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SEC: Short on Brains!
In July of 2007, the SEC changed a rule that had been in effect since
1929. Known as the uptick rule, it was designed to prevent short
sellers from shorting a stock that was dropping in price, forcing them
to wait for a price uptick before they could short. Since that ill
conceived change, the market has dropped nearly 4,000 points. It's
time the SEC admits it made a mistake, and acts to prevent short
sellers from destroying the markets. Reimposing this rule would be a
good start, prohibiting naked shorting also needs to be done
immediately. In fact, all shorting should be eliminated, it is a relic
of the past when markets were manipulated to benefit the few at the
expense of the many. Numerous companies have been destroyed and
countless jobs lost by allowing this practice, Bear Stearns was just
the latest victim. It's time for the SEC to wake up and restore order
to the markets. This is an issue both candidates should address, and it could well determine my vote and that of many other investors.
Comments (15)
Isn't naked short selling already illegal, at least in the majority of cases?
July 15, 2008 5:06 PM | Reply | Permalink
You'd think so, but it is not. There is a Reuters story today about the SEC proposing to stop naked shorting on key financial stocks, like Fannie and Freddie.
July 15, 2008 5:13 PM | Reply | Permalink
OK, I'll take your word on it. I'm definitely no economics expert. It seems like a bit of a no-brainer that selling what you can't get should be illegal, but not every one in Congress has been accused of having brains.
July 15, 2008 5:20 PM | Reply | Permalink
Have any of them been accused of that?
July 15, 2008 5:21 PM | Reply | Permalink
One or two, I'm sure. They're just unproven accusations, however.
July 15, 2008 5:56 PM | Reply | Permalink
Eliminate shorting? Doesn't seem fair to tell people that they can only buy or sell a stock. If I want to make a bet on a price decline who are you to say I shouldn't? Would you eliminate put and call options as well?
July 15, 2008 6:10 PM | Reply | Permalink
I find it mildly amusing that we have a Democrat arguing with a Republican against regulating the market. (Of course, Destor labels himself as a "Libertarian Democrat".) It says more about the short-comings of such labels than anything else, of course.
I'm going to mostly agree with theCleverBulldog, here, however. Especially on naked short selling, where the person is selling something he doesn't even know if he can get! On short selling in general (as well as puts and calls), I think theCleverBulldog also has a point that it's a way of manipulating the markets. I can't say I know much about it, but I have no problem in general with regulating systems that get regularly abused.
July 15, 2008 6:35 PM | Reply | Permalink
I would not eliminate puts/calls. That is your way to hedge your position or bet on a decline. But put/call options are sold by stock holders or investors willing to buy a stock. It does not effect the stock float or the price directly. Shorting a stock, especially naked shorting, is a way to directly effect the stock price. Shorters profit from spreading rumors and causing panic. They have put companies out of business that would otherwise be healthy companies employing thousands of people. It is strictly a tactic for manipulation.
July 15, 2008 7:06 PM | Reply | Permalink
Hi, could you please explain what you're talking about, for us non-economists? Thanks.
July 15, 2008 6:21 PM | Reply | Permalink
http://en.wikipedia.org/wiki/Naked_short_selling
July 15, 2008 6:30 PM | Reply | Permalink
The real problem with shorting is that for certain types of companies that rely on investor confidence or continued access to capital, they can be destroyed. If you short P&G, the price might dip, but since they sell consumer products to millions, and generate tons of cash, even short term drops in sales from rumors or drops in stock price have no long term effect. However, a company like Bear Stearns, which needs investor deposits, can be put out of business if depositors get scared and remove their cash. Banks in general,and brokerages also, will collapse if depositors suddenly pull out (like IndyMAC just did). Other companies, like WorldCom and Enron, needed to sell stock periodically to get operating cash. Both companies collapsed when shorts drove stock prices so low they could not raise the funds they needed. (Enron also engaged in some illegal activity, but it was the short attack that killed them)
July 15, 2008 7:13 PM | Reply | Permalink
Honestly, I don't understand this discussion, but I'm learning a great deal from reading the thread... so thanks to you all.
July 15, 2008 7:29 PM | Reply | Permalink
Well, basically it is about a practice that the SEC is allowing to take place on the markets called shorting, or short selling. A short makes money if the stock declines. The problem is that shorts have resorted to spreading rumors to start panics to cause mass selling of a stock so they can make money. The SEC rule change allows hedge funds to attack a stock and destroy it, like they did to Bear Stearns. I maintain that the markets were created to allow companies access to capital and investors access to company profits, not for manipulators to make money destroying companies.
July 15, 2008 7:48 PM | Reply | Permalink
The point here is that by selling naked shorts, you get paid to open the position, SELL the position, you do not have to produce the stocks, or DELIVER unless the price goes below the "strike price."
If you know the fed will bail out the equity, in essence protect the price from falling below a reasonable price, then the options "expire" and you accrue the short sell position.
The SEC and FED find themselves in a lurid position, they are telling the market that they will do what is required to keep Fannie and Freddie solvent, "keep the price up" and at the same time saying that you cannot perform in an essentially legal position or trade.
The act of "selling the shares" reduces the float of shares, shares available for purchase which also leads the probability that the position will not reduce below the strike point.
Finally and theoretically, while the FED is "buying??" positions to protect the equity price, is there a plunge protection unit?? then the naked shorts create a scenarion where it is more expensive for the fed to create the desired result of the naked short seller.
Illegal? No.. if the price drops below the strike the short position will lose the short seller fee, and have to deliver the equity at the strike spot.
Typically you control 100 shares with an option position, so ten short sale positions with an expiration say in August would control 1000 shares.
See Cramers famous, "never short an internet stock" to see how violatle these markets can be, and how shorting can also lead to a reduction in float that increases price.
The irony?? The FED telegraphed the position and the strike price globally on Sunday, at option expiration I don't think there is any surprise.
What the FED should do???
Sell shares of the equity and force margin calls on the position, see the shorts cover, and then buy back the positions... is that illegal?? No.. the data is at the CBOE and that folks is how the game is played.
If it is indeed a case where the spoo's team, plunge team is the major institutional holder, then the fed should whiplash the positions until such time it "HURTS" to take a position outside of the range of liquidty.
Laughing.. bee glad Dee Illuminati is not watching the CBOE data of open positions on Fannie, and Freddie, I would take these people for a painful ride.
And ohhh the bitching, whenever the market is down and people make money on that fact, the fed and the market gets crabby.
But if the market is going up, and the short selling helps that process, nobody cares..
The SEC is whining in my opinion, and I laughed when I read the news release.
Also the "rumors or touting" press release was laughable as well. As if touting wasn't the purpose of the Treasury Office itself assuring the market that the equity could not fail.
The SEC debacle is a response to the Treasry touting.
laughable, sad state of affairs, strange market indeed.. but again, If I had the feds position I would serve up an ass burning case of whiplash instead of complaining, being brutal about the trading range down.
Maybe, Maybe, SEC is selective, institutional short selling welcome to promote liquidity in lieu of failure, but with private investors.. well get away from the free money trough.
The more you understand the more cynical and wary you become.
And yes I have traded options and nobody cried a tear when I covered 10 oex puts when the fed announced a rate cut intra meeting....
it is all BS and SEC whining... stop whining and whiplash the positions instead..
nobody on the street admires a whinner.. they only admire power, so evaluate the CBOE open positions and exercise some power instead of whining.
Gawd this is embarrasing, the sec person should be fired for whining and not instead whiplashing these positions.
July 15, 2008 8:49 PM | Reply | Permalink
The only free cheese is in a mousetrap, when you remove moral hazard, there is no mousetrap.
The real point here is that we have whiners instead of people who will protect the position of the US dollar.
be damn glad that I'm not behind the buy and sell decisions and also responsible for ensuring stability, I would create an implicit understanding, that if you sniff at my cheese, you get bloodied.
If you are going to interfere and manipulate a position, do so ruthlessly.
Gawd this is disgusting, risk adverse and incompetent...
defend the damn dollar
July 15, 2008 9:03 PM | Reply | Permalink
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