Banning 'Terrorism'

I have a nasty feeling that Christopher Cox watches Jim Cramer. Today, Cramer started waxing conspiratorial about the dastardly types who would be so unpatriotic as to sell investment-bank stocks:

"It could be financial terrorism. What a great way to take down America. It's a financial national emergency. There's someone who wants to bring down capitalism. No one's listening to me! To ban short selling is wrong. Unless you have reason to believe that it's a force which would use physical terrorism which is using financial terrorism."

And lo, later that same day:

The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

This is not a good idea, see Paul Kedrosky and John Jansen explain; they will be joined by many others soon enough. Justin Fox attempts a weak defense ("a bear raid on a bank or securities firm can become a self-fulfilling prophecy"), but the fact is that a ban on short selling isn't just a bad idea in and of itself, but it will also have very little practical effect. If you want to bet that a certain stock is going to fall, there are lots of ways to do that (like, say, buying put options), and the Law of One Price will take care of everything else.

I think that what the anti-short crowd largely fail to realize is that you don't need any sellers at all for the price of a stock to drop. If a stock price is falling, that doesn't need to be because lots of people are selling at any price; it's just as likely to be because no one is willing to buy at a price similar to where the stock was trading yesterday. In a bear market, the key people to keep an eye on aren't the sellers but the buyers: it's the buyers who are the price-setters, and when they go away -- as they're liable to do, in times like these -- stock prices can plunge dramatically even when there aren't any shorts at all.

Of course, no one's interested in the details of market dynamics right now: much better to point fingers and Take Decisive Action. At least that way, if the market continues to fall, it's harder for other people to blame you for being asleep at the wheel.

Still, I'd love to see what would happen if Osama bin Laden were to release a video claiming credit for all the recent market turmoil. If Cramer is right, that alone would be enough to cause a massive stock-market rally, no?

Comments

[Just001:]

Would you shortsell your house and car unless you are desperate. But suppose a middleman like a broker lends me your house and says well you can sell this at whatever price you can. What would happen. Your house will be sold for a few dollars and so will be your car.

2008 Sep 19 01:17 AM

[1worldcurrency:]

clueless comment.

2008 Sep 19 01:33 AM

[Steven Hansen:]

if i buy long i pay full price. if you short you are betting against me with massive leverage. seems fair to you????

how about a new shorting vehicle where you have to pay full price day one. no leverage. just like the inverse ETF's. this is fair. you bought into the market just like i did.

2008 Sep 19 01:42 AM

[ming2198:]

If no one is buying and no one is selling then we see stabilization, but guess what? market marker go belly up, exchanges bankrupt. My point is price is not set by buyer or seller alone, It's the combination of less buyer and more seller kills the stock. Now, less buyer is inevitable in this environment, but the pace of increasing number of sellers should be controlled so that company in solvent can have time to work through. Time is the key, short sellers are not giving any time, Let's say "get better tomorrow or you're 0", Now, this is pure abusive. Hedge funds lost shit load exiting commodities too late. Now brutally sold of everything financial in concert. Someone is going to jail, Cox will be prosecuted. This is going to be huge, como is all over it, this is butter and bread for him, he'll bring some of them down, way down. I'm not sure if McCain is serious about Cox. But, if there's any link between Cox and hedge funds, then Let's see.

Shorts take my advice, no matter what you say, this is enough, take the $, run and hide. MS and GS are not the ordinary target you can shoot. Watch out, may all the wealth stay!!

2008 Sep 19 01:44 AM

[Matt Blackman:]

Dumb & Dumber in London and Washington....
That the Brits banned short selling, not simply naked short selling that is effectively counterfeiting), but all short selling for a minimum of four months for London markets is extremely short-sighted and frankly stupid. (Goes a long way in reinforcing the truth behind the joke that government intelligence is an oxymoron doesn't it?)

But if Cox, after failing to enforce RegSHO rules for more nearly three years now decides to add all short selling to the list of illegal activities only days after finally acting to enforce naked shorting, is simply foolhardy...

Attacking speculators in currency markets in London for shorting the pound in the early 1990s and then in 1998 when Malaysia blamed currency speculators for the drop in the ringhit (which also instituted a similar ban) turned out to be a fiasco in both cases. It impedes markets and sets the stage for a bigger failure.

For example, how will regulators again allow short selling without causing a stampede on markets?

Short selling provides a necessary ability to place bets on lower prices, which is necessary to offset the buy-side bias in markets. But making myopic decisions under pressure I guess is part of the panic process.... Too bad.

2008 Sep 19 02:08 AM

[Bryan Gomez:]

It is entirely wrong to ban short selling. If the Fed/SEC/Treasury were to ban short selling, that would be a stupid move because as all of the seasoned market palyers/investors know, short selling creates artificial buying amidst price discovery. Short selling is like the match that lights candle that lights the house fire. Short covering and squeezes starts the ball rolling for a brand new perception of the market. Those that are against short selling does not really know how the market works.

2008 Sep 19 02:19 AM

[bearfund:]

They may be able to stop us from shorting stocks, but they cannot stop us from shorting them. The market for Treasuries is global and deep, and there are plenty of places to sell that garbage short.

2008 Sep 19 02:23 AM

[jimmy46:]

@the <ignorant> hand

You can't short stocks without putting up collateral.
Engage brain before writing.

2008 Sep 19 03:03 AM

[gritz71:]

Short-selling is only needed for volatility, which traders make money one. It is absolutely not needed for any other purpose. Natural price discovery does not need to happen instantaneously, especially if perception is going to be based on one wealthy short selling fund. It can happen naturally in the market between participants that want to own the security, and those who own it and want to sell it. Period.

You have all convinced yourselves short-selling is necessary for a marketplace. It is not. Get over it.

2008 Sep 19 06:35 AM

[BrianZach:]

A ban on short selling will have a practical effect on bear raids.

A bear raid is caused by an over abundance of short sellers who put fear into all the buyers, making them freeze. Since these events can cause a self fulfilling prophecy in financial stocks, it makes it less willing for buyers to step in.

Banning short selling is an extreme measure, but when big banks are going out of business from the fear they are causing, something has to be done. These aren't normal times

2008 Sep 19 11:18 AM

[Pent up demand:]

The "evil" short sellers would not be able to drive these stocks to zero if there wasn't a widespread suspicion that they are insolvent.

I bet all of the people whining about "massive leverage" (which does not exist in the first place, see: collateral) have no problem with investors buying on margin. Hypocrites one and all.

2008 Sep 19 12:52 PM

[JasonC:]

Sure, shorts have no effect on prices, that is why two separate occasions of bans on the practice resulted in giant 5 sigma blasts to the upside across entire markets, to the tune of trillions of dollars.

Yes you can still find ways to have short exposure. But your having short exposure won't manipulate down a price the way endlessly flooding every bid with twice as much offered "at the market" will.

The shorts protest too much, and they can and should be routed.

2008 Sep 19 02:02 PM

[Pent up demand:]

Who said shorts have no effect on prices?

Those "5 sigma" blasts are a disruption to the market's balance. You remove the weight on one side of a balanced scales and the same thing happens. They can change the reality for a few days, but no longer.

I am selling into this make believe rally and I will buy it all back for 20% less in a week or two when these wacked out regulations are lifted.

As a sop to the whiners they should bring back the short-uptick rule, and counterbalance that with a buy-downtick rule.

And go back and re-read your Shakespeare. Everyone uses the "protest too much" quote in the incorrect sense.

2008 Sep 19 02:28 PM

[gunsandgold:]

The whole "you can buy put options" argument even if they ban short selling doesn't make any sense. Maybe you can find some sole put seller out there, but no market maker will sell you a put without shorting the underlying to hedge himself. If the market maker can't hedge himself he won't be selling puts to you, there will be no market if he can't short. It will be like a private transaction, so good luck finding that seller for you if you want to buy puts.

2008 Sep 19 09:55 PM