The SEC has now implemented its short-selling ban: it's on 799 financial stocks, which, interestingly, do not include XLF, the biggest ETF for financial stocks. In theory, if you wanted to short a given stock in the XLF basket, you could short XLF and then just buy the individual components you weren't interested in. But there are easier ways of shorting, like selling calls or buying puts.
With short-selling banned, there will probably be a substantial move into the options market by the erstwhile shorters. That might well drive down the price of call options, especially on financial stocks but also on broader indices. And I'm reminded of the advice that call options can be a smart investment anyway, especially for younger investors who can afford to lose their money. If that was something you were thinking about already, right now (or some point over the next few weeks) might be a great time to enter the position.
On the other hand, all options get significantly more expensive in times of high volatility, so maybe the effect of the short-selling ban will simply be to make call options slightly less expensive than they were, but far from cheap.
I do wonder though about the opportunities this financial crisis provides to investors who can stomach illiquidity and have a long time horizon. There are many such investors out there, both retail and financial, not to mention all those university endowments, sovereign wealth funds, and the like. Does anybody have an idea of where the long-term, locked-up money is going?
As for anybody thinking of trying the short-XLF play, I have some simple advice: don't do it. It's more stupid than clever, and if anybody catches you trying to make such an obvious end-run around the new regulation, you'll deserve the large fines the SEC will surely find some way to impose on you. After all, anybody doing such a thing is a financial terrorist!
What next, will we call forex traders the "currency insurgents" driving down the value of the dollar (and the fundamentals have nothing to do with it?)?
Should we call people driving energy efficient cars "energy saboteurs" and blame them for the losses of oil investors over the last 3 mos?
Will we ban the longs from selling their stock to prevent the stock from going down?
And since when was it the government's job to prevent investors' assets from declining in value? Isn't that what it tried to do with housing a few years back? Will the govt. go back and restore the stock value of pets.com, at the expense of the taxpayer and the dollar?
Taxpayers are passive enough, why not?
When you buy a put, the market maker offsets his position by shorting the stock until he can buy the put back from someone else at the other side of the bid/ask spread (then he buys back the short position). That way the market maker can greatly reduce the risk while he waits to collect the difference in the bid/ask spread. Gains/losses in the puts will be offset by losses/gains in the short position.
Take away his ability to short the underlying and he has to gamble that the underlying price won't move very far before he offsets the put position. Since there will be some movement, the spread will widen to counter the risk of loss due to the inability to offset by shorting.
Liquidity in the financial put options will be reduced as no market maker will want to take immense gambles on directional positions without being able to use offsetting shorts.
Tip to foriegn central bankers: If you don't recognize the sucker at the table, chances are its you.
"The following entities are excepted from the requirements of the Order: registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market."
A question: why would anyone pay their credit card bills if the Govt. forces taxpayers to absorb trillions in losses from banks off balance sheet worthless holdings? And why wouldn't the bankers and politicians not be jailed who exempted banks from off-balance sheet rules after the Enron "lesson".
This is no longer a small issue these guys are destroying our financial systems and our economy.
Please don't misunderstand Friday's price action. Goldman is in big trouble because their longs dumping them (the short interest on GS is small). The prices mysteriously popped (read that manipulated) overnight and in Goldman's case, still drifted lower all day. That can only be longs liquidating.
There is no such thing as a "perfectly fine" investment bank right now. The world's financial system damn near collapsed last week, and it had nothing to do with the shorts.
I kid you not when I say this may be the smartest time to panic.
Millions of people sleep better so stop complaining.
If the government did nothing, most hospitals probably filled with patients already. Stress, you know.