the naked short selling ban
Posted by Moonage on 28 Jul 2008 | Tagged as: Ethics, Fed Policy
Here’s the story:
The ban didn’t cause the rise. By the time they enacted the ban, the shorts were gone. The damage had been done and they made their money and left. The only thing the ban did was keep them from coming back once the appreciation had occurred.
I hate short selling. The only thing I hate more is naked short selling. First of all, let’s make sure we’re on the same page. Short selling is selling something you don’t have at a high price, then buying it back at a lower price. Sound convoluted? Try this then, naked short selling is selling something you don’t have with no money and buying it back at a lower price so that you get more cash than you didn’t spend in the first place. Now, did that make sense? That folks is a huge element of stock trading these days. And, in my opinion, it should never have been legal in the first place.
Here’s why. The intent of any stock is to reflect the value of the company it represents. Pure and simple. When a person makes a decision to buy stock in a company, they are betting the value of that company will change. Most people speculate the value of the company will grow, shorts speculate the company’s value will fall in value. Simple enough. However, shorts are never bashful to push that process along. It’s illegal, but I don’t think it’s regulated at all. Nada. When Lehmen Brothers ran into some difficulty, it’s volume tripled in one day. Now, granted the news was bad, I can’t see 150 million shares worth being bought. They weren’t. As the shorts reached their profit margin, they began “selling” what they didn’t own and quite a few didn’t spend any money on not owning them. Those speculating on the future were ready to gobble up those shares at heavily discounted prices. Sounds great for both sides. However, the big picturs is Lehmen Brothers is now in a huge liquidity jam because of the huge discount of their value. This jam is reflected in difficulties their customers will face getting new loans and the like. Those toying with the stock are causing real world problems for people who have no control over the value of the stock.
How’s about we just level the playing field and eliminate short selling once and for all? My bet is if we did, these repetitive shock-value stories will greatly diminish. Their will be no reason, other than direct competition, to trash a company publicly. And, people like me won’t be so distrustful of being in the market. Once the game is perceived as fair, and stocks once again truly reflect the value of the company, then I think more people will put their money in the markets for the long term.
That in itself would solve this credit crunch.
2 Comments »
on 29 Jul 2008 at 9:25 am 1.Jeff said …
My head almost exploded reading that explanation of naked short selling. Id never heard of it before. Of course part of me was hoping it was a naked woman selling shorts. LOL Its amazing the ways people find to make money with others peoples money.
on 29 Jul 2008 at 9:45 pm 2.Moonage
said …
I used to daytrade some. Short selling was the dirty secret no broker tells you about when you naively jump in. All the positives in the financial world don’t mean squat when it’s a lightly traded stock and people shorting control more shares than traditional investors. A lot of shorts pick a lightly traded stock and then pump it up some via spam emails, those “to the moon” stocks you’ve never heard of, and then when it reaches a certain level, start selling the shares they never owned and start buying shorts they never will pay for only to drive the price back down so they can unleash those shorts. The sucker who bought the shares only to see them go up 10% will watch them dive 20% in one day.
By FTC definitions, that’s illegal. However, they rarely do anything about it. In my opinion, the practice of naked shorts should be banned permanently. It has no logical place in legitimate business practice.