Britain's Short-Selling Ban

Marketwatch is reporting Britain bans short-selling of financial stocks:

LONDON (MarketWatch) -- Britain's Financial Services Authority on Thursday banned short-selling of financial stocks and prohibited any increase in new bearish positions in the sector. Also, disclosure will be required on all positions of more than 0.25% of a stock. The regulator said it may extend the bank to other sectors. The ban is due to remain in force until Jan. 16, but it will be reviewed in 30 days. "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," said Hector Sants, chief executive of the FSA.

Banning short selling is an act of pure desperation guaranteed to fail. Short term, I do not know what the market will do, but if shorts are squeezed out an air pocket below will form just as happened in the US with share prices of Fannie Mae (FNM) and Freddie Mac(FRE).

The simple fact of the matter is that short sellers add liquidity to the market. Barring bankruptcy, shorts have to cover at some point. Also short selling is a necessary function of market makers.

Finally, attempts to prop up the market simply will not work regardless of what government intervention there is. If by some miracle the market manages a sustained rally after this announcement, it will do so only because the market was ready to rally on its own accord.

I spoke about government intervention in earlier today in China, Russia Intervene In Equity Markets. Inquiring minds should take a look.

Comments

[JasonC:]

Nope, shorts are the problem and they will be royally creamed. As soon as confidence is actually restored, the sound fundamentals will assert themselves.

Many of the companies that already failed deserved to, but what happened after that was merely mechanical doubling up on the next available target with all the winnings from the last several kills. And they were shooting at the likes of Goldman, which just earned nearly a billion in one quarter in 1932 like conditions. They were trying to generate a pure self fufilling prophecy of collapsing confidence, and it had reached targets where it was all utter guff.

And regulators simply called them on it and blew them away. If all it is to amount to is firepower, they will never even come close.

2008 Sep 18 04:02 PM

[User 142738:]

Banning short-selling does nothing.

Case in point: short-selling has been banned in China (not Hong Kong) pretty much forever despite the 70% drop this year. It did not help.

2008 Sep 18 04:21 PM

[JasonC:]

Right, that is why the two times it was done so far this year were instantly followed by epic 5 sigma blasts to the upside, trillions of dollars in size. And why the shorts caught out are screaming for their mothers at the top of their lungs. It is simply glorious...

2008 Sep 19 02:49 PM