Lost in the financial crisis is a what many may find disturbing, the US government fundamental changed the rules of the financial game, literally overnight, with no congressional hearing, no notice, and with no disregard for those who found themselves on the wrong side of the change.
On Friday, the Securities and Exchange Commission took the unprecedented step of banning, the perfectly legal practice of short selling in 799 financial stocks, for at least 30 days.
When you short a stock you basically borrow stock (stock that they do not own) from a brokerage’s inventory and sells it. If the market price falls, the trader can buy new shares later to replace the loaned shares and pocket the difference between the sale price and the repurchase price.
If the stock rises instead of falls, you lose.
It’s the opposite of buying a stock and hope that the price of the shares rises. It’s like playing the “Don’ Pass Line” on the craps table.
The SEC said it had become concerned that short selling of financial shares “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets.”
Note the “may be causing.” The SEC is conceding that it doesn’t know for sure what effect short selling has had on financial stocks.
So the government decided to blatantly try to stop financial stock prices from going down.
On Friday, the order had the desired effect, and then some: The average financial stock in the Standard & Poor’s 500 index soared 11.1%, on top of the 11.7% surge Thursday, when rumors first began to circulate that the U.S. was planning bold steps to deal with the financial crisis.
Investors who have shorted financial stocks this year didn’t try to disguise their anger.
“The irony is that the SEC is doing exactly what it claims to be against manipulating the markets,” said Eric Newman, who manages the West Chester, Pa.-based TFS Market Neutral mutual fund, which shorts some stocks while going “long” (buying and holding) others.
Many academics were no less critical of the SEC. Jonathan Macey, a securities law professor at Yale University, said the ban on short selling was “an abomination.”
The SEC wasn’t operating in a vacuum. Securities regulators in London made the first move against short sellers Thursday, when they banned shorting of British financial stocks through year-end.
The SEC says it, too, is ramping up its probe of short sellers, and will require them to discuss their trading activities under oath.
No I have never shorted a stock. I also do not “play” the market, so I have no direct financial interest in the decision.
However it concerns me that the government can and has changed the game in the manner it did.
Just over a month ago the government announced it was investigating oil speculators and traders, in light of the run up in oil prices.
If the government perceives an industry is making too much money, too fast, they investigate it.
They put it on the front burner.
As an entrepreneur in an industry of entrepreneurs, it is somewhat troubling to see the government taking this immediate overnight action, changing the game, thereby creating winners and losers, instead of allowing the market to determine them.
Similar thing happened after 9/11 regarding wiretapping and other anti-terrorism tactics that may have been unconstitutional. This is the financial equivalent not to take anything away from that tragedy. Desperate times call for desperate actions. I’d be more concerned if the gov’t did nothing and just stood by. They need to raise taxes drastically now to solve the additional national debt from all of this.
Agree completely. Pretty scary.
Maybe they should make a law that you can NEVER sell a stock.
Maybe they should set up a fund so people can borrow money to buy stocks too?
Sounds like a great idea. Sure.
Backing the failing investment banks, I can see that but banning short sales in a free market economy.
VERY VERY bad precedent.
actually this type of manipulation is quite disruptive to the market and encourages fraud. Could you imagine how many execs are taking advantage of this no short period and selling out? The people who are left holding the bag are the retail investors. Since there are no shorts left, any decline in a stock will be devastating since you don’t have shorts to cover their positions this time. Liquidity is essential for this market to recover.
People thought the market was not gamed by many before this? Its just another adjustment on the game.
Certainly, its not a popular move, not a move the government even wanted to make at all, but seemingly a bad choice among even worse options like doing nothing. The short stops are a temporary position, two weeks or so.
No one seems to be critiquing the collective, massive weight of millions of irresonsible borrowers who got in way over their heads and caused this building tsunami to finally reach the shore line. It starts with personal financial responsibility, and millions utterly failed their task.
Mr. Black
I disagree that this is just “another adjustment of the game”.
The short stop is for 30 days right now.
It was announced over night so anyone who was short was basically screwed and had to cover causing the market to artificially surge basically at the governments direction.
The point of the post is who knows what will be the next business they will target.
Short sellers today, Oil spectators buying long positions last month, next month maybe what you do?
The SEC was wrong to pull the uptick rule and should put it back in place. It was used for 70 years for a reason. Without it, a bear market can easily turn into a freefall.
More info: http://blogs.reuters.com/reuters-dealzone/2008/09/19/what-was-so-bad-about-the-uptick-rule-2/
Short selling rules needed adjustment (they have been changed back and forth in the last couple years) before this, most already agree on that. What happened here was rapid decisive action. If people wanted to vote on it in commitee, take a national poll, etc, there would be no decision when one was needed and the market would have crashed. After all, the Senate’s leader said the day prior, “No one knows what to do”, so the “people’s” voice cast its vote to hand wring the problem. Nice.
Sure, the precedent is not favorable. Its a bad choice among worse ones. If people continue to act irresponsibly, then yes, it seems more decisions will be forced upon the largely ignorant masses.
Remember, the short selling rules apply to only about 1/10th of all publicly traded stocks.
Funny that the government didn’t see the need to step in when speculators drove the price of oil to $147.
Now it had a double bull market top and has hit $92 per barrel.
It’s called the American way now we have less freedom… again.
Total and complete market manipulation. I find myself asking, “Where the hell am I? Is this America? Really?”
Desperate times call for wise lucid responses. Not this crazy knee-jerk self-mutilation.
Great post & response.
We are all debating the cure and not the problems which are
Greed and iresponsibility
As far as investing and short selling … let’s call them what they have become Legalized gambling.
If you have an addiction and need help get it
If you just want “your fair share” at the expense of the country go find another country to rob from.
as far as raising taxes this is a pipe dream from the kook extremists on the lunatic left wh wrongly think that
a) everyone who has money was born with a silve spoon and should have their unearned wealth whisked away and into the pockets of the unfortunate victims who btw have been unfortunate victims for generations upon generations.
b) are so ignorantly arrogant that they think hyonest hard working Americans will continue to foot the bill for these fools that buy things they can’t afford and live in places that keep getting washed away.
God bless America What there is left to it!
SA
All the above are good points…I for one will be turned off of stcks for a LONG time to come…I already knew about the manipulation that goes on but now that the GOV will bail them out I’m out for good…the company execs that got away with all this have to be saying under their breath “I cant believe we got away scott free”.
I wonder how many Invest. bank ceo’s will be foreclosed on this year…prolly ZERO!
not the only scary thing the gov/fed doing these days…
http://www.321gold.com/editorials/schiff/schiff091808.html
Welcome To The USSA
http://www.321gold.com/editorials/denninger/denninger091908.html
As my website says….BullShitWebsites.com
so is the govt SEC
UPDATE
Today, Sunday the leaders of two of the world’s largest options trading and clearing entities criticized the Securities and Exchange Commission’s emergency ban on short selling scores of financial stocks.
William Brodsky, the chief executive officer of the Chicago Board Options Exchange, said in a written statement that the ban is “a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace.”
Wayne Luthringshausen, chairman and CEO of Chicago-based The Options Clearing Corporation, said he understood the need to curb abusive practices but called the SEC order too restrictive. Luthringshausen said the ban could “harm a marketplace that a great many investors have come to rely on to manage risk in their equity portfolios.”
Sounds like the SEC has done this as a PR move for Sheeple. Let the crowds think the govt is doing something to Wall St, never mind dollar will plunge and resulting values won’t be real.
But comon folks, the markets have been a manipulation and obfuscation of information and real values for years now. Not knowing what stuff was really worth was part of the game, at least, I am sure the people high enough originating this junk knew it was next to worthless. Just my 2 cents.
Ari and David Castello are completely right. It’s hard to explain to people outside of the finance industry why short selling is a perfectly healthy practice for the markets and makes complete sense. However they should never have pulled the uptick rule, it also just made complete sense.