Short Selling: The Free Speech of Wall Street

Short sellers are a pretty happy bunch this week. In fact, the Brits just banned short selling for the next three months. Everyone likes to blame shorts for things that go wrong, but shorting is really the free speech of Wall Street.

I don’t do a lot of short selling, but here’s a list of potential shorts from one of my favorite bloggers, Timmy Sykes.

American Dairy (ADY)

EPIQ Systems (EPIQ)

Tanzanian Royalty Exploration (TRE)

Converted Organics (COIN) and the warrants [COINW]

Valence Technology (VLNC)

A-Power Energy Generation Systems (APWR)

Just glancing over these stocks, they appear to be truly awful. I’m not exactly holding my breath for Converted Organics to make that big jump to the NYSE. Tim’s strategy is basically to look at crappy penny stocks and get ready to pounce when the charts look good, meaning bad.

Short sellers have one big advantage over the rest of us: When things go wrong, they go really, REALLY wrong. There are far more crappy stocks that plunge 50% in a single day than there are good stocks that double in one day. To be a good short, you need to be very patient. Also, not having a soul helps.

I should try more shorting. I look through gobs of balance sheets everyday and I’m amazed by how much garbage is out there.

Disclosure: None

Comments

[Chuck:]

Good BUY... Free Speech.

Welcome to the USSA

2008 Sep 19 08:24 AM

[ain't no fo...:]

Sad to say, but the law of unintended consequences will no doubt come into play when the full impact of this disgraceful period of governmental intervention and manipulation is felt in the markets.

They have applied imperfect hedges and bandages, and restricted the freedom of markets, price discovery, liquidity... because they couldn't figure out a way to fix the broken balance sheets of hundreds of financial companies that had broken all the rules of common sense and transparency.

It is financial fascism, not capitalism.

First you couldn't short THEIR 19 stocks.

Now you can't short THEIR 799 stocks.

But what about the other 7000-8000?

There is an adage in the markets... if you can't sell what you want, sell what you can.

What hath God wrought?

2008 Sep 19 09:01 AM

[farmer448:]

Chuck and Wpdragon, I suppose the 400 point swings are not due to naked shorting by hedge funds.

So quit complaining about the SEC actually following the rules. And as for free speech, ask the poor protestors at the Democratic and Republican conventions if they got free speech or a police baton. (just to make a point). We have restrictions on rights just like their are restictions on trading.

So ask yourselfs these questions?
So how many naked shorts are there?
Can the person who shorted the stock cover if the trade goes wrong?
How much credit has been provided by shorting and what is the risk to the market?

2008 Sep 19 09:13 AM

[carey_jim:]

Without rules (and penalties for breaking the rules) you can't play any game, including financial games.

But changing the rules in the middle of the game is dangerous even when necessary.

The present financial storm been coming for a long time and it has been tracked by many, many financial observers as it neared the shores of Wall Street. Why has it taken so long for the regulators to deal with it?

2008 Sep 19 10:04 AM

[gybognarjr:]

Interesting? Free speech rights have nothing to do with speculation and it has no connection to greed, robbery, lying, extortion, etc. or any of these damaging qualities which can be part of someone selling short any stock.

2008 Sep 19 10:16 AM

[gybognarjr:]

Free speech rights have nothing to do with short selling. Motivation behind short selling can include greed, deception, lying, stealing, and every possible criminal activity. Even, when no criminal deeds occur, short selling is purely a bet and speculation, should not be allowed. Of course it is clearly understood, that anyone who is for it, is a person condoning the above listed human weaknesses.

2008 Sep 19 10:20 AM

[GeminiAtlas:]

I just got screwed on SEF (Short Financials ETF), down 78%. That is very dangerous to change the rules mid-stream like that. All the willy-nilly moves by the gov't will end up undermining the confidence in the system in the long term (despise the cheering you hear in the short term). It's pretty much like the ref in a game that chooses to enforce rules haphazardly, what happens? Both teams and fans get pissed off real quick. I have no problem them enforcing the "no naked shorts rule", but I have a problem with them stopping the legal shorts. Now what are the short traders supposed to do? Buy the garbage stocks in a long position, yeah, right... watch for a lot of money sitting on the sidelines. Anyways, can anyone explain why SKF (ultrashort financials) is higher than SEF? trying to figure that one out.

2008 Sep 19 10:37 AM

[ain't no fo...:]

gybog, you're insane... you just described the personality traits of the financial executives that put us in this mess in the first place, destroyed the concept of free markets, and are traits which the LONGS possess in full and equal quantity as the shorts.

You obviously don't have a single clue about the difference between legitimate short selling which has been a valuable and incremental part of free markets since they were started, and naked short selling which the SEC refused to enforce for years because it was their friends in the financial industry who were profiting from it at the expense of the little guy.... you really ought to read a little bit before you make uninformed and totally wrong statements like you did.

Naked shorting is done by the hedge funds who were spawned by the brokerages... which Cox refused to do anything about because they were his friends... now they're eating their own and all of a sudden these monstrous hypocrites are crying foul and begging the taxpayer who they have ripped off for years to bail them out.

And the concept of free markets has died as a result.

Despicable, and aided and abetted y well meaning but uninformed and naive investors like you who have no idea what they're talking about.

2008 Sep 19 10:58 AM

[OldLimey:]

I'm guessing that gybojnarjr is OK with all the "greed, robbery, lying, extortion, etc." on the long side. I'm also guessing that he has no idea of what risks the events of the last week presage for the future of the United States generally and confidence in the freedom of its much-vaunted free markets; neither do I, but my feeling is that that beyond the immediate euphoria the outcome won't be good.

2008 Sep 19 11:07 AM

[mdmrjsds:]

Let's see if we can do an analogy here.

You walk into McDonald's and order a big Mac, a large fries, and a large vanilla shake. The clerk takes your money and you walk over to the pickup area. In a few minutes the clerk in that area tells you one of three things:

1) Here is your order. Enjoy your meal.

2) Your order was filled by a short seller. They have 13 days to provide it for you. Enjoy your meal.

3) Your order was filled by a naked short seller. They've promised to fill it at some point. Hey, would you like to buy another one. They will be happy to sell you all the meal promises you want. Enjoy your meal.

I think the only ethical short selling would be if the short seller found someone with your order, 'rented' their meal from them, and gave it to you in the expectation they could buy it cheaper than the rent they paid before they had to pay the lender their 'rent' and their meal.

Is it clear now why shorting is fraud? Unless you come to the transaction with shares in your hand?

No??? Then talking about free markets doesn't mask the fact that you're a fraud artist.

I'm not saying you shouldn't be allowed to short stocks, just that you shouldn't be allowed to perpetrate fraud to do so.

Finally, if shorting makes markets so efficient and isn't just a mechanism to manipulate them, how did we get in this mess? Why didn't shorting take care of the problem years ago?

In short, give me a reason to believe that you aren't in favor of shorting solely because of your ability to manipulate markets in order to make money. By committing fraud on the counterparty to your trades.

2008 Sep 19 11:23 AM

[Urbane Gori...:]

The issue isn't shorting... It's "naked shorting". I haven't heard anyone gripe about shorts yet.. It's the lopsided betting when you don't have money in your wallet that seems to be partly causative of the wild swings and excessive squashing of very reasonable companies.

jegan ;-)

2008 Sep 19 12:11 PM

[ain't no fo...:]

Spot on OldLimey... the future looks bleak.

Make no doubt about it, what they have done to kill America's cherished tradition of free and open markets they fully intend to do to the Constitution, and the book burning attempts by Palin are a clear example of what we cam expect from this terrifying group of criminals.

We're on the brink of a police state.

2008 Sep 19 12:17 PM

[gordon:]

Data showed after they banned NAKED shorting on 19 financials (because Goldman was being heavily shorted) , IT WAS SHOWN THERE WAS PLENTY OF STOCK TO BORROW (legal shorting) This "all shorting of financials) is a blatant financial fascism, like someone called it, TO RIG THE MARKET POSITIVE, with financials always leading the S&P direction. As they did several months ago, by lowering interest rates in premarket on QUAD-WITCHING, they have engineered the "BANG-FOR-THE-BUCK" 6 weeks before an election, simultaneous with McCain taking credit for it on C-SPAN.

2008 Sep 19 12:54 PM

[jacosa:]

I always get [more] nervous when people blame the shorts for a price drop. Mostly, short sellers are the undertakers of the market, they help get rid of what's already dead.

Naked shorting is the same as watering a stock. It's very different from real shorting. There are plenty of honest alternatives, too (only...they don't distort the markets in favor of the people using them).

It looks to me like we had a teaser of tightening the lid on uncovered shorting, and now we're seeing restrictions on real short sales. That carries a risk of setting us up fpr a bigger collapse next time.

2008 Sep 19 01:10 PM

[ain't no fo...:]

Gordon, everything they have done to manipulate the markets the past 6 months has been tied to politics and keeping the Dow above 11,000.. look at the steps they have taken each time it breaks below 11,000 and people start to panic, that's the level where they start losing votes.

They opened up the discount window to the IB's for what? To provide capital for lending, or to repair balance sheets? NO WAY!!!!!!!!!!

They did it to give their friends the financials enough firepower to make incredible trading profits whipping the markets both ways, grabbing a piece each way, to help partially offset their subprime losses.

But the price for those hundreds of billions of taxpayer dollars? "You keep this damn market above 11,000 or we all go down the tubes".

2008 Sep 19 02:31 PM

[ain't no fo...:]

Jacosa, great comparison, shorts are the undertakers of the dead wood on Wall Street.

Did you happen to see the graphic CNBC kept flashing at lunch time?

"Dow has largest 2 day percentage gain in 79 years, since October 31, 1929. "

How fitting and yet just slightly ironic... October 1929 was a swell time to buy and hold stocks.

2008 Sep 19 02:34 PM

[carey_jim:]

This was probably the most volatile week since Oct 1929 also.

Ominous. Monday should be a hoot.

2008 Sep 19 04:13 PM

[rogerk2:]

Hey, I hear you want to rent a 1956 Chevy convertible for your daughter's wedding. I don't own one, but my buddy down the street does. I'll borrow his and let you use it for $500. Just don't tell anybody where you got the car.

Oh, I hear you're also interested in AIG stock....

2008 Sep 19 05:19 PM

[jmkeynes:]

It is doubtful that all the contradictions in the SEC's temporary ban on short sales will be worked out before the ban is lifted.

However, the existing rules against naked short selling will be enforced and they're not going away.

So, if you want to make money as a naked short seller, you may have to go elsewhere.

Speaking of which, I hear that Brazil is now promoting a few secluded beaches where naked short sellers will be allowed to congregate. However, I don't think they'll be allowed to buy or sell anything. :-)

2008 Sep 19 07:38 PM

[Gaucho:]

Naked shorters NEVER need to COVER. They just leave the shares in the systems and change the name of the firm with a new PO box on the Cayman Islands. This is just like writing bad checks except they have the police in their pockets. Supply and demand. The more fake shares you print the more you can destroy a stock. This is NOT about a balanced market it is about Corruption of our markets our congress and our government. This is terrorism of our way of life. These guys are like ever increasing parasites that will weaken and destroy our country.
This is no longer a small issue, these guys are destroying our financial systems and our economy. We need the military and Guantanamo bay and water boarding and trial and execution for the threats against this country. I would love to see a bag over their heads or the look in their eyes just as they are placed in front to the firing squad. I would be best if CNBC were forced to broadcast the executions since they are part of this gang of thieves.

2008 Sep 19 10:24 PM