Separate Abusive Short Sellers from Those Who Play by the Rules

Let me be perfectly clear about my opinion on short selling. It is a necessary part of the financial system. I short sell. The market needs short sellers like Doug Kass (of whom I am proud to know) and Bill Ackman. What we do not need are rogue short sellers who abuse the rules and manipulate markets.

This is akin to the insider traders that were prevalent in the 1980s. They were criminal, they abused the financial markets and profited at the expense of other market participants. We needed to separate the Ivan Boeskys from the Warren Buffetts. That came with criminal prosecution. Thankfully Boesky is gone from the markets and Buffett remained all of those years.

Now we need to separate the abusive short sellers from the Kasses and Ackmans, the later being the good guys. Those short sellers that use exchange traded funds to get around married put rules or spread false rumors or violate Regulation SHO have got to go. I predict that within the next few weeks we will see the criminal indictment of an abusive short seller. This will have a dramatic impact on the markets.

In conclusion, keep short selling - those short sellers that play by the rules. Throw out the bums that act like the short version of insider traders.

Comments

[glassbox]

Scott, with all due respect, could you share with me why short selling is a necessary part of the system? Just barelya few years ago, many said that CDOs and Subprime securitised products were just part of the system but they obviously are not necessary now. I cannot find any compelling reason to justify short selling's existence.

Also, what would you pay to borrow stock - or rather, what would be your threshold before you decide perhaps its not worth borrowing the stock?

[fxtrader07]

the truth about naked short selling and the 'journalists' in the financial media that cover it up and secrectly and silently support it:
deepcapture.com

[lavalyn]

glassbox: all of those loan products really are part of the system. It's the irresponsibility of the lenders that got us into the subprime mess. No, subprime debt is not AAA grade.

Short selling is also part of the game... it adds incentive for proper price seeking. Short selling is also one of the things that keep the selloffs mostly orderly. Yeah, we're seeing 30% daily moves in some stocks. Would you prefer a 75% hit in a day and ridiculous volume as price discovery fails and nobody can actually sell at the "last" price?

[hdgfun]

Note the dichotomy of the temp. short regulation: (1) protect certain financials against hostile or predatory shorts and (2) Fed issues subpoenas to various Financial Broker Dealers to review for manipulative stock practices...

[BerkeleyBob]

In the absence of effective regulation, short sellers investigate and bring to light accounting irregularities and help assure an honest market. Short sellers pushed the likes of Tyco, Enron, World Com, etc. out of the window--they and their corrupt executives needed to fall. Although some past abuses have been legislatively and administratively corrected, part of the present credit crunch is due to lax underwriting, inflated ratings, and lack of transparency. Is there a fundmental difference between Enron's scams and the complex debt instruments peddled abroad and at enormous cost to America's reputation?