Friday, Sep 19, 2008
UK Government outlaws speculative selling on FTSE
BBC 'News': FSA introduces short-selling ban
"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets," said FSA chief executive Hector Sants. If it is a legitimate investment technique, and the UK operates a free market economy, why are they banning it? Does this mean we are turning into communists? I think so.
Posted by paul @ 08:45 AM (576 views) Add Comment
12 Comments
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1. paul said...
This is akin to the government banning voting for other parties. As with everything the FSA does, this will not have the desired effect. It will probably widen fear as the market is no longer working efficiently, and prompt mass dumping of banking shares.
2. ontheotherhand said...
Why not ban people and companies from withdrawing their savings from banks? Indeed why not control the FX markets and stop people selling GBP and go back to the days where one had to get a passport stamped to change money?
3. techieman said...
I think Paul is right. The market was oversold and the govn are directing their venom at the short sellers. This isnt right, they sell short because they can make money because the banks are in the 5hit. What will happen? The short sellers got killed as they had to panic cover their positions. My understanding though is that they wont (actually cant) outlaw other forms of short selling - eg. options CFDs etc, so after this violent rebound the downtrend may re-assert itself.
4. shipbuilder said...
Techieman, I think you're answering the wrong concern. I don't think that people believe that short selling hurts an otherwise healthy company - the question people are asking is, does short selling hasten the bank's demise, or finish off a bank that might have pulled through eventually? Maybe not in a rumour-free environment where a failure doesn't become a self-fulfilling prophesy, but then people don't belive this either.
5. a saver said...
Wonder what will happen with absolute return funds that were using the fairly new (USCITS III?) rules passed by the government?
eg the Blackrock one I have in my SIPP?
6. paul said...
shipbuilder, short selling is another market mechanism. There is very little "idle" speculation going on I believe - its on the basis of a better understanding of the risks than the market might have at any point. If your liabilities outstrip your assets and you're borrowing from the BoE heavily, you have a lifespan. Short selling is the equivalent of pulling the support tubes away.
Leaving the support tubes in won't cure the patient though, as the FSA and our esteemed comrades in central government now believe.
7. techieman said...
shipbuilder - again paul is right IMO - look at the article he has posted re Lehman's. Its a diversion from HMG. Does it hasten a demise? YES why shouldnt it? Does it force an otherwise well run (any company) that is liquid to go under? No i dont think so because the buyers will just take out the shorts. Do short sellers get braver and put the next one into play - now i could - at a stretch admit this as a possibility, but i dont believe they would be successful unless there are underlying reasons that they would be.
8. monty032 said...
I teach options to MSc students at a well-known university. This recent move seems a particularly brainless thing to do. What is stopping the hedge funds buying put options instead? What is stopping them creating a basket of non-financial shares that has historically had a high correlation to a particular financial company, and shorting those instead? Nothing that I can see. It's just moving the problem elsewhere, and creating the illusion of doing something. These are questions no-one has asked, because the politicians making the decisions, and the journalists questioning them, know f***-all about derivatives.
9. still renting said...
But will anyone sell you a put option if they can't hedge out the risk with a short?
10. 51ck-6-51x said...
Let's say I'm a bank and part of my business was in repo's - that is the lending of shares (to be sold and later bought back and returned to me). I do this business because I am paid interest on the value of these shares - whilst they are out of my hands I make a risk-free profit. Yum I like that very much. Suddenly, however, I cannot lend these (financial) shares and I also know that a large proportion of the market was taking a view on these going down in value. What do I do? Get them off my books.
Hang on - does that not imply that these shares should now plummet?
I'm not sure what the U.S. & U.K. govts have planned, but unless it is taking *all* the bad debts away from banks I cannot see how anything will help (the market that is, not the taxpayer ;p). The banks need to trust each other - there needs to be the Common Knowledge that there is no stress in the market.
Am I wrong in my logic somewhere?
11. jonb said...
Still renting,
A short sale is not a good way to hedge the sale of put. If the price of the share goes down, and you are compelled to buy it back, then yes, a short sale in the other direction will work.
However, if the price of the share goes up, the put option won't be excercised. You get to keep the premium, but you still have to buy back the share you short sold at a higher price than what you paid for it. You could lose a lot of money that way.
12. jack c said...
@ a saver (Friday, September 19, 2008 10:17AM)
Blackrock have made an announcement - I can post up info if you need it?
130/30 funds are going to be hit by the FSA moves on "shorting"