May 5, 2009
Short selling is not the problem, nor is the reinstatement of the uptick rule the solution. Short selling is basically what you do when you buy a put option-the right to sell a stock at a given price. Short sellers just sell the stock immediately.
So, say I want to sell stock X at today's price, because I think I can buy it back cheaper later. I can either: 1) short sell the stock LEGALLY (which hints at the larger issue) or 2) I can buy a put at the price I want to sell the stock. Buying the option is fine, but short selling the stock isn't? Doesn't make much sense to me.
The big problem is NAKED SHORT SELLING. Naked short sellers arrange to sell a security short without ever having the intention of taking posession of the stock, thereby creating/increasing the float on a stock out of thin air (much the way the FED creates money). This is an illegal activity that can create an avalanche of downward pressure on the stock-just like the increase in the supply of money creates downward pressure on it's value. Print more stock certificates, existing ones become worth less especially when the downward velocity increases-just like with FRNs.
You have the SHO list every day. Why are the laws/regulations not enforced? When market participants can "issue" stock at will you will always be prone to extremes when the market psychology becomes as panicked as it has the last year+ because of the egregious extremes caused by government and the financial industry. Those conditions were not caused by legal short selling.
They were not caused by the removal of the uptick rule.
Now I realize this is not a PhD dissertation on the subject, but perhaps the ideas of Buffet and Munger might be useful here where they rail against the complex mathematics used to analyze and guide decision making. If a theory or analysis is so convoluted that it takes more than 15 minutes to completely grasp it, throw it away.
Markets are simple places. Two parties come together in an attempt to exchange value. The government's job is to keep the playing field level. Make sure what is being exchanged is real, and limit the structural advantages you give to one party over the other as well as the guy who owns the marketplace.