Should shorting be suspended/banned?

[tech/a]

This is what your after guy's

THE TRILLION DOLLAR SECRET




http://www.cornerstoneri.com/comments/TrillionDollarSecret.htm

 

[deadset]

I understand how it works on a very basic level, and even then it just seems wrong.

If you own a stock, why would you want someone without your knowing, to borrow it in order to sell it, in order to drive the price down ?

If someone owns a stock, and they decide to sell thinking it will go down, then when they rebuy at the bottom, they've saved themselves money and they are using their own stocks that they own.

If I own a stock, I definitely do not want somone getting their grubby hands on it to sell down on me, buy your own shares, don't use mine.

Naked shorts, I'll have to grasp the concept better, I just don't see how this can be possible, its got zero risk if I understand it, because the person can then decide, nah I didn't want to short it afterall if he decides to after the event and its not in their favour.

In any case, I'll take the comments in favour of shorting on board, particularly WayneL's comments, as I happily admit that I don't fully understand how it all fits together.

As I understand the Australian market has had to suspend shorting on a few occasions over a long history.

I know the holders must be happy with people shorting, because they win either way.

 

[freddy2]

If you own a stock, why would you want someone without your knowing, to borrow it in order to sell it, in order to drive the price down ?

I would lend the shares for shorting if I am not intending to sell in the near future as I get paid to and it has no affect on the earnings of a company which is what really determines the long-term price of the shares.

 

[Bushman]

Nice short covering rally happening over at MQG and NAB at the moment.

The system seems to be working today.

 

[awg]

Are you referring to short selling as being financial engineering and only available to few sophisticated users? Short selling is actually very straightforward and requires only a little thought, it is also available to anyone with a reasonable grasp on the subject. All relevant information can be found on public forums, like this one.

The recent turmoil is a failure of regulation, not a result of short selling.

No, as u can see from the 1st sentence of my post, i dont think short selling should be stopped at all.

my belief is that complex engineering of short selling on a massive and highly leveraged scale is where the problem potentially is worst, and the possibility of regulation needs to be examined.

this strategy is not available to anyone or everyone

the playing field is not level.

these strategies are only available to large players.

I believe such strategies favor the very wealthy, as only they can participate.

(only large players have institutional acces to really large parcels of shorting stock)

the potential for destabilisation, and wealth destruction of the majority is the question i raise.

i question in whose interest it is for exmple for say MQG to go down then up 30% in 2 days, and what role shorting and covering plays in that.

great for u if u made the right call 2 days running and were highly leveraged!

but for the majority...not good.

I am all for reasonable profit making potential, but if the risk of massive wealth destruction is increased by certain situations, my opinion is that should be considered.

Tech A post highlights some of these risks

i think most people would agree that the "financial masters of the universe" function at the cutting edge of capitalism, and "for want of a better word" are greedy.

i personally myself would prefer that limitations be imposed on methods that allow vast profits (or loss) potentialities to cause severe systemic risk.

shorting as a whole does not cause that risk.

massive undisclosed highly leveraged shorting, maybe that does.

of course i acknowledge my opinions may be incorrect..my old socialist tendencies must be creeping up on me!

 

[deadset]

I'm kind of getting the gist of how the share holders (as opposed to the actual owner) that allow shorting can use it as a type of insurance on their total value.

I've never done CFDs or shorting before myself. I'm not ruling it out in the future. I need to read up on the nitty gritty details of it a bit more.

Is Naked Shorting zero risk ? I'm not sure how that can be allowed, as then there would be a vehicle to manipulate without risk. I'm confused about this, because http://www.investopedia.com/terms/n/nakedshorting.asp says its illegal, yet I'm sure I saw company advertisments on yahoo finance US for Naked Shorting about a month ago.

 

[Trembling Hand]

Zero Risk???

You are exposed to unlimited losses when you go short

 

[prawn_86]

Three things:

1. Who/what did people blame before short selling was public knowledge?

2. What % of shorting here in Aus is actually done direct to market, not through MM CFDs? (is there anyway this can be found out? I would be really interested)

3. If you ban shorting, then do people support the banning of buying shares? Buying pushes prices up, selling pushes it down. In fact even for shorters to make cash they need other sellers there, otherwise its no different to buying and moving the price up...

 

[tech/a]

You missing the point here a bit guys.

Its the NON ASSET backed Derivatives which are the issue.
Simple short selling of stock is a non issue.

 

[sam76]

0310 GMT [Dow Jones] Australian government doesn't appear likely to ban short-selling, despite fresh concerns it heightened market volatility by triggering sharp falls in certain share prices, including Macquarie Group (MQG.AU), in recent days. Though PM Rudd welcomes moves by U.S., U.K., regulators to temporarily suspend short selling of stocks in attempt to stabilize markets, indications are his government won't go that far. Spokesman for Corporate Law Minister Sherry tells Dow Jones government will introduce Corporations Amendment (Short Selling) Bill into Parliament - as previously announced - in current spring session to ensure so-called "covered short selling" is adequately disclosed to market; but she indicates no further measures planned. Short selling in focus on concerns recent sharp share price falls exacerbated by hedge funds intent on driving down share prices. MQG shares rebounded as much as 52% today, reclaiming all previous day's loss and then some after actions by central banks globally and U.S. authorities soothed markets overnight; now +40% at A$36.42. (RAP)

 

[brty]

Tech,

This derivatives thing is something that is not understood by most. Let me explain.

A new derivative contract can be created out of thin air, for example if I drew up a contract to buy one trillion $AUS dollars worth of $US for 80 cents on the 15 july 2009, and you agreed to take up the other side of the contract, a new derivative of $1,000,000,000,000 has been born. I will assume neither of us has the $trillion to back it up

At the conclusion of the contract if the $AUS is only worth 79 US cents, I have lost $10 billion, you have made $10 billion. But wait!, I don't actually have $10 billion, so i go bankrupt, you get both cents that I do own.

In the above scenario, you as the counterparty did not lose anything, except the gains you thought you were going to make. The effect of the derivative being unwound is not that harmful to the economy as a whole.

The situation on Wall Street is not as simple as above, as what has happened in the past is that one side of the contract has on sold the contract to another party and made money on the exchange. (Eg say Lehmans bought the contract off you for 1 trillion and 1 billion dollars, they gave you the $1,000,000,000 profit, that you promptly declared as income, paid tax on, and spent the rest.

If the contract closes at 79 cents, I have still only lost what I own, you still have whats left of your profit, and Lehmans lost $1 billion of borrowed/shareholders funds.

The $160 trillion of derivatives mentioned can mostly be unwound, yet there will obviously be some large losers along the way, but they will only lose the equivalent of past spent profits from all the parties playing the game, after all it is a zero sum game.

brty

 

[awg]

maybe i have combined different issues into my earliear posts

shorts on stocks

leverage

short positions in derivatives, magnified with leverage.

like I said straightforward shorting of stocks is integral to the system

obviously u also need a short taker in a derivative, in order for a long position to exist.

it still seems to me tho, that if their is high leverage and volume in any instrument, it is possible to predict, that at some time, a chain of events will take place that lead to a need for some party to unwind quickly, by firesale.

in a way, its not unlike a major builder that goes broke...the subbies dont get paid, tradies, suppliers, maybe even the bank, the houses dont get built and the builder might have to sell his house too...even the ATO!

anyone who put up unsecured loans or equity..no money

 

[chops_a_must]

We should ban people selling.

 

[nunthewiser]

Top post tech/a

 

[PS421]

ASIC to ban short-selling

Posted 36 minutes ago

The corporate regulator has clamped down on short-selling after what it describes as a week of unprecedented turmoil.

The Australian Securities and Investments Commission (ASIC) says so-called "naked" short-selling will be banned temporarily from Monday.

Short-selling is the practice of trading borrowed shares in such a way that the investor makes money when they lose value.

ASIC has made the move after the UK's corporate regulator, the Financial Services Authority, announced a tougher stance on short-selling overnight.

The US regulator is also reported to be moving against the practice.


http://www.abc.net.au/news/stories/2008/09/19/2369608.htm

 

[Smurf1976]

You missing the point here a bit guys.

Its the NON ASSET backed Derivatives which are the issue.
Simple short selling of stock is a non issue.

Agreed there.

I first read about this whole situation, including the US mortgage implosion, in 2002. Yep, it was totally foreseen, a situation possible because what's been going on relies absolutely upon nothing going wrong in a world where things usually do go wrong eventually.

Like watching a driver speed through the suburbs at 200 km/h, the fireball was entirely predictable with only the timing and location of the disaster not known in advance. Something unexpected always happens eventually, and if you've got massive momentum / leverage and no escape route then you're totally stuffed when that moment unexpectedly arrives.

 

[Naked shorts]

I AM DEAD

 

[agro]

London midmorning: Surge continues

LONDON (ShareCast) - Footsie (news) is now nearly 400 points higher after financial stocks surged on the back of FSA plans to crack down on short-sellers.

Shares in Bradford & Bingley
(Advertisement)
(LSE: BB.L - news) , Lloyds, HBOS (LSE: HBOP.L - news) , Royal Bank of Scotland (LSE: RBS.L - news) and Barclays (LSE: BARC.L - news) are all up more than 30%.

From midnight last night, the UK financial regulator introduced new provisions to the Code of Market Conduct "to prohibit the active creation or increase of net short positions in publicly quoted financial companies".

US markets also picked up last night on talk that Treasury Secretary Hank Paulson is set to unveil a new rescue plan would create a vehicle to take on the US banks worst bad debts and get them lending again. Something similar was set up when the saving and loans banks industry collapsed in 1989.

Elsewhere, HSBC (LSE: HSBA.L - news) has walked away from its offer to buy a 51% stake in Korea Exchange Bank (004940.KS - news) , citing the current turmoil in the financial markets. "Discussions with Lone Star have not led to agreement on how the transaction might proceed on a basis acceptable to HSBC," the group said.

A private equity consortium led by Providence Equity Partners has scrapped its offer to buy conferences and publishing group Informa (LSE: INF.L - news) ,reportedly due to probelms raising the finance for the deal. The consortium's decision marks one of the first large deals to collapse since the onset of the credit crunch.

Pharmaceuticals giant GlaxoSmithKline (LSE: GSK.L - news) has confirmed that Variable Sales Forward (VSF) agreements with Lehman Brothers Finance SA have been terminated. The VSF agreements relate to 20m common shares of Quest Diagnostics.

Expectations that the current economic turmoil will boost bus use at the expense of trains prompted JP Morgan to raise its target prices on Arriva, National Express (LSE: NEX.L - news) and Stagecoach.

JP Morgan has lifted its target price on the aircraft services group BBA by 2p to 103p to reflect the stronger dollar, but remains 'underweight' on the stock given the economic risks it faces.

Altium Securities has raised its rating on engineering design software provider Aveva to 'buy' from 'hold' on valuation grounds.

The broker notes that shares in Aveva have fallen by more than a quarter since the beginning of the month in line with general turmoil and the falling oil price.

The Western Health and Social Care Trust has named an Interserve (LSE: IRV.L - news) consortium preferred bidder for the PFI contract to create and maintain a new acute hospital at Enniskillen.

Online gaming group PartyGaming (LSE: PRTY.L - news) has appointed Jon Salmon as its new chief marketing officer. Salmon will join PartyGaming from Ads Dot Com next month and will report directly to chief executive Jim Ryan.

Environmental consultant RPS is on the acquisition trail again, snapping up MSL, a European provider of specialist laboratory services. RPS is acquiring MSL from its management for a maximum cash consideration of £1.9m.

Aggregates group Ennstone (LSE: ENN.L - news) has received a preliminary approach which may or may not lead to an offer being made for the company.

 

[MrBurns]

Here you go.....

http://www.abc.net.au/news/stories/2008/09/19/2369608.htm

 

[Smurf1976]

I AM DEAD