wayneL
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Should shorting be suspended/banned?
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Shorting is an unacceptable face of capitalism.
wayneL
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Oh really?
Perhaps you can answer this question: Should the shorting of S&P 500 futures be banned. Is shorting the futures "an unacceptable face of capitalism"?
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A step too far
Michael West
Banning short selling means less liquidity therefore more volatility in share prices. It is reckless policy-on-the-run.
That said, if a brief moratorium on shorting can stabilise stock prices and restore some confidence, it may be a good thing. The problem is the regulators have gone too far by banning all shorting _ naked and covered that is, and in all stocks and sectors - and the present policy settings are unlikely to see out the month.
It is a killer for the ASX, as well as liquidity in general. In a normal market, short selling accounts for a third of volumes and right now the share would be closer to 50%. Despite the conspiracy theories, shorting is not just about hedge funds ravaging stock prices for their own greedy ends _ though that is a good part of it.
All the big brokers ''make a market'' in most of the big stocks, buying and selling themselves just for the sake of volume which can bring them corporate business. Further, they ''facilitate'' large portfolio transactions, shorting shares in order to achieve price outcomes for their clients.
Then there's arbitrage, long/short funds and brokers simply shorting to keep a price where they want it while they are trying to pull off a large ''crossing'' of shares in a company.
Yesterday's price action tells the story. ASX fell 5%. Macquarie rose another 5%, Centro and Babcock surged. ANZ and NAB rose 8% and 6% whereas CBA and Westpac rose 4% and 5%. Outside the major banks the good stocks edged higher or were flat while the dodgy stocks rallied hard.
In a normal market where there was real buying the opposite would have occurred. Most of the action was at the outset where vulnerable companies shot up in the panic of a ''short-covering'' rally. The rest of the day was spent wondering what would happen next. These are unchartered waters.
The ideal solution would have prevention rather than cure, or prevention before life support for that matter. All along the policy should have been to enforce disclosure of share lending data on a daily basis, perhaps banning ''naked'' shorting altogether.
It is a fair call that, had ASIC not stepped in and canned shorting, big offshore hedge funds may have turned their attention to Australia, and to Macquarie in particular which has already attracted the focus of foreign funds including famous Wall Street short-seller Jim Chanos. But US and UK regulators had only banned shorting in financial stocks, so why didn't we?
The Government appears to have capitulated to some vigorous lobbying over the weekend from Macquarie, which is ironically one of the biggest short-sellers in the market via its equities derivatives business. As it is an ''approved market maker'' in warrants and so forth the provisions of the ban effectively allow the group to continue shorting but not be shorted itself. This is a policy feature which won't make its rival investment banks and brokers too happy.
In fact, most major market players will be demanding further clarification today, particularly whether listed funds and various hybrids are subject to the new measures and what the implications are for counterparties of the market makers.
For its part, a one month ban should help Macquarie as it continues to unwind its leverage, selling assets in its satellites and head stock to raise its capital buffers.. A failure would be damaging to the entire market given its sheer size and its reach into the economy via infrastructure assets and super funds so if the government can help avert that the ''moral hazard'' could be worth it.
Few debates have polarised opinion as has the brawl between the critics and the advocates of short-selling. There are worthwhile points to be scored on both sides but shorting, for the most part, is a benefit rather than a hindrance to the market.
Liquidity is just one aspect. Price discovery is another. The quicker a stock is restored to its right value the better. Shorting has been going on since the Dutch boom in the early 1600s and was banned by Napoleon 200 years later as a scourge on the market which thwarted his raising money for the war effort. It was banned for many years in the US in the 19th century.
The most often quoted evidence of the benefit of a market taking pain promptly on the chin is the Japanese experience. Its economy, stock market and banking system still bear the scars from the aftermath of the 1980s crash thanks to the Government's refusal to let its banks fail.
While the US market is in utter disarray and now subject to the biggest bail-out in history it should not be forgotten that one of its most compelling facets has been a willingness to allow booms and busts to take their natural course. The recoveries are rapid.
The fact is that stocks are usually shorted because they are too expensive and the selling restores their proper price. Although ''the shorts'' are lambasted in every cycle as conspirators and rumour-mongers they are mostly driven by fundamental analysis, the very fundamental analysis which went missing in the euphoria of a bull market and whipped stock prices to unsustainable highs.
What will happen in one month's time?
mwest@fairfax.com.au
http://www.businessday.com.au/business/a-step-too-far-20080923-4lxz.html#
Michael West
Banning short selling means less liquidity therefore more volatility in share prices. It is reckless policy-on-the-run.
That said, if a brief moratorium on shorting can stabilise stock prices and restore some confidence, it may be a good thing. The problem is the regulators have gone too far by banning all shorting _ naked and covered that is, and in all stocks and sectors - and the present policy settings are unlikely to see out the month.
It is a killer for the ASX, as well as liquidity in general. In a normal market, short selling accounts for a third of volumes and right now the share would be closer to 50%. Despite the conspiracy theories, shorting is not just about hedge funds ravaging stock prices for their own greedy ends _ though that is a good part of it.
All the big brokers ''make a market'' in most of the big stocks, buying and selling themselves just for the sake of volume which can bring them corporate business. Further, they ''facilitate'' large portfolio transactions, shorting shares in order to achieve price outcomes for their clients.
Then there's arbitrage, long/short funds and brokers simply shorting to keep a price where they want it while they are trying to pull off a large ''crossing'' of shares in a company.
Yesterday's price action tells the story. ASX fell 5%. Macquarie rose another 5%, Centro and Babcock surged. ANZ and NAB rose 8% and 6% whereas CBA and Westpac rose 4% and 5%. Outside the major banks the good stocks edged higher or were flat while the dodgy stocks rallied hard.
In a normal market where there was real buying the opposite would have occurred. Most of the action was at the outset where vulnerable companies shot up in the panic of a ''short-covering'' rally. The rest of the day was spent wondering what would happen next. These are unchartered waters.
The ideal solution would have prevention rather than cure, or prevention before life support for that matter. All along the policy should have been to enforce disclosure of share lending data on a daily basis, perhaps banning ''naked'' shorting altogether.
It is a fair call that, had ASIC not stepped in and canned shorting, big offshore hedge funds may have turned their attention to Australia, and to Macquarie in particular which has already attracted the focus of foreign funds including famous Wall Street short-seller Jim Chanos. But US and UK regulators had only banned shorting in financial stocks, so why didn't we?
The Government appears to have capitulated to some vigorous lobbying over the weekend from Macquarie, which is ironically one of the biggest short-sellers in the market via its equities derivatives business. As it is an ''approved market maker'' in warrants and so forth the provisions of the ban effectively allow the group to continue shorting but not be shorted itself. This is a policy feature which won't make its rival investment banks and brokers too happy.
In fact, most major market players will be demanding further clarification today, particularly whether listed funds and various hybrids are subject to the new measures and what the implications are for counterparties of the market makers.
For its part, a one month ban should help Macquarie as it continues to unwind its leverage, selling assets in its satellites and head stock to raise its capital buffers.. A failure would be damaging to the entire market given its sheer size and its reach into the economy via infrastructure assets and super funds so if the government can help avert that the ''moral hazard'' could be worth it.
Few debates have polarised opinion as has the brawl between the critics and the advocates of short-selling. There are worthwhile points to be scored on both sides but shorting, for the most part, is a benefit rather than a hindrance to the market.
Liquidity is just one aspect. Price discovery is another. The quicker a stock is restored to its right value the better. Shorting has been going on since the Dutch boom in the early 1600s and was banned by Napoleon 200 years later as a scourge on the market which thwarted his raising money for the war effort. It was banned for many years in the US in the 19th century.
The most often quoted evidence of the benefit of a market taking pain promptly on the chin is the Japanese experience. Its economy, stock market and banking system still bear the scars from the aftermath of the 1980s crash thanks to the Government's refusal to let its banks fail.
While the US market is in utter disarray and now subject to the biggest bail-out in history it should not be forgotten that one of its most compelling facets has been a willingness to allow booms and busts to take their natural course. The recoveries are rapid.
The fact is that stocks are usually shorted because they are too expensive and the selling restores their proper price. Although ''the shorts'' are lambasted in every cycle as conspirators and rumour-mongers they are mostly driven by fundamental analysis, the very fundamental analysis which went missing in the euphoria of a bull market and whipped stock prices to unsustainable highs.
What will happen in one month's time?
mwest@fairfax.com.au
http://www.businessday.com.au/business/a-step-too-far-20080923-4lxz.html#
Wayne L
I have been looking at the oil price this morning and noticed that it jumped to $130 overnight(at its highest)due to short sellers having to cover due to contracts rolling over. I am having trouble working out how this shorting helps markets could you explain it to me.
Thanks
LOL. Shorters make stocks go down in a falling market and go up in a rising market.
Maybe the politicians should ban going long in the oil market, I'm sure the they would get a lot of support from the public.
Trembling Hand
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Subi where did you get that from
Thats just not right.Without shorts in the market we have no futures market. We have no price discovery, we have no easy way to price commodities, we have large supplies setting the prices. Have a look at BHP, RIO and the other big Iron player they just set the price and the mills have to take it. They are squeezing the hell out of our comrades to the north. But that is fine because everyone is long BHP including the government.
Would you like Exxon, Shell and BP to set your price for oil. Or would you like to have what is the best of few options educated and skilled speculaters and investers setting the price. Ones that will take the otherside of huge powerful companies.
wayneL
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Eh? Contracts rolling over has nothing to do with short sellers. Both shorts and longs have to roll over. That move was exclusive to the October contract and was all about guaranteeing delivery. Somebody was caught out with physical supply as only refiners and suppliers are involved with the Oct contract at expiry. This often happens with commodity futures contracts on the last day of trade on small volume.
If you look at the November contract, it is a different story. The vast bulk of traders have rolled over days ago.
Nothing to do with short selling in the normal course of business and in particular, absolutely no relation to the short selling of stocks.
Subi where did you get that from
Without shorts in the market we have no futures market. We have no price discovery, we have no easy way to price commodities, we have large supplies setting the prices. Have a look at BHP, RIO and the other big Iron player they just set the price and the mills have to take it. They are squeezing the hell out of our comrades to the north. But that is fine because everyone is long BHP including the government.
Would you like Exxon, Shell and BP to set your price for oil. Or would you like to have what is the best of few options educated and skilled speculaters and investers setting the price. Ones that will take the otherside of huge powerful companies.
Fair enough but I just thought price control would be similar to the fruit & vege markets where the amount of supply & demand determines the price.
It appears to me as though the type of shorting that has been going on in a lot of markets is manipulative. In the end the only guy standing is the biggest because he has tricked everybody else to being on the wrong side of the trade.
Maybe actually the ban on short selling is an example of this. Everybody is short and then they change the rules. The same thing happened when they extended natural gas contracts for 2 months during the hurricane.
wayneL
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Trembling Hand
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Could you provide a clear example of a perfectly good company that will not be impacted by the toxic stench coming from the US that is clogging up the world economy and bringing into question the bull market growth of 02 -07
AND has been manipulated??
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Hi wayneL, I've decided to use my inaugural rights and not answer this question. Will answer later, if I remember.
Unfortunately, shorting of stocks is very difficult to control. An ideal situation, where a computer programme can stop shorting if it represents far more stock than is traded in an average week, is a long way off.
It is a matter of control. Some small companies in the States were driven out of business when more stock than existed for trading became shorted.
Now it seems that much bigger companies have found a large percentage of a stock shorted and it just became a financial game.
Until shorting is able to be tightly controlled it remains "an unacceptable face of capitalism".
wayneL
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Nice dodge, but I'm not letting you off after making such a ludicrous statement.
Is the shorting of S&P 500 futures unacceptable?
Furthermore, do you believe traders should be able to go long S&P 500 futures?
These are simple questions and deserving of an answer.
Name one profitable company where this occured. You do realise that the stock market is a secondary market and a stock price has no affect on a companies profits in almost all circumstances?
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You know 'Dubya' - as in the god of debt and tax cuts, the implementer of 'big things' for 'big problems'.
The main issue is not the traders tool of shorting, it is disclosure around shorting that needs to be improved. At the moment it's not a fair ball game. Longs need to disclose substantial positions, shorts do not. Sets up the capital ambush. Short by all means but lets get the information out there. It is meant to be an 'efficient market' after all.
Anyhow it is a one month ban so they can figure out some punitive measures for nasty rumor mongerers. Not the end of the world even though it will be one volatile month ahead of us. As some of you have pointed out, our markets have lost a shizen load of liqudity now that the shorters have received a red card. So a black October is more possible now than it was before.
Then again if a Citibank had fallen, what then for the markets?
Anyway back to the main game. How will Hank and Ben get Congress to sign off on the new breed of uber financial socialism that has been proposed? Ha ha. Should prove to be entertaining.
The main issue is not the traders tool of shorting, it is disclosure around shorting that needs to be improved. At the moment it's not a fair ball game. Longs need to disclose substantial positions, shorts do not. Sets up the capital ambush. Short by all means but lets get the information out there. It is meant to be an 'efficient market' after all.
Anyhow it is a one month ban so they can figure out some punitive measures for nasty rumor mongerers. Not the end of the world even though it will be one volatile month ahead of us. As some of you have pointed out, our markets have lost a shizen load of liqudity now that the shorters have received a red card. So a black October is more possible now than it was before.
Then again if a Citibank had fallen, what then for the markets?
Anyway back to the main game. How will Hank and Ben get Congress to sign off on the new breed of uber financial socialism that has been proposed? Ha ha. Should prove to be entertaining.
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Whoa
Looks like the market is going to go down today!!!??
No wonder - its because the banning of short selling has tilted the market.
Solution - ban naked long buying.
We can text Kevin that this will definately stop market manipulation!
Looks like the market is going to go down today!!!??
No wonder - its because the banning of short selling has tilted the market.
Solution - ban naked long buying.
We can text Kevin that this will definately stop market manipulation!
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If a companies shares are dramatically reduced in price by shorting of the stock. Then it impacts the companies loan book and banks can call-in loans and this can mean the end of the company. Other companies seeing the fall in price of the company may not wish to trade, suspecting a hidden problem, where in fact one does not exist. In my view this is an unacceptable face of capitalism.
Halifax Bank of Scotland was saved by a takeover by Lloyds TSB after suffering severe shorting of their stock. They are a profitable company.
Trembling Hand
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Yep that can happen for sure. But to what companies. CNP? ABC Learn? Lemmings?
What fundamentally sound company has that happened to?
Trembling Hand
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See the US Bank index had the largest fall in HISTORY last night.
WITHOUT short selling. :bonk::eek3::screwy::bad:
WITHOUT short selling. :bonk::eek3::screwy::bad:
wayneL
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