Should shorting be suspended/banned?

[Naked shorts]

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

 

[cordelia]

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.

This is a fair comment......

Firstly, this is a link to article which clearly outlines the rules of short selling on the asx:
http://www.bwts.com.au/download/articles/long_short_and_short_selling.pdf

If you are a long term investor then the short term fluctuations in price really don't affect you....covered shorts were a good instrument in times past....the Internet has changed how people trade......and what we see....

The problem lies in the timeframe and naked shorts....I think the banning of naked shorts is a must.....

I am not going to outline the differences between covered and naked shorts ...there's plenty of info if you google it....but they are very different

I have read somewhere, I am not sure where and someone please correct me if I am wrong ,that brokers can only lend out shares, for the purpose of short selling, that have been purchased on a margin without gaining permission from the holder. This makes sense when you consider how brokers push margin lending

 

[nomore4s]

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

Didn't the media used to say "profit takers moving in" but I suppose thats only relevent for bull markets when there are profits to be taken:.

 

[wayneL]

Here you go.....

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

There is an unsurprising ignorance of the difference between naked and covered short selling, given the appalling standard of financial journalism as displayed in this article.

"Naked" short selling has always (and should be) illegal.

The US and Aus regulators have banned naked short selling (hang on, it's always been illegal ). However the UK has banned ALL short selling on financial stocks.

The average muppet investor, I can forgive, even if they're muppets. The financial journo's are promulgating nonsense. Given the importance of understanding the issue, it is unforgivable.

The regulators, in manipulating sentiment in the face of said ignorance, should be arrested (serious!!!).

The UK regulators should be thrown into the tower of London to await beheading (only half joking).

This is changing the rules because they're losing... moving the goalposts.

Absolutely sickening.

 

[chops_a_must]

Didn't the media used to say "profit takers moving in" but I suppose thats only relevent for bull markets when there are profits to be taken:.

I'm still spewing short sellers brought down my Dutch Tulip Bulb business.

 

[Whiskers]

This is a fair comment......

....the Internet has changed how people trade......and what we see....

The problem lies in the timeframe and naked shorts....I think the banning of naked shorts is a must.....

I am not going to outline the differences between covered and naked shorts ...there's plenty of info if you google it....but they are very different

I totally agree as I have mentioned earlier.

I suppose a point to remember is that if certain rogue operators hadn't abused the regulations or traditional custom where regulations were sparse, so blatently, such as by creating and fueling rumors and fear etc to assist their shorts, we wouldn't have this situation.

The investment industry operators only have themselves to blame to a large extent for not sticking to a code of conduct that would keep control of the so called rogue shorting industry by self regulation and avoid this sort of heavy handed approach by the law makers,

 

[wayneL]

I totally agree as I have mentioned earlier.

I suppose a point to remember is that if certain rogue operators hadn't abused the regulations or traditional custom where regulations were sparse, so blatently, such as by creating and fueling rumors and fear etc to assist their shorts, we wouldn't have this situation.

The investment industry operators only have themselves to blame to a large extent for not sticking to a code of conduct that would keep control of the so called rogue shorting industry by self regulation and avoid this sort of heavy handed approach by the law makers,

And rumours were never used on the upside were they?

Idiot thinking.

 

[It's Snake Pliskin]

There is an unsurprising ignorance of the difference between naked and covered short selling, given the appalling standard of financial journalism as displayed in this article.

"Naked" short selling has always (and should be) illegal.

The US and Aus regulators have banned naked short selling (hang on, it's always been illegal ). However the UK has banned ALL short selling on financial stocks.

The average muppet investor, I can forgive, even if they're muppets. The financial journo's are promulgating nonsense. Given the importance of understanding the issue, it is unforgivable.

The regulators, in manipulating sentiment in the face of said ignorance, should be arrested (serious!!!).

The UK regulators should be thrown into the tower of London to await beheading (only half joking).

This is changing the rules because they're losing... moving the goalposts.

Absolutely sickening.

The world is totally stuffed when a topic can be totally abused in the media.

And now, as I listen to the online radio that the market rose because of the ban on short selling. What nobs

 

[jeflin]

When times are good, investment banks resisted all forms of intervention and regulation in the name of free market principles but now, when they gouged themselves with debts and are in trouble, they are begging the government to bail them out and ban short-selling on their stocks.

Double standards, don't you think.

 

[Whiskers]

And rumours were never used on the upside were they?

Of course they were. But one has to remember who has the power to make the rules.

From a political perspective if values keep going up people (and pollies) are generally happy.

But when they go down they're not so happy... and if people get the perception that certain big operators are profiting even manipulating the market by fueling their shorts with rumour that naturally pisses people off.

Idiot thinking.

Nah, the real idiots were the chief market operators for not enforcing a code of conduct that would keep everyone happy, public and pollies included.

The bottom line is when you're on a good thing and want to keep it... DON'T PUBLICLY FLAUNT THE SYSTEM.

By exasperating the market correction a few rogue operators have succeeded in causing a lot of the public and consequently pollies to loose confidence in the industry to self regulate the system, hence the crack down.

In short what do you expect if you ignore the umpire... you get sent off. If you then throw sand in the eyes of those who do have the power to change the rules you obviously risk them suspending or banning you from playing again.

Not very smart to abuse the umpire if you want to keep playing the game.

 

[It's Snake Pliskin]

When times are good, investment banks resisted all forms of intervention and regulation in the name of free market principles but now, when they gouged themselves with debts and are in trouble, they are begging the government to bail them out and ban short-selling on their stocks.

Double standards, don't you think.

Yes, it seems there have been double standards when the regulataionor lack of has failed.

But also the double standards of the average person too. All is ok while making money, oh and let's add to the waterfall by offloading with no intention of buying back. Now that is scary!

 

[wayneL]

Of course they were. But one has to remember who has the power to make the rules.

From a political perspective if values keep going up people (and pollies) are generally happy.

But when they go down they're not so happy... and if people get the perception that certain big operators are profiting even manipulating the market by fueling their shorts with rumour that naturally pisses people off.



Nah, the real idiots were the chief market operators for not enforcing a code of conduct that would keep everyone happy, public and pollies included.

The bottom line is when you're on a good thing and want to keep it... DON'T PUBLICLY FLAUNT THE SYSTEM.

By exasperating the market correction a few rogue operators have succeeded in causing a lot of the public and consequently pollies to loose confidence in the industry to self regulate the system, hence the crack down.

In short what do you expect if you ignore the umpire... you get sent off. If you then throw sand in the eyes of those who do have the power to change the rules you obviously risk them suspending or banning you from playing again.

Not very smart to abuse the umpire if you want to keep playing the game.

But you see this exposes the fluffy thinking as espoused by you. The umpire has a vested interest in the outcome.

He turned a blind eye to all the illegalities and questionable practices when it suited his interests (ie getting re-elected)

Financials have been ignoring the umpire the whole time, nay, been breaking the rules with the implicit approval of the umpire because it suited his purposes; it made the punters feel wealthy, (though it was largely illusory).

It was all OK on the upside, but not OK on the downside.

Now that the chickens are coming home to roost, the umpire wants to slam the chicken pen door shut before they get home - to avoid the awful truth; that the system is bankrupt, financially and morally, and has been for a long time.

One need look no further than the advent and proliferation of CDOs and allied instruments, and the complicity in fraud of the ratings agencies to understand that the system was rigged. The problem was that like any house of cards, it doesn't take much to blow it over once it gets to a critical size.

Now the regulators want to shield the collapsed pile of cards from few.

Worse... much worse.... is that they want to re-inflate the bubble, to rebuild the house of cards, to achieve a few more miserable years of power; at the expense of total financial collapse later, rather than taking the medicine now.

It is helped along by people like you who want to ignore the cold hard facts... that the system is unsustainable.

So congratulations Whiskers, you are in the imbecile majority who can't think past your own self-interest and the few short years "western capitalism" (aka demi socialism) has left.

We have (errrr had) a once in a cycle opportunity (perhaps the last opporunity) to correct systemic ills of our economies and stave off the end of western economic hegemony and avoid handing it on a silver platter to the far east.

Because of the idiotic complicity of ignorant muppet investors, regulators and gu'mint, we have missed a golden opportunity.

Enjoy the illusion while it lasts, but be aware that your children and grandchildren will be paying for your total self-centredness and conceit and of the selfish generation of which you belong.

Be proud Mr Manchurian Candidate.

</rant courtesy of Kronenburg 1664>

 

[wayneL]

Another view:

From John Stepek, across the river from the City
​

John Stepek

You all know the story of the Emperor’s New Clothes. It’s an amusing tale of how a ruler’s greed and folly and the madness of crowds are punctured by the naïve and pure honesty of a young boy. I suppose you could say that the moral of the story is - “the truth will out”.

But I always thought there was something about the fairytale that didn’t quite ring true. I finally realised what it was a few years ago when I read a similar folk tale from Singapore.

In it (or one version at least), a young lad takes the Raja and the local population to task over a clearly deluded scheme to boost the local economy. Instead of thanking him heartily and running the Raja out of town, the crowd chucks him off a cliff into the sea. The moral of that story is – “no one likes a smart-alec.”

And the world’s short-sellers are rapidly finding out to their cost, which of the two tales is the most accurate reflection of human nature…

Short-sellers aren’t to blame for the banking sector’s problems

It’s time to “clean up” the City, says Gordon Brown. He’s going to rush forward better rules to protect whistleblowers, apparently and crack down on “irresponsible behaviour” in the financial markets. After all, he says, “we don’t want these problems occurring in the future.”

The FT reports how his noble words have roused the party’s left-wing. Labour MP John Cruddas said: “In the wake of casino capitalism and with the onset of recession, the state is the only means society has of protecting itself from the destructive forces of global capitalism.”

It would be hilarious if it didn’t make you want to weep. Bankers may well have acted as if they’ve been sitting in the casino during the boom years. But it was a state-owned casino, with governments as the croupiers, and central bankers behind the bar giving out free booze.

This Government built its reputation for economic “stability” on soaring house prices and nothing else. It was happy enough to point to this growth in “wealth” (not “debt”) as evidence of its competence all through the boom. And the reason that banks were able to lend as freely and as stupidly as they did, was because central bankers pushed interest rates so low. And who were central bankers working for? The Government, who set the inflation target too high, at a time when prices were being pushed lower – a healthy development - across the world by globalisation.

But of course, it can’t be the Government’s fault. So now we have a witch-hunt against the nearest available target – short-sellers. Yet, if you really want to protect whistleblowers, you should embrace short-sellers. Here’s why.

Short-selling’s a risky business. When it goes right, you can make a lot of profit. But when it goes wrong (as it clearly has today, given the rapid surge in the FTSE 100 and elsewhere), you can end up owing far more than your initial stake. So it’s not something to be done lightly. Unlike many ‘active’ fund managers, who just buy what everyone else is buying, a short-seller has to pick their targets carefully.

So when a short-seller takes an interest in a company, you can bet it’s got problems, or that it’s about to run into problems. It’s no coincidence that the most shorted stocks in the run-up to the UK recession have included retailers, newspapers, and of course, banks.

The point is that the shorts are just taking advantage of the underlying problem. The banks made wildly irresponsible loans all through the property boom, and now that the bubble has popped, they are in serious trouble. In a perfect world without politicians, there’d be no problem with short-sellers taking advantage of that – in fact, the banks are only getting their just desserts.

The real ‘spivs’ behind the financial crisis

If Alex Salmond and the like want to attack ‘spivs’, how about the spivs who were cheerily selling young couples interest-only mortgages at six times their joint income? “Don’t worry about interest rates, love, you’ll be able to remortgage to a better deal in a couple of years’ time. And don’t worry about the capital – you can always start paying that back once you can afford it. Besides, the house’ll be worth a lot more by then.”

Those unlucky homeowners are now staring negative equity and rising mortgage payments square in the face, and the truth is it doesn’t matter a damn to them who owns their debt, because they can’t pay it anyway. Banning short-selling won’t help them.

But then, all that dodgy dealing was going on back in the good times. And when times are good, no one wants to hear the warnings, or to let anyone spoil the party. And unfortunately for short-sellers, when times turn bad, most people would rather throw the smart-alecs off a cliff, than admit that maybe they got it wrong.

 

[chops_a_must]

Of course they were. But one has to remember who has the power to make the rules.

From a political perspective if values keep going up people (and pollies) are generally happy.

But when they go down they're not so happy... and if people get the perception that certain big operators are profiting even manipulating the market by fueling their shorts with rumour that naturally pisses people off.



Nah, the real idiots were the chief market operators for not enforcing a code of conduct that would keep everyone happy, public and pollies included.

The bottom line is when you're on a good thing and want to keep it... DON'T PUBLICLY FLAUNT THE SYSTEM.

By exasperating the market correction a few rogue operators have succeeded in causing a lot of the public and consequently pollies to loose confidence in the industry to self regulate the system, hence the crack down.

In short what do you expect if you ignore the umpire... you get sent off. If you then throw sand in the eyes of those who do have the power to change the rules you obviously risk them suspending or banning you from playing again.

Not very smart to abuse the umpire if you want to keep playing the game.

I've been away for many months, and you are still just as much of a spanker now as you were then.

 

[Whiskers]

I've been away for many months, and you are still just as much of a spanker now as you were then.

But you see this exposes the fluffy thinking as espoused by you. The umpire has a vested interest in the outcome.

Of course they have! I thought that is what I said. Even more reason not to piss them off and throw sand in their face.

Lets get one thing crystal clear. I'm not against legal shorting. I've even recommended it on ther forum. Copy of post below.

It is helped along by people like you who want to ignore the cold hard facts... that the system is unsustainable.

I've said a number of times that the system is unsustainable, including earlier in the XAO thread, but isn't the idea to trade what you are dealt. Well from an investment/trading perspective I think I've got it pretty right.

So congratulations Whiskers, you are in the imbecile majority who can't think past your own self-interest and the few short years "western capitalism" (aka demi socialism) has left.

We have (errrr had) a once in a cycle opportunity (perhaps the last opporunity) to correct systemic ills of our economies and stave off the end of western economic hegemony and avoid handing it on a silver platter to the far east.

Because of the idiotic complicity of ignorant muppet investors, regulators and gu'mint, we have missed a golden opportunity.

Hey man, that sounds more like a political speech from some idealistic politician than a trader.

Be proud Mr Manchurian Candidate.

No way... the Manchurian's are the arogant loose canons in the industry that took on the umpire, dared him to act and lost.

</rant courtesy of Kronenburg 1664>

So what's this pissed off Fuming mood all about eh? Did ya get caught a bit short, maybe with yer pants down?

[From the XAO thread]

No, I didn't expect this sort of a bounce... because I really didn't think this 'pot hole' would get so deep.

But as it got deeper I could see no other option than the US regulators really jumping on 'suspicious' activity particularly 'naked' shorting, since they had threatened to previously if the market couldn't regulate itself.

I think it's just going to be a fact of life now that a few greedy and unscroupulous operators have tried to exploit the market going up then down again and got the lawmakers really pissed off enough to force their hand to more heavily regulate and monitor the system.

While some problems still exist in the US it just seemed inevetable that something like this would happen... I can't just recall the exact phrase I used some time ago (U F might recall )... bit it was basically that the worst of the US economic fallout would be deferred to another day.

 

[wayneL]

No way... the Manchurian's are the arogant loose canons in the industry that took on the umpire, dared him to act and lost.

Sorry, you can't bounce the tag Manchurian. This shows complete lack of knowledge.

The "umpire" has ensured more Ma & Pa's get hurt in the market and people like you are too cognitively biased to know and too self centred to care.

So what's this pissed off Fuming mood all about eh? Did ya get caught a bit short, maybe with yer pants down?

Likewise, a lack of knowledge. I am celebrating my best week in 7.5 years as mentioned on the beer thread. Volatility is good, no matter which direction.

I am fuming because I have a social conscience and detest moral hazard. In fact, the "umpire" here in the UK has broken the law over the LTSB/HBOS merger and a class action is being initiated right now. Stay tuned selfish man.

 

[Whiskers]

Hey Wayne... you're not still soaked on that kronenburg are you?

Sorry, you can't bounce the tag Manchurian. This shows complete lack of knowledge.

Sorry, but you can't pin the tag Manchurian on me. I had nothing to do with changing the rules or even desired to. All I have been doing is trying to warn that a rogue element in the industry was dareing the gov to act and was always going to loose.

The "umpire" has ensured more Ma & Pa's get hurt in the market and people like you are too cognitively biased to know and too self centred to care.

I don't know about that. Perhaps you could eloberate how more Ma and Pa's will get hurt.

I am fuming because I have a social conscience and detest moral hazard. In fact, the "umpire" here in the UK has broken the law over the LTSB/HBOS merger and a class action is being initiated right now.

With all respect, the moral hazad began ages ago as you have highlighted, when all the bad lending, gearing etc practices started and weren't nipped in the bud then by the industry who has the first duty of care.

Are you advocating that two wrongs make it right, ie that it will be better to just sit back and watch the rogues scavenge through the calamity and chaos and take pot luck that Ma and Pa investers don't get hurt?

Did you have money invested in them?

Stay tuned selfish man.

So how am I more selfish than you? After all you aparently rely heavily on shorting and profited from the wild swings both ways... thriving on the volatility. I've only been accumulating long positions lately.

If you have such a moral conscience shouldn't you have abstained from the market and not tried to profit from the situation as soon as you realised the bad practices were happening? It sounds a bit hypocritical to even engage in, let alone profit from something you so strongly believe is a moral hazard.

 

[wayneL]

Whiskers,

The short selling rogues is a massive straw man. Sure there were institutional short sellers, but only after doing their due diligence and deciding that banks had nuked their own value. That's not rogue behaviour, that's just legitimate investing.

The influence of the illegal naked shorts is marginal at best.

You will have to wait and see about the Ma & Pa stuff, but mark my words.

So how am I more selfish than you? After all you aparently rely heavily on shorting and profited from the wild swings both ways... thriving on the volatility. I've only been accumulating long positions lately.

If you have such a moral conscience shouldn't you have abstained from the market and not tried to profit from the situation as soon as you realised the bad practices were happening? It sounds a bit hypocritical to even engage in, let alone profit from something you so strongly believe is a moral hazard.

Oh please!

I have only ever played by the accepted rules of the game. I only take markets, I don't make them. I am at the mercy of the market, I live or die by the choices I make, I don't move the goal posts when I'm losing. I don't change the rules.

Ergo, there is no lack of morality on my part. Short selling (covered) is legal, moral and necessary for proper market function and actually supports share prices as I and others have detailed a thousand times.

Most short positions are maintained by option houses and MMs to be delta neutral the market and are totally benign.

The rules will not stop institutions shorting the market anyway as they can still short via SSFs (single stock futures) and synthetic shorts via options. It's a piece of piss. Nothing will change except the perception that gu'mint is doing something and tinpot CFD traders won't be able to join the fun.

The immoral and stupid thing, is to blame short sellers for tanking share values. It's scapegoatism. Short sellers are not to blame for banks toxic activities which destroyed their own market value. They themselves are to blame.

But the truly toxic thing is banning ALL short selling. It is morally repugnant and anyone who supports it does not understand markets. Those that still support the ban after having it explained are just plain stupid and short sighted.

I can't go into LTSB/HBOS too much, but watch this space.

 

[wayneL]

Some back tracking already:

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aJ0LXWUmmLBg

D'oh!!!!!!!

SEC Considers Revising Shorting Ban in Options Market (Update2)

By Edgar Ortega and Michael Tsang

Sept. 19 (Bloomberg) -- The U.S. Securities and Exchange Commission may revise its ban on short sales to add financial companies and carve out an exemption for brokerages that pair off brokers in the $1.6 trillion U.S. options market.

The commission may add companies after firms such as M&T Bank Corp. were left off a list of 799 insurers, banks and securities institutions barred from short sales. The staff also will recommend that options market-makers be exempt from the ban, easing concern the rule would raise investor costs, the agency said in a statement today.

``If they don't fix it, there just won't be an options market on Monday,'' Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago-based online brokerage unit of options trading firm PEAK6 Investments LP. ``If they have an exemption for market-makers that they're allowed to sell stock short, then they can provide a market in the options.''....

...`Disastrous'

Options market makers would have been prohibited from making short sales starting next week under the ban adopted today to keep speculators from driving down stock prices. The Options Clearing Corp., which guarantees all trades exchange- listed options, said a ban would have proved ``disastrous.''


Under rule announced today, market-makers such as Interactive Brokers Group Inc. and Susquehanna International Group LLP would be unable to short a stock to hedge their risks when clients buy or sell options on financial shares. Options give investors the right to buy or sell stocks at fixed prices in the future.

Market-makers, accounting for about 40 percent of trades, are obliged to quote prices at which they'll buy and sell securities so investors are able to complete trades...

....``Either you had to change the rules or you had to halt options trading,'' said Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options market analytics. ``This is the better choice. You couldn't have left it as it is because options market makers were refusing to quote without the ability to hedge.''

Option Prices

Prices for options today show that market-makers were already seeking to compensate for the added risk by widening the difference between their bids and offers, according to Peter Bottini, an executive vice president of Chicago-based online brokerage OptionsXpress Holdings Inc. The wider spreads make it more costly for investors to buy or sell options.

``For our retail customers, the costs of adjusting their portfolio has gone through the roof, because the bid-ask spreads have gone through the roof,'' said Bottoni, a former market maker at the Chicago Board Options Exchange.

MUPPETS .... IDIOTS

 

[nomore4s]

Worse... much worse.... is that they want to re-inflate the bubble, to rebuild the house of cards, to achieve a few more miserable years of power; at the expense of total financial collapse later, rather than taking the medicine now.

It is helped along by people like you who want to ignore the cold hard facts... that the system is unsustainable.

This is a very insightful point imo, one that is overlooked by nearly everyone.
History is littered with examples of what happens when bubbles burst, yet the governments and media are still in denial about it.

The longer these bandaid solutions are applied the worse the fallout will be in the end. What are the long term implications going to be? It appears everyone nowadays, from the bankers who dreamt up these schemes to the government who is now trying to stem the bleeding only have short term visions.

Damn Wayne your turning me into a full on bear: