Should shorting be suspended/banned?

[franktbird]

After considerable deep thought *coff* I blame the immediacy of ..... THE INTERNET!!

BAN IT!! [size=+1]BAN IT!!! [/size][size=+2]BAN IT!!![/size] :bounce:

HEAR HEAR.
Better still America caused this lets ban them.
Everyone start pulling your funds out of US, recall all loans and invest them in something else.
That'd knock them down a peg or two.
The only problem I can see here is that they'd want to start a war with us.

 

[Timmy]

Why wouldn't you want to earn an extra whatever (say 1%) if it doesn't make any difference in the long term? The super funds are still long when lending out the stock, the shorters have to give the stock back at some point in time.

And from time-to-time you could mention to your fund manager buddies at the rugby that you were thinking of recalling your stock in, say, "XYZ" (or whatever) and if they thought the same thing maybe a bit of a short-covering rally could be engineered ... just hypothetically, of course.

 

[prawn_86]

Everyone start pulling your funds out of US, recall all loans and invest them in something else.
That'd knock them down a peg or two.
The only problem I can see here is that they'd want to start a war with us.

China is slowly buying them up from the inside, and when the US does want a war it will be one hell of a fight

I'll go for China at this stage but reserve the right to change teams half way through

 

[Julia]

Realised gains for super funds doesn't really come from stock price appreciation does it?

No? Where does it come from?

 

[cuttlefish]

What difference does it make?

They'll still write calls, which no-one would have a problem with, yet in reality is a short or at least, negative position.

The difference that it makes is counterparty risk. What level of risk management is applied to the risk that the stock cannot be returned because the counterparty that borrowed it goes broke. The reality is that stock lending is a title transfer in exchange for a 'promise' (counterparty risk) to return said stock. The lender has no title any more over the stock that has been lent.

Written calls do not have counterparty risk except for the call premium. If the calls are assigned then the exercise is transacted via the asx and thus settlement is guaranteed by the ASX and the National Guarantee Fund is capitalised to compensate for such situations.

This is not the case for stock lending as I understand it as the lending happens outside the exchange (and the term 'lending' is a complete misnomer).

So the question is - do the super companies factor in this risk and does the stock lending fee adequately cover and justify the risk being taken on.

 

[franktbird]

I'll go for China at this stage but reserve the right to change teams half way through

LOL yeah me too.

What happens when they allow shorting again?
Will we be shorted out of existence?

 

[finnsk]

I thought with this ban on short selling that share was only suppose to go up, obviously not every body has been reading about the new rules

 

[subi1]

I thought with this ban on short selling that share was only suppose to go up, obviously not every body has been reading about the new rules

I think it was the shorters who were saying that shares would only go up and there would then be a big crash because prices would go too high.

Maybe this is how a real market works?

 

[Bushman]

So the question is - do the super companies factor in this risk and does the stock lending fee adequately cover and justify the risk being taken on.

Exactly what I was thinking about today. Why is X% a reasonable risk adjusted fee? There seems to have been no thought given to lending out their clients stock by the fundies. The equities market is 'returning to risk fundamentals'. Why not those lending stock out to short sellers?

If I was retiring in the the next few years then 1% would obviously not cut it given my capital return has been smoked and my investment horizon does not give me time to recover. Total return certainly matters when you need to liquidate your position.

 

[captain black]

Just came across this on the ABC news website:

http://www.abc.net.au/news/stories/2008/09/23/2372329.htm?section=justin

Government drafts short-selling legislation Posted Tue Sep 23, 2008 5:00pm AEST
The Federal Government has moved to make the practice of covered short-selling of stocks an offence unless it is reported.
The Australian Securities and Investments Commission (ASIC) has temporarily banned most forms of short-selling in which investors trade in such a way to profit from a share price decline.

This bit is interesting:

Corporate Law Minister Nick Sherry says the Government is preparing to lift the ban with the proposed legislation.

The sooner the better!

 

[noirua]

UK has brought in new rules, from today, that will require investors to make a declaration on shorting shares in financial firms.

 

[chops_a_must]

The difference that it makes is counterparty risk. What level of risk management is applied to the risk that the stock cannot be returned because the counterparty that borrowed it goes broke. The reality is that stock lending is a title transfer in exchange for a 'promise' (counterparty risk) to return said stock. The lender has no title any more over the stock that has been lent.

Hey?

If that is the case, how do firms recall lent stock, which they do?

 

[Trembling Hand]

You wanna fix the counter party risk in the market.

Here's one 100 times worse than shorts. Retail broker account being able to trade on T3. There are actual threads on this forum and others of FOOLS daytrading without ANY money!!!

But thats ok because they are longs

Whats worst is if you have three days to come up with the money what will happen in a real crash. I will guarantee that some idiots will just empty their settling accounts and run in such a case.

But thats ok they are longs

But shorts that are real time mark to market...... Still no good!!

 

[wayneL]

Here is the oil strip to demonstrate what I'm talking about.

Here is a lesson demonstrating the idiocracy of the financial press.

Yesterday they were reporting that oil had shot up $25 or whatever... biggest one day rise and so on. Yes, the October contract did that, but had nothing to do with the price of oil.

Now that the Oct contract is dead, November is spot, and is trading at this very moment at $107.30

So did oil crash back down from yesterday's reported price. Not at all! It is down a couple of bucks, but the October closing price was illusory.

IT DID NOT EXIST in real terms.

The point? Be careful about believing what you read in the financial pages. They are journalists posing as experts on things they know very little about.

Extrapolation of this principle to the topicof short selling is prudent.

 

[cordelia]

i am a nervous long without the safety net of short sellers...I have no intention of justifying that statement...but that's where it's at...those who understand do.....those who don't need to get educated...

 

[cuttlefish]

Hey?

If that is the case, how do firms recall lent stock, which they do?

The 'borrower' (misleading use of the world) has a legal obligation to 'return' the stock (also misleading use of the term) however the 'lender' (misleading use of the term) has no real title over the stock that was lent during the time that is is in possession of the borrower. Thus the lender is simply a creditor of the borrower as per the terms of the lending contract.

Thus the lender exchanges secure title to the stock the it has lent for counterparty risk. This is why I dislike the use of the terminology 'lend' and 'return' - its simply not what is occuring in reality.

If you borrow somebody's car you can't sell it because you have no title over it. But with borrowed stock it can be sold - that is because the borrower has title over it. Only one person can have title over a stock. (just ask some ex Opes Prime clients who will have been well educated on this fact - they 'lent' their stock - it wasn't 'returned' because the 'borrower' went bust - instead the real owner - ANZ bank - got to get it.

The same can happen (according to my understanding) to a super company that lends stocks to one of these CFD providers that then use it to allow retail investors to play the shorting game. If the CFD provider goes bust the institution is now just another creditor.

But shorts that are real time mark to market......

Now TH makes a good point - which is that the borrower has to lodge funds mark to market to cover the differential between the price at borrow vs the current price. This lodgement does mitigate the risk to some extent but its not fool proof. I'm not sure whether there is consistency in the stock lending contracts either as they are not done via standard stock exchange settlement procedures - thus I'm assuming they can vary in terms depending on the agreements between the parties. I know there's something called an AMSLA put out by the Australian securities lending association, but I'm not sure how detailed or consistent it is and how much it is varied for each individual agreement.

Here's one 100 times worse than shorts. Retail broker account being able to trade on T3. There are actual threads on this forum and others of FOOLS daytrading without ANY money!!!

I completely agree and I think its another risk that isn't being properly mitigated for by the brokers.

 

[It's Snake Pliskin]

From the Sydney morning herald:
http://business.smh.com.au/business/a-step-too-far-20080923-4lxz.html

Banning short selling means less liquidity therefore more volatility in share prices. It is reckless policy-on-the-run.

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.

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.

There are some good points to the contrary too.

 

[cuttlefish]

Where did they get the statistic that short selling accounts for a third of volume (and currently 50%)?! - its sounds like complete BS to me - short selling wouldn't count for anywhere near this level of volume would it?

 

[wayneL]

Where did they get the statistic that short selling accounts for a third of volume (and currently 50%)?! - its sounds like complete BS to me - short selling wouldn't count for anywhere near this level of volume would it?

That's a surprise to me too, would like to see accurate figures. I would have been surprised at anything over 10% TBH.

Not comparing stock to futures but in the futures, short selling is precisely 50% fwiw (as a clue to outstanding answers).

 

[cuttlefish]

Well its either another ill informed journalist or its an interesting statistic. I guess for intraday positions in the larger liquid stocks it might be possible but it seems highly unlikely. I would love to know where the figure came from.