May 4, 2009
Shorting is a legitimate strategy, naked shorting is another matter. Naked shorting must be stopped and should be either be included in the rule modification or enforced with a higher degree of rigor.
Having the ability to "create" stock changes the supply and demand dynamics that makes a market. The ability to cause an imbalance transfers the ability to drive the price to the organizations that create the supply. Concentrating that pricing power, the ability to drive individual companies or entire sectors down, into the hands of a few is unsound. Witness the most recent example of numerous bank stocks driven to single digits.
The imbalance in supply and demand and the unrelenting nature of these sales exacerbated the panic and destroyed enormous wealth in our nation. For how long did we stand agape at the never ending bottoming process? How many of those shorts were naked shorts? It seems highly probable that not every short position was supported by borrowed stock.
I also recommend the up-tick rule be reinstated. The up-tick rule would work as a mini circuit breaker, creating a more orderly market. At the end of the day, we might still have been down 50% but the uptick rule might have prevented a number of equities being down 90%.
Creating a broader circuit breaker seems disruptive. What has made our nation and consequently our markets great has been our ability to take our pain swiftly and recover just as quickly.
All I ask is for the rules to be applied equitably. We must all wonder just how much damage might have been prevented had the up-tick rule and no naked shorts been in place.