Can We Short the SEC?

A friend of mine asked me about the SEC's new shorting rules, set to commence Monday. He's not in the investing business but with a family, a house, a business and a portfolio you might say he's at least tangentially interested in American free market capitalism and was curious if this was a sign that the world is actually ending or if it only looks that way (readers already know my opinion).

The SEC is taking the stocks of 19 firms and putting a wall around them, allowing short sales only when the shares are confirmed to have been borrowed. I can say without reservation that in all the years I traded equities and options as a market maker, the number of times I could short a stock when my clearing firm was unable to borrow it was exactly zero. None. Never. Maybe some other traders had a different experience, and if any did I'd love to hear about it.

Just like the oil "speculators" before them, short sellers are being held up as the new demons. Just like speculators can't make the price of a commodity go up, short sellers can't make a company's stock go down (well maybe they can for a little while, but unwinding the trade will cost them). But, this is America and someone has to be blamed, ideally someone with a scary name.

Just like legislative proposals for cutting down on oil speculation, this rule's chief virtue is that the SEC gets to say it's "doing something." Mostly I think this proposal makes the SEC, like Congress on oil, look like the guy in your office who is incredibly busy but doesn't actually accomplish anything other than looking busy. Far better would be to bring back the uptick rule (a stock can only be shorted when the last price is higher than the immediately preceding price).

Comments

[Things Come...:]

What 19 firms and why? Sorry I've been away and I'm catching up on the news.

2008 Jul 18 04:41 PM

[whidbey:]

Will you have not been too widely acquainted. Start by looking into foreign exchange shorts of US stocks (thousands of nondeliveries), or say, gold juniors which are naked shorted by their underwriters making use of compensation shares, and many others who work out of Canada, particular Vancouver. As for the SEC, if you ever catching do anything about misbehavior at the broker level, please let us know; they are whores to the industry.

2008 Jul 18 05:23 PM

[eddie6442:]

You need to have certain level of knowledge before being published---at least that was once the case. The SEC publishes a SHO REPORT, which is an extensive listing of SHARES NOT DELIVERED, with all the extensions beyond three days............
DAH!!!!!!!!

2008 Jul 19 08:04 AM

[aristid:]

why only short the SEC? Why not the whole government, spending, Fed the burocrats etc? they all contributed to the mess we are in.

2008 Jul 19 08:27 AM

[ryoung8177:]

Have you not read the SHO report? Who do you think is shorting? If I want to short my broker stops me dead in my tracks if the shares are not available. Don't you understand that a naked short to a prime broker is just like creating free money, which as Yogi says "is just as good as cash." Please make you public comments more carefully. I hate stupid, maybe we could adjust the SHO using the birth and death tables and it would be more in line with the Labor Report.

2008 Jul 19 08:37 AM

[swaps:]

I thought Cramer was referring to naked short selling when he produced on air the SEC regulation supposedly enacted years ago which already bans the practice. He said the SEC just isn't enforcing it.


Cramer said the regulations are already in place - I assume they apply to all stocks.

The fact that the SEC is only going to build a wall around 19 firms and protect their shares shows (SHO's) that guvmint will do nothing to keep the Wall Street Wolves from continually attacking the public.
The SEC can print a list. But so what if that's all they ever do?

2008 Jul 19 04:24 PM

[Nighthawk:]

You might care to look at the regulatory history behind the rescission of Rule 10a-1, the up-tick rule which was in place for roughly 70 years. You might also care to look at the VIX chart before...and after... Rule 10a-1 was rescinded by the SEC last year. Lastly, you might wish to look at the SHO report.

Finally, you might wish to consider the impact of naked short selling which does occur both legally and illegally, if it is abused to undermine companiesthat are integral to the healthy functioning of this economy. If traders are unfettered in their ability to drive them into oblivion, which they will do without restraints or control, then you will lose the "Main Street" investor who risks his/her capital by investing based upon fundamentals. When you allow the capital markets to function as nothing other than a gambling pit, you'll quickly find that sane people simply remove themselves from this game and go elsewhere to invest their capital.

Unfortunately, the history of "Wall St." is that greed, like fear, if it is not regulated, has the capacity to destroy an orderly and rational market. So, while many of us advocate "free markets" those of us who've been around for a while recognize that shiny shoe kids fresh out of B-school with whiz-bang computer programs that identify stock price momentum are going to try to exploit the system for personal profit, at the expense of anyone else. If you do it within the bounds of the law, that's cool...if you don't, you can expect that you're about to get an SEC subpoena and spend a lot of your ill-begotton earnings on attorney's fees.

2008 Jul 19 04:53 PM

[Jimmy Lathrop:]

Nighthawk -

You are trotting out the same old argument against letting the markets work efficiently - that is to say, "the main street investor who bought into a business model on fundamentals" is getting hammered by the Sith Lords of naked short selling.

A simple review of analyst reports on the 19 financials from a year ago show their optimism was unfounded. For years the "Main Street Investor" heard reports of no income, no verification loans and 105 percent financing and had no problem with it. The "MSI", contrary to historical data, assumed home prices would go up ad infinitum.

The "MSI" also felt Yahoo! would rebound to $200. The "MSI" felt Pets.com was a viable business model.

In short, what you are advocating is that the "MSI" should be allowed to have their ignorance, sloth, and lack of business acumen be used as a sword and shield against investors who are trying to make an accurate market in securities rather than prop up inflated values which may have to be bailed out at other innocent taxpayers expense.

I would prefer that the "MSI" put their money into something more productive rather than something fundamentally rotten at the core.

If I am going to face an SEC subpoena for saying that banks were lax in their lending requirements, that they are leveraged at unacceptable levels, that necessary capital infusions will dilute shareholder interests, that financial institutions are carrying securities on their books which have no markets and cannot be valued accurately, then I may as well be living an Orwellian nightmare where the truth is a lie and night is day. That is not the America I was raised to believe in. That is not the America you should be defending.

2008 Jul 20 12:31 PM