSs attached to bonds to hedge, you can buy puts attached to stocks to hedge, you can keep hedging an existing short put position, but you cannot say, "I think the market is going down so I am increasing the size of my short position" once the VIX gets past 30, 35, or 40 or we hit some % DMA trigger. (EG 75% 50 DMA). Shorting in a complacent market is a good thing, but shorting during a panic creates negative economic value in the same way that a deliberate short squeeze creates negative economic value and unnecessary volatility.
Short sellers provide non bullshit analysis of a company.
IP, I really appreciate your posts, but your distaste for short-selling is strange. At the heart of a short sale is a sale of a stock. Banning short sales will just move big institutions to stop borrowing the stock and buy the shares outright.
Also, wouldn't the short sale of the stocks of AIG, GS, MS, etc have helped them by making their shares more attractive? The short-sale doesn't affect the companies balance sheet, current and future business, so wouldn't driving the stock price down actually help those interested in buying equities? Yes, it may cause a "run" on the bank, but that is just the mindset of a crowd.
There might be a very conservatively leveraged regional bank- levered say 10:1. Short-sellers and CDS buyers with enough cash can come in, get the stock price to drop 50% in a week, trigger a run on that bank, and eventually force it into bankruptcy, especially during a more general panic. The bank wasn't taken out by anything it had done- it was taken out because the short-sellers chose to target it rather than other firms.
So the best approach, IMHO, is to stop people from opening new negative economic interests during a panic and let stock price movements track a little more to the fundamentals rather than technicals. And the problem with short-attacks these days is that back in the 1920s, after a major short run, you could come in, buy 110% of the shares in the BK entity thereby cornering it, and demand delivery on them by the shorts or charge $10,000/share or whatever other price you saw fit if they couldn't come up with them. These days, your counterparty can cry market manipulation and go running to the SEC saying they've got a smoking gun- right after they just manipulated a bank into BK.
We should either allow a carte-blanche for market corners during periods of heavy vol, or we should declare that only an idiot or a market-manipulator would short a stock when the VIX is north of 30 and a stock is 20% below its 20 DMA, and make that illegal.
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