August 20, 2009
So what you’re proposing is... to reduce volatility you can only sell short on the offering and can’t hit a bid to create a short because this would place unusual downward pressure on stocks. Let’s take it one step further and be equitable. Let’s also make it so you can only buy to create a long position on the bid…as we wouldn’t want to create undue pressure upward pressure on a stock and short players. Then your removing volatility on both sides. Nobody seems to have a problem with stock moving up excessively creating a short squeeze and major pain for short players. Is it only a problem if stocks go down excessively hurting the longs positions? May I remind you that there are far fewer short players than long and so they could never alone have the power do the damage in stocks by pushing a stock down that the massive number of long players can do squeezing and pushing a stock up. Why is it ok for stocks to run up being bought long on the offering but not move down being sold on the bid. The real issue should be ensuring that short players get a borrow. If stocks are being shorted heavily the market will find its natural level. Once again remember that there are always far more players playing from the long side as there are short players so there’s a natural long bias in the market already before disabling the short side. And short players get buy ins which force them to cover their shorts often well before they want to which creates another buy force. Nobody tells a long I need to take your shares and you must sell. This rule is one sided and not the problem. Get a borrow and short the stocks all you want at your own risk and be prepared to get run over buy long players and other shorts that are forced to cover and push the stocks up further. Look at the stock AIG over the last few weeks. Since august 5th the stock has rallied from $13.50 to $36. Nobody is complaining about that crazy upward pressure. In fact over this period it was almost impossible to get a borrow on the stock to short it…which would have slowed down the upward pressure…without the short sellers there to aid in the game the pressure has been one way up and the people who were short prior to it being hard to borrow are getting hurt badly. Maybe they should complain that there should only be long purchases on the bid to slow the upward movement. Let the markets longs and shorts battle it out and stocks will go wherever the true value lands it. When they get too cheap buyers step in more aggressively and push back and when they’re too expensive sellers step in more aggressively and push back. That’s how fair markets work for both sides. maybe if there wasn't so much margin being used longs wouldn't be forced into selling which adds to the downward pressure on individual stocks.
Good Luck,
Jonathan Fial