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Short Selling And Hft Petition

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Trying to stop a market is rarely a good idea. If there's a problem it's generally better to improve, grow and enable the market in other areas to counter-act the problem.

Trying to stop a market is like trying to dam a river. It can hold back a little of the problem but the rain keeps coming and the rats keep finding a way through.

In the case of banning short selling, we can all still short sell. To do this, we just have to do it manually, approach someone who owns shares and borrow to sell. It's similar to pawning a wedding ring. All 'banning' does is raise the bar so that the elite are able to continue but the little guy can no longer participate. Like a form of censorship or prohibition, it forces it underground.

Hedging.

Let's say I'm employed with a company with an income dependent on the price of platinum. When the price last crashed I lost my job. To insure against this I can short the price of platinum, or companies dependent on the price. This way I can self insure against the price going up.

If I am prevented from hedging this way then I then have to infer what prices of things tend to go up as the price of platinum goes down. So I can still 'short sell' - it's just happening now in a distorted market. By distorting the market this way the problem has been moved elsewhere.

In the case of HFT what we have here is an uneven playing field. It's all about whoever is closest to the exchange computers to react quickest. Instead of banning it, how's about providing that level playing field? There's a company I forget the name of trying to establish this right now for London.

We are going to see a lot more of these petitions as we get poorer. Having lived in poor and rich countries I see a pattern. The poor countries go against trade and the rich countries support it. The only other pattern so strong as this is that poor countries print their money into oblivion and richer countries are blessed with a privately elected bank that is a little more generous. The market does boom and bust but it's an efficient tool that can't be bullied.

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I had a look on wikipedia this morning and found this, so not sure if a ban makes any difference:

On May 18, 2010, the German Minister of Finance announced that naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's ten leading financial institutions will be prohibited. This ban went into effect that night and was set to expire on March 31, 2011. On May 28, German financial market regulator BaFin announced that this ban would be permanent. The ban is effective July 27, 2010. The International Monetary Fund issued a report in August 2010 saying that the measure succeeded only in impeding the markets. It said the ban "did relatively little to support the targeted institutions’ underlying stock prices, while liquidity dropped and volatility rose substantially." The IMF said there was no strong evidence that stock prices fell because of shorting.

On the same page though :

Robert J. Shapiro, former undersecretary of commerce for economic affairs, and a consultant to a law firm suing over naked shorting,[21] has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the ground.[10]

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I'm not the right person to go into great detail on this but there is an argument that in a market crash the only support the market gets is from profit-taking short-covering

Quoting Martin Armstrong (in his inimitable style):

"The net result, without SHORT positions, is simple. The markets go down even more. The reason is clear. A short position is either (1) a hedge and banning short selling forces people to liquidate when they cannot hedge. (2) Abolishing short selling prevents a short-cover rally and eliminates the one person who buys during a panic providing essential support and liquidity. But politicians are not elected because they actually understand anything. They smile and can look the part, but that’s it. The day we can outlaw politicians from meddling with the economy, we will be much better off.
The reason panics take place is because you undermine the CONFIDENCE of the people. Once CONFIDENCE is lost, people sell. If shorts are eliminated, then the ONLY buying requires courage from someone going long. That person may eventually buy, but he usually waits until the market has at least paused and the panic selling stops. It is the FLASH CRASH we saw last year. This was one of the primary reasons WHY the market fell to 10% of the high during the Great Depression – scared the shorts."

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Like I say I'm not Mr Expert but the argument is that if no-one is allowed to be short and then for whatever reason the market crashes then the absence of short-covering means the crash will be much harsher

Does shorting bankrupt companies?

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According to Robert J Shapiro (quoted above) it does. I can see shorting affecting the ability of small companies to get funding if the share price is being depressed by shorts so maybe there should be some more limits but I'm not sure there should be complete ban. I don't think I should have signed that petition LOL, seems to have got sigs than the HFT petition.

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