Does it include options, futures, swaps, and other instruments? If the ban includes all these instruments, how can a "short ETF" accomplish its task? Or, let us say if I want to short China through FXP, then all of a sudden China puts a ban on shorting. How does the FXP etf go about doing its task of being an inverse of FXI? Input please. Not that i care about shorting, but was just wondering how will all these new government rules will work. And if the etf's get screwed.
Adding to the question- The media, even the reputable media has been very unclear about how those who are already short will be affected- Is the ban on shorting affectively forcing those already short to cover? Because intuitively, a manager running a Market neutral fund would come into some difficulty if he had to unwind massive short positions and go to cash.... this in itself could destabilize the Markets.
Its a good question and your not alone in wondering what the heck the govt is doing to the free market. The ban does not directly change how options or futures are traded. both are derivatives of another product. In the case of options, interesting enough it appears that you can still become short stocks via buying puts or writing naked calls. I imagine many did that due to the timing of the options expiration date being last friday. In the case of futures you always have one party that is long and one party that is short. The real sad thing in all this is that the average guy is the one that gets screwed. In example one you have Joe blow trader who feels a stock is overvalued and will trade lower but now cant short it. In example two there is a trader/investor that will now have to pay more than the true market price because of example one as well as the fact that those that were already short have to buy back in an non orderly fashion. But this little smoke and mirrors trick gets better. The big money can STILL short stocks. HOW?? What to short a dow stock? no problem for the big guys, you just buy all the dow stocks except that one and short the YM (dow futures). With their large size the transaction costs are very low. But wait, it gets even better, while actually distorting the free market and adding no value they APPEAR to work because people will have a short memory. You can point and say that "see the prices went up on that Friday" but will forget (or simply not understand) that on the next leg down there will be less buyers because its the shorts that really lend the stability and liquidity to a down market as they are the first ones to be buying and even aggressively buying when no one else is. shorts keep bubbles from getting further out of control and keep the aftermath from being worse.( China market comes to mind )
Certain option transactions now prohibited by the SEC Effective on Friday, September 29, 2008 option traders are prohibited from initiating certain opening transactions on stocks where short selling has been banned by the SEC. No option position can be opened if that position would lead to a net short equity position if exercised or assigned. This includes opening naked short call positions and exercising long puts unless the underlying stock is held. Positions opened prior to Friday, September 19 are not affected.
It seems to me they are using the shock treatment to transfer liquidity from equity markets to credit and credit derivative markets. Removing liquidity from equity markets is less of a deal since the shareholder base can be easily diluted.
So what happens to the short etf's like pro shares? If there will be stricter rules after the 29th for options (as alluded to above) - can inverse etf's still do its job? Or for example, if Germany, Canada, and let us say UK put a ban on shorting what happens to EFU? Or if Taiwan ... what happens to EEV? If they can't do their job the NAV of the ETF may no longer reflect the intended strategy of being an inverse. Or back to the USA, what happens to SKF - the inverse of financials?