SEC Exploring Remedies for Short-Selling Manipulation 21 comments
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In early December 2008, the SEC placed my article proposing a remedy for short-selling manipulation on their website for consideration. My solution entailed enacting a simple rule: disallowing short-selling on the bid.
This idea is somewhat different than reinstating the uptick rule in that the latter solution provides that a short sale can only be entered after a trade causes the last price to increase; a short-seller can still short on the bid as soon as the last trade causes the stock price to go up (shorting allowed when the green "U" symbol or neutral "zero plus" shows up on Level 2).
Securities Exchange Act of 1934 Rule 10a-1 -- Short Sales [Removed and Reserved, Effective July 3, 2007]:
No person shall, for his own account or for the account of any other person,
effect a short sale of any security registered on, or admitted to unlisted trading privileges on, a national securities exchange, if trades in such securities are reported pursuant to an "effective transaction reporting plan" as defined in Rule 242.600 of this chapter and information as to such trades is made available in accordance with such plan on a real-time basis to vendors of market transaction information:
A. Below the price at which the last sale thereof, regular way, was reported pursuant to an effective transaction reporting plan; or
B. At such price unless such price is above the next proceeding different price at which a sale of such security, regular way, was reported pursuant to an effective transaction reporting plan.
My solution would allow shorting at any price and at any time, just not on the bid price, and negates most prevalent kinds of downward manipulation tactics employed by short-sellers to push stock prices lower and lower using a technique called "pinning the bid."
If short-sellers were operating ethically, they would want to short at as high a price as possible, and then have the stock move organically lower. Instead, shorts rely on attacking the bid price until it "caves"- which, in turn, results in longs panicking and selling lower than they would have. And potential longs (the smart ones) simply wait for the "pin the bid" attack (bear raid) to end--which is the point in time when shorts start to feel the bear raid may be overdone, and/or that a short squeeze is overdue.
Very recently, the new SEC Chairwoman, Mary Schapiro, told the New York Times that she is "exploring whether to impose restrictions on short-selling...and is considering the revival of the uptick rule."
Shortly thereafter, Fed Chairman, Ben Bernanke, testified before Congress that, "In the kind of environment we have seen more recently" the uptick rule “might have had some benefit.” He also relayed that, if Mary Schapiro asked him, he would be in support of it.
Former SEC Chairman, Christopher Cox, who tried to get a modernized uptick rule restored last year, said he was out-voted by fellow SEC commissioners. His proposed version of the rule would only allow shorts to place their orders a few cents above the best bid. One of the problems in reinstating the original rule is that fast-paced electronic trading poses a very difficult-to-overcome operational logjam.
Which is why my version of the rule makes sense across the board. It's simple to implement in high-volume, fast-paced trading: any incoming short-sale offers would be instantly compared to the highest best bid price available and rejected immediately if they match that bid price- therefore, a short-sale offer price would be filled only by a long (or short cover-buy) coming up to a short-sale ask price. And, of course, once short sale offers are rejected for being placed at the bid price, or if short offers are meant to crowd a rising bid and risk being rejected, these short-sellers would then have to reload (or potentially reload) their trade tickets, or already have separate trade tickets ready to go- further slowing down the ability to attack a stock.
My idea also has the added benefit of preventing any naked shorts from "dropping" their illicit shares on the bid. Naked shorting is another huge problem relating to short-selling downward manipulation (although, there has been a large drop in naked shorting since the SEC warned brokers last fall in regard to Reg Sho discrepancies).
Whichever solution Mary Schapiro may choose, it is imperative that she holds true to her stated mission to move quickly, as with every passing day, the shorts are clobbering stocks left and right by manipulating stock prices downward in an environment where there are fewer and fewer longs trading (many of whom are simply waiting for the bear raids to play themselves out)--all of which is exponentially destroying the wealth of millions of passive investors, including those who have their 401k's tied to the stock market. Trading desks are fully aware that, in effect, "there are only two trades going on these days, the short-sale and the short cover-buying."
Any and all arguments that short-sellers make against reinstating the uptick rule or my rule is total nonsense because the small minority of short investors who trade should not be allowed to do so at the expense and destruction of capital wealth of millions of American investors and companies. Especially in regard to passive investors who aren't in the market trading themselves.
In fact, suffice to say, the person who gets the uptick rule restored (or who implements my rule) will go down in history as the person who really saved the markets--and millions of long investors.
Because stock prices will start to rise, which will instantly stop the panic and, soon after, confidence will be restored in the stock market.
Let's boot these shorts where it counts...it's for the good of all fine Americans.
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This article has 21 comments:
If a seller wants to really sell, he meets the bid. Pretty simple as I see it.
Where else than Wall St can someone sell property that they don't own (sell stock short) or sell property that does not exist (naked short selling) for a profit.?Boggles my mind that this scheme is allowed to flourish as long as it has.
1) Reinstate some form of the uptick rule.
2) Eliminate naked short selling.
3) Suspend mark-to-market accounting for financials.
This more than any capital injection or stimulus, will stabilize the markets. Then they can go in and sift through the wreckage to determine true asset values in a normal market. In the absence of these changes, they are merely attacking the next hotspot that flares up in a huge firestorm.
What if buyers want to buy but current shareholders do not want to sell?
Short selling provides liquidity by allowing buyers to enter long positions at some or any price or at a lower price than they might otherwise be forced to pay.
Once again, thank you for your enlightened insight. I hope that your proposal is implemented as soon as it can be vetted by the SEC.
Perhaps, Mr. McDuffy, you will be that person that goes down in history as the savior of our financial system!
That said, absolutely eliminate naked short selling.
Short selling is a terrific way of telling the market where you think a company should be in negative terms, but doing so on 100% leverage is systemic risk. Short selling increases liquidity and provides secondary feedback. "I would definitely buy if the price were x". Futures markets do this.
Remember: Back in 2006-7 some short sellers were amongst the first people to blow the whistle on the over-leveraged positions of companies like Countrywide on their CDO's and sub-prime exposure (Peter Schiff was one and he's openly admitted to short-selling financials that hid exposure). Short sellers were absolutely right about the long term financial problems with CDO's and CDS's. They put their skin in the game and voted against the prevailing wisdom. There are good short sellers who know the process, and vultures that need to be controlled. The former deserve the money that have made on shorting stocks. They did better research and voted with their cash and have been vindicated.
Keep mark to market. It's a ray of accounting sunshine. M2M told us the market mechanism was broken for CDO's. Without M2M, companies would have of-balance sheet fudged for months while the collateral completely tanked. There needs to be an immediate accounting mechanism for that to register so the markets have transparency. Your point about the speed of markets is one of the reasons why M2M is so necessary.
Buying low and selling high is the objective of all traders. Sometimes you do this by buying first, sometimes by selling first.
Last year, when they outlawed short selling, the stocks all just drifted lower. This was due to the fact that the regulators removed the one person from the market who has to buy - the nervous short seller.
Stocks go up and stocks go down. The ones that just go down have issues.
AIG/LEH/BSC/BAC/MER - all these stocks became cheap for a reason - the had poor managment! GS and MS were attacked by short sellers, they both survived and the shorts were hurt - because they had good management.
Short selling helps in the Darwinism of the free market. Goverment Bailouts confuse everyone and destroy the free Market.
wouldn't that be nice.
let's have all the lions & the lambs lie down together.
> jack
business.theage.com.au...
Maybe a nice orderly drop to zero is what these morons really want.
On Mar 02 10:43 PM simple simon wrote:
> I've got a much simpler idea. Ban all short selling!. Other than
> provide speculators the opportunities to manipulate stock priceis
> downward, what is the economic purpose of short selling? Don't tell
> me it is a mechanism to curtail irrational exhuberance to the upside.
> That is pure poppycock. Let the law of true supply and demand work.
> If one believes that a stock is overpriced one would simply adjust
> their bid accordingly.to buy.
> If a seller wants to really sell, he meets the bid. Pretty simple
> as I see it.
> Where else than Wall St can someone sell property that they don't
> own (sell stock short) or sell property that does not exist (naked
> short selling) for a profit.?Boggles my mind that this scheme is
> allowed to flourish as long as it has.
On Mar 02 11:55 PM Briggsy wrote:
> For those who question the value of allowing short sales whatsoever:
>
>
> What if buyers want to buy but current shareholders do not want to
> sell?
>
> Short selling provides liquidity by allowing buyers to enter long
> positions at some or any price or at a lower price than they might
> otherwise be forced to pay.
The "Free Market" seems to be an illusion anymore.
This does not mean that analysis is invalid.
One must consider the influence and motive of all market players to make decisions. Lack of account of environment allows for peril.
On Mar 02 11:55 PM Briggsy wrote:
> For those who question the value of allowing short sales whatsoever:
>
>
> What if buyers want to buy but current shareholders do not want to
> sell?
>
> Short selling provides liquidity by allowing buyers to enter long
> positions at some or any price or at a lower price than they might
> otherwise be forced to pay.