March 23, 2009
The key to the latter- is that once a pin attack is launched, as I said, long-position sellers panic PLUS those who are looking to buy long will lower their bids to ultimately buy long as low as possible. These two resultant "panic plus bottom-fishing" motives by longs snowballs the bid- pin/downward short manipulation process. In effect: the shorts manipulating the bid downward rely on their technique to cause the snowball- thereby the shorts don't have to do much work (or spend much money during the pin) to cause the stock to sink a lot lower than it normally would have.
And, then, of course, once shorts have made enough money, they begin to cover buy and take their profits.
So, what can be done to solve this problem- which, I believe is rampant in the market
1. Don't ban short-selling- as you need short-selling to create a liquid trading market.
2. Don't just re-instate the "up-tick" rule.
Instead: do not allow shorting on the bid. Period.
I'll say it again- do not allow shorting on the bid. Longs could sell on the bid. Shorts could cover buy on the bid. But shorts couldn't short on the bid.
It's simple. And it will resolve a ton of issues that relate to downward manipulation of the market.
Logically- if short-sellers were wanting to operate ethically, they would not have a problem with this. Why? Because if a short-seller truly (and ethically) wants to maximize profit on a trade- he would want to place his short at as high a price as possible and then cover-buy as low as possible. Why pin the bid, when you can short at the ask- or higher.
Indeed, if shorts were operating ethically, they'd want the longs to come up to them, and then rely on legitimate market forces at work- such as negative news- to fuel any sell-off.
But, since shorts rely heavily on tag-teaming a stock lower- which they could not do if they were not allowed to attack the bid, I am certain shorts would object to my simple proposal.
I would highly recommend that the SEC, Congress, and companies lobbying Congress against short-selling- such as Citigroup, strongly consider implementing this change. It will not result in stock prices being "higher then they should be"- but, rather, it would allow for stocks to not be crushed without reason.
As for naked shorting- interestingly enough- such naked "phantom" shares might then, very well, be exposed by surveillance bots as the only short-sells that show up on the bid- as legitimate ones would be prevented from doing so at their source.
Thus, such naked bids could be isolated and dealt with immediately by enforcement.
You see- most members of the SEC, Congress and company executives don't trade- so they don't sit there looking at Level 2 on any given day watching this manipulation in real-time. It's so easy to spot- in fact.
Perhaps someone should be invited to Congress- and set up a giant real-time trading screen for House members during market hours- so they can be shown what goes on in the very stock market they say they want to fix and support. Then, bailout dollars-to-donuts- they'll have it fixed before you can say- "Don't pin that bid, short fella." "