Posted on 07/19/2008 5:23:52 AM PDT by shrinkermd
WASHINGTON -- The Securities and Exchange Commission's new rule designed to limit certain negative stock bets is set to start Monday. Already, a political backlash is brewing.
Last Tuesday, the SEC said it would tighten short-selling rules for 19 financial firms, including mortgage titans Fannie Mae and Freddie Mac, by requiring traders to "pre-borrow" stock before initiating a so-called short sale. The SEC said it had concluded "there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally" that could affect orderly markets.
Shares in financial stocks on the list soared, in part because of the SEC's move, prompting a chorus of complaints from firms that weren't included, many of which have been equally battered in recent weeks
...In a letter to Mr. Cox, the American Bankers Association, a trade group that represents the interests of 8,500 banks, said it fears short sellers will now focus on banks not covered by the new rules, many of which are already big targets of short sellers.
"The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country's banking industry," the ABA wrote, as it called for an expansion of the order to including stocks of banks and bank holding companies.
(Excerpt) Read more at online.wsj.com ...
I note that last August, before the market began shuddering down, the downtick rule was abolished. Previously, you could only short on the uptick. Seemingly, this must have given at least encouragement to shor-sellers.
In any case, with so much short-term money sloshing in the market, it would seem prudent to slow the rapid changes. Even a few years ago, over 50% of all NYSE stocks were held by 100 of the largest institutions.
As limited as they are, individual investors and pension plans remain an important part of the market. Scaring them away doesn't seem wise.
I also note that this and other articles fail to mention that Friday was options expiration--another big day for large institutions and the 29th is the last day you trade August futures.
The market seems specifically designed for big players. This may be right, or at least, inevitable; however, it will have the unintended consequence of chasing many individual investors from the the market.
> The market seems specifically designed for big players. This may be right, or at least, inevitable; however, it will have the unintended consequence of chasing many individual investors from the the market.
Possibly what may be needed is a trading-volume rule, setting maximums for any single trading entity in any single stock to a maximum number of shares traded per day?
This wouldn’t necessarily stop large institutional traders from doing transactions that exceed this maximum: but what it might do is encourage the development of a secondary market to bust up the huge volumes going thru into smaller trades handled by multiple trading firms, which might just smooth things out a bit and allow smaller traders a look-in.
> ... requiring traders to “pre-borrow” stock before
> initiating a so-called short sale.
We can’t read the full article for free, so all we can
go on (until this gets published more widely) is the
above fragment.
I take this this to actually be about “naked shorts”,
short-selling stock you don’t hold, and haven’t actually
“borrowed” from someone who does.
I’m surprised (slightly) that the exchanges permit this.
The SEC may just be leaning on them to change it.
This sort of play (a pure bet that a stock will go down)
really needs to be hosted by bookies in Vegas.
As an individual investor, do I really want to be in a
market that allows naked shorts (sometimes never covered)?
Naked shorts do for Wall Street what high-grade Chinese
countefeit coins are doing for numismatics.
How about investing in companies for long term growth? Wall street should be regulated like a Casino or any other gaming industry. Lets not call the players “investors” lets just call them “gamers”.
The problem with this rule is that naked shorting is already illegal and anyone caught doing it should be jailed for a long time. This whole thing is terrible because its as if they gave it with a wink as if to say, “alright lay off the banks but we’re looking the other way on everything else.” These investment banks are most likely the guiltiest ones IMO of violating the shorting rules. Shorting adds no value what so ever to the markets no matter what the advocates say. Now that people have 401ks for retirement and that is there only hope for retirement its high time shorting was made illegal. Lets face it shorting is done to bring stocks down, why else do they do it. No one shorts a stock because they think it may go up. Shorters have no vested interest in the markets except for there own personal gain. Ask yourselves this question, why does anyone else have the right to borrow stocks that I or you have bought for a long position to use against us in shorting it? Those are our shares and they have no business shorting with them.
It depends on what you mean by "worked". The big banks were all for the old rules.. until the party stopped and they became short targets due to their billions in losses. These guys, caused this mess. They are the cause of the inflation, the cause of the economic contraction, and now they have gone to the government to be protected from short sellers.
F them.
All this rule does is atttempt to protect a select few companies who are deemed “important.” It’s a naked attempt to artificially prop up the value of the stock. Call it the “you’d better be nice to these stocks you nasty market forces” list.
The problem is that in the long run, it won’t work. Those who wish to will find a way around this. And it will also discourage investment in the companies’ in question. And worse, it’s a system that is prone to abuse depending on which company (and it’s directors) have enough political clout to be put on the list at a time in which it becomes convenient.
“Shorters have no vested interest in the markets except for there own personal gain.”
The same could be said for any investor in the market. I don’t buy stocks, bonds, or other securities out of a sense of charity. I do so for what I hope will be my own personal gain.
I do too, but if the stocks of my companies do well other people do well with jobs and good products which flows through the economy. Shorting stocks until they have lost a lot of value hurts companies and there ability to grow and provide more jobs.
Your first sentence hasn’t applied to American economics for twenty years. Before I retired from SWBT (AT&T) the announced focus of the corportation changed from customer service to share holder value. That change put a hell of a lot more money into the pockets of senior management than did customer service.
The decision making process was massively altered to achieve the latter aim.
Does anyone know why markets always go down faster than they go up?
It's because MOST players/investors in the market are LONG, not short. And that's the way it is without any regulation, period.
Short sales are fundamentally different. When you buy a stock, you are buying something, a piece of a company, and likely because you expect that the company will earn money or otherwise grow in value. When that is no longer the case, you find someone else who wants to own that company, and sell them your stock.
In short selling, you don’t own a stock, but you promise to sell it to someone for less money than other people will sell their actual stock. If you get someone to buy, you can then sell more even cheaper. If you succeed, you can then “buy back” all the stock you just sold for the new low price you set by “selling” stock you didn’t own — playing NOT on value, but on panic you induced in people, or worse, by driving the value down you forced margin calls.
IN the end, you rarely have to buy the stock, you just get the people you sold to to pay you off to NOT have to buy the stock at the high price you offered.
If you screwed up, and the stock goes up, since you don’t own it, and didn’t borrow it, you can’t deliver it, and so you have cheated people out of the stock they thought they bought.
If you really want to bet on a stock going down, you can use options. Options don’t generally DRIVE a stock price, they simply lock in the chance to make money on moves.
People use short sales because they want to MOVE the market. If they actually owned a lot of stock, they could sell to move the market, but they would hurt themselves by driving their remaining stock price down. So real owners take care when selling.
Short sellers are driving down the price of someone else’s stock, and when they don’t find someone willing to lend them the stock, they are doing it without even bothering to use someone else’s stock.
At least before last year, you could only short-sell a block of stock after someone had just purchased the stock for higher than the current value (uptick). This limited the ability for short-sellers to drive the price down — at best they could keep the price from moving, which didn’t make them money.
The Hunt brothers tried to drive up the price of silver by buying so much of it, and then dumping it on the sly. At least there they had actual product. short-sellers are doing the opposite, and are just as evil.
They should simply ban ALL naked short sales. Well, part of me says they shouldn’t ban so much as they should require full market disclosure, so that the investors see that the sellers aren’t really selling anything, which should prevent the panics. But banning will be effective, and is only mildly interfering in the free market.
United States Oil Fund (Symbol: USO) Has 210% Short Interest
zeestephen | 24 June 2008
Posted on Tuesday, June 24, 2008 10:11:15 AM by zeestephen
United States Oil Fund (USO), an Exchange Traded Fund that tracks the price of light sweet crude, has a short interest of 210%. In general terms, that means that ALL of USO’s 8.7 million shares have been “borrowed” twice and “resold” twice by traders who think the price of oil is going to come down. That, dear Freepers, is a stunning number, the largest I have seen in 10 years of trading. What does it mean? It means that thousands of professional traders think the price of oil is going to come down FAST and HARD. Time will tell. Here is the link. http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=qqq&time=&freq= (halfway down the page, in red print).
The market goes down faster than up (to the degree that is actually true) for many reasons. One major factor is margin investing. People buy twice the stocks they can afford, and whenever the market drops, they have to sell stocks to pay their margin, which makes the market drop more.
Also, it is expensive to artificially drive up the price of stocks, because you have to have money to invest to buy up the supply. Short-selling on the other hand actually makes you money, so long as you are successful, and you need money only AFTER you fail and have to pay up.
Third, in a rising market, you are always breaking high price points, so people are always trying to figure out whether the new price points are a good value. When the market drops, it is easy to assume the price had been falsely driven up, so it seems right to sell out.
Fourth, people like to make money, so too many set sells for small drops to “lock in their winnings”. Small drops trigger sales which makes stocks drop more.
Last, major market drops happen because of external triggers which panic the general investment community. There are rarely external triggers which so clearly signal that stocks are horrendously UNDERVALUED. So a “9/11” incident, or a major bankruptcy, is much more likely to drive a downturn, than a company announcing a huge unexpected profit will trigger the idea that ALL companies will do so.
Still, when the market HAS dropped significantly, it will shoot UP quickly. Look at the two days earlier this week when the market went up almost 500 points. People thought maybe it was oversold.
Most of the market is “long” because most of the market is still made of people who actually are buying COMPANIES. Housing is “long” as well, because most people actually buy houses because they want houses.
By CHRISTOPHER COX | Posted Thursday, July 17, 2008 4:20 PM PT
The demise of IndyMac, coming on the heels of Bear Stearns' desperate sale to JPMorgan Chase, is a sure sign of the fragility of today's markets. What's needed now, more than ever, is reliable information for investors and confidence that trading can be conducted without the illegal influence of manipulation.
Because financial institutions depend on confidence, they are uniquely vulnerable in the current climate. A "run on the bank" can take hold quickly, and can be fatal. But stampedes are not always rational.
When an irrational panic is fueled by a sense of urgency, false rumors that must be acted on immediately and the fear that everyone else may get out first, market integrity is threatened. It is the job of market cops to provide a measure of confidence that financial information about public companies is accurate and reliable — and when it is not, to punish those responsible.
Who profits from intentionally false information in the marketplace? Those who are in on the scam and positioned to benefit from the predictable response of others who believe the fraudulent information to be true.
The classic "pump and dump" scheme, in which a stock is inflated through false information and then dumped on unsuspecting investors when the perpetrators flee, is one example of how this works. "Distort and short" is the same thing in reverse.
Naked short selling can turbocharge these "distort and short" schemes. In a naked short, the usual process of short selling is circumvented, because the seller doesn't actually borrow the stock and simply fails to deliver it. For this reason, naked shorting can occur even when actual shares aren't available in the market. It allows manipulators to force prices down without regard to supply and demand.
Next week, the SEC will implement an emergency order designed to prevent naked short selling in the financial firms that the Federal Reserve Board has designated as eligible for access to its liquidity facilities.
Because these are large firms with substantial public float, honest short sellers can readily locate shares to make good on their short positions. Continued legitimate short selling in these issues will act, as it is supposed to, as a way for market participants to invest in the downside and to hedge other positions.
At the same time, eliminating the prospect of naked short selling will help assure investors that it is safe for them to participate, and that the current declining market is not the product of unseen manipulators and "distort and short" artists.
Our emergency order is not a response to unbridled naked short selling in financial issues — so far, that has not occurred — but rather it is intended as a preventative step to help restore market confidence at a time when it is sorely needed.
Many people think naked short selling is already illegal, but that isn't true. Shares are normally delivered to the buyers within three days of the trade. But in most stocks, including those covered by our emergency order, that three-day period can be extended indefinitely.
Even without these extensions, and even when a short seller locates shares that can be borrowed, there can be problems because the short seller is not currently required to actually borrow those shares until settlement.
As a result, securities lenders can tell multiple short sellers they can borrow the same shares of stock — a sure recipe for a failure to deliver. Once the commission's order takes effect, this possibility will no longer exist.
The SEC is committed to maintaining orderly securities markets. The abusive practice of naked short selling is far different from ordinary short selling, which is a healthy and necessary part of a free market.
Our agency's rules are highly supportive of short selling, which can help quickly transmit price signals in response to negative information or prospects for a company. Short selling helps prevent "irrational exuberance" and bubbles.
But when someone fails to borrow and deliver the securities needed to make good on a short position, after failing even to determine that they can be borrowed, that is not contributing to an orderly market — it is undermining it. And in the context of a potential "distort and short" campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences.
It was famously — perhaps too famously — said that "markets will fluctuate." That is certainly true if they are well-functioning. As market referee, the SEC neither can nor should direct the market's fluctuations. Instead, our most basic role is to ensure a continued flow of liquidity to the markets from participants who are confident the game isn't rigged against them.
Naked short selling can undermine the market's integrity. For the financial sector in this crisis, certainly, but as soon as possible for the entire market, this is one worry investors shouldn't have.
Cox is chairman of the Securities and Exchange Commission.
Both your posts are superb! Thanks
Adding inefficiency and expense won't help the markets.
I’m surprised (slightly) that the exchanges permit this.
They don't allow it. You're supposed to have a stock borrow lined up before you can short. I'm not sure if they want you to borrow early, before the short can occur or if they're going to just enforce the rule already on the books.
> Adding inefficiency and expense won’t help the markets.
On that basis the futures markets should not have daily trading limits, no?
The problem with your idea is the broker is supposed to allow or not allow the short sale, depending on the availability of borrowable stock. If the broker tells the client he can short it, the client assumes the broker can borrow.
Shorting adds no value what so ever to the markets no matter what the advocates say. Now that people have 401ks for retirement and that is there only hope for retirement its high time shorting was made illegal.
After we make shorting illegal, maybe we should force every American to buy shares of Fannie and Freddie? LOL!
Lets face it shorting is done to bring stocks down, why else do they do it.
Maybe people shorted Fannie and Freddie in the $60s because they knew the books were cooked?
Ask yourselves this question, why does anyone else have the right to borrow stocks that I or you have bought for a long position to use against us in shorting it?
Because you bought them in a margin account.
Those are our shares and they have no business shorting with them.
Hold all your shares in a cash account. Then they can't be borrowed.
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