May 4, 2009
Confidence is the Key
I am a retail investor and manage my own portfolio - both an IRA and a trading account. I'm sure there are many, many more people like me that work hard, put away money, spend a ton of time keeping up with the market as well macro economic conditions... yet feel like it doesn't really matter because not everyone has to play by the rules.
Short selling is necessary, and fair short selling should not be inhibited or regulated away. The key word however, is FAIR. What's fair?
Let's start with what was previously established.
1. Can't sell short shares that don't exist (duh)
2. Have to wait for a buyer to pay up before shorting
No naked shorting and a price test (uptick). Those two components have worked together since they have been put in place as far back as the 1930's. And they have protected us precisely from the type of decline in the markets we have seen in from October 2007 - February or 2009. We have clear evidence what happens when these rules are not in place. Not just a "model", but the actual event.
I'm saying there's no discussion to be had here. It's like having a meeting to discuss whether planets are round...
The SEC simply needs to do a better job using the laws and principles that already exist. There should be no short sale ban - temporary or permanent. The old uptick rule works. If modified, the effects should be evaluated - and not using a 2005 (or any other bull market model) - in a down market, and tweaked if necessary without delay.
I don't pretend to have all of the answers, which is why I am not commenting specifically on the proposed rule changes. I don't know what will work best. But the SEC has to act swiftly. And if rule changes don't have the intended effect - admit you were wrong and fix the problem. As a retail investor, I need to have confidence that my government favors wealth creation over wealth destruction. And that it will ensure the deck is staked in the favor of wealth creation.
But under no circumstances should short selling be outlawed or not permitted in certain stocks as a result of mathematically determined situations. The market has to be fair - even for short sellers.