Regulating Short-Selling is Ridiculous

Discussion in 'Trading' started by JohanLinden, Aug 17, 2011.

  1. My first post here. I hope you enjoy it and comment on it.

    As always when the stock market is running bad there is this discussion among authorities to forbid short-selling of stocks. This time is no different as I could read yesterday that several authorities are talking about banning short-selling of stocks.

    So, it must be good for the market if we forbid short-selling right? No, wrong.

    There is no evidence whatsoever that it will be better for the financial markets. Show me proof and I will surrender!
    Why keep up prices if market participants want them lower? Prices will always end up where they belong sooner or later. The sooner a stock shows its real value, the better for an effective stock market.
    Restricting the market makes the market less liquid and effective, which leads to lower prices. Not really what the authorities had in mind I guess.
    There are ways to get around this ban by using futures and options. So as usual, the ones that lose are the average Joes who do not have access to those instruments while the sharks prosper as usual. Or maybe we should forbid those instruments too? Why not forbid the whole stock market to avoid turbulence?

    The most important point though, is why there is only talk about trying to lower the downward swings. If the market have not gone so high to begin with it would not have gone so deep now. Why ban short-selling? If we instead had ban people from over-investing and buying on the margin we might not have gotten these swings.

    Check out the chart below for how the market did the last time we did when banning short-selling in 2008.

    short-selling ban 2008
  2. rmorse

    rmorse ET Sponsor

    I too don't think they should ban short selling. I think there is nothing wrong with requiring locates on hard to borrow stocks and a plus tick rule to stop market manipulation. However, short sellers get a bad rap.
  3. After todays big decline in Europe people blaim on computer guided trading, and say that must be forbidden.

    As long as these ridiculous claims come to explain the declining market, we have a long way to fall still I believe.
  4. dont be a simpleton

    its very possible for hft to run the market into the ground.

    as long as they can SELL and COVER lower they will keep doing it until they are selling for 2 cents and covering for 1 cent

    the fundies only matter to eggheads.
  5. dv4632


    Agreed. I have a trader friend who has told me that as soon as he heard they were going to ban short selling back in 2008, he was telling everyone he knew that we were going to have a market crash. The thing is short-sellers have to buy to cover, which in turn does support the market. If you ban short selling, all you have is fundamental selling and hardly anyone buying.

    He made the same comments to me recently when the Europeans were first considering the idea, saying he hoped they remember what happened here in 2008 because they'd be risking a similar result if they tried it.