October 3, 2008
The ongoing crisis clearly shows that also stock markets need permanent improvements. Short selling by the huge hedge funds is really deteriorating the investors confidence in stock markets and I'm afraid you are losing many long term investors for good if the market regulation is not improved. And this would be very unfortunate for the whole financing system.
So especially the short selling needs to be corrected. Basicly it's quite strange to think that the market allowes somebody who doesn't own stocks to sell them. Short selling only tries to damage the companies. It turns the market to a betting house where gamblers rule the business.
We don't need these hedge funds with short selling business model. (The model is to smell the blood in a business sector, then together make an attack with hundreds of billions of dollars only in order to damage the companies by crushing the stock prices, funding possibilities etc. etc. And after the damage these vultures will come to the ruins to buy the assets with firesale prices. As simple as that.)
I do understand that in some rare cases the short selling may prevent stock markets form bubbles. So far the recent evidence seems to be vice versa (housing bubble, credit bubble, commodity bubble, tech bubble...).
If the short selling is not banned for good then we'd need at least the following improvements:
1. Positions must be public and they must be public instantly when the positions are taken.
2. Uptick rule is needed.
3. Limit the short positions to a certain maximum percentage of free float (10-15%).
4. The hedge funds may not operate together.
5. The hedge funds may not have ownership connections to investment banks or banks.
And about the bubbles. They are somewhat prevented only by tight credit regulation. Perhaps also SEC has a role here too.
Greetings from Finland!
Mr Vesa Karttunen