Short Sellers Under Attack

[jyl]

The SEC and other govt regulators are trying to run the shorts.

Recall a few months ago, the SEC prohibited naked shorting in 19 financial stocks. While the stocks rallied briefly, the shorts got back on and drove a number of them, incl FNM FRE etc, to effectively zero. The prohibition on naked shorting is pretty easy to work with, or work around.

Now the govt is apparently urging large funds to stop loaning stocks to the shorts. CalPERS announced today it will no longer loan MS or GS stock, the NY pension fund said it will not loan any financial stocks. I suspect that other large funds are cutting back on their lending as well, quietly.

The SEC has also proposed requiring daily public disclosure of short holdings. Hedge funds hate having their positions exposed, as it makes them a target for other hedge funds or long funds trying to force covering. Hedge funds will also likely lose their access to managements who know they are being shorted by that fund.

NY has announced an investigation into alleged abusive shorting, and will be subpeonaing records from hedge funds. The targeted funds could have their trading records, emails, IMs, etc all subpeonaed.

The SEC has also proposed an outright ban on shorting, for some undetermined period. This would completely disrupt the investment strategies of many hedge funds, who stay market-neutral with balanced short and long positions.

The UK's equivalent of the SEC has already banned shorting of any financial stocks.

I was told today that prime brokers are telling their hedge fund clients that the cost of borrowing stocks will go up 3-5X. That is a huge increase.

I have to think about the wisdom of these measures. But clearly they are extraordinarily aggressive steps.

The market rally today was almost entirely from short-covering. You saw the most-shorted stocks soar, +10-15% in some cases, while the less-shorted stocks were typically -5% to +5%. A lot of hedge funds lost money today, and most long-only funds underperformed the indicies. It was a crazy day.

[Zeke]

If i had my way, you'd have to actually have the stock certificate in hand before it became negotiable. That'll fix any rapid buying and selling as well as most manipulations.

[Porsche-O-Phile]

Cramer has been complaining about the SEC's elimination of the so-called "uptick rule" for a long time. Although he tends to be a sensationalist and I disagree with about 90% of what he says, I think he's 100% dead correct on this point. Elimination of that rule was very stupid and has allowed large hedge fund managers to manipulate the markets and unfairly beat down stocks in order to make obscene profits. It defeats the entire purpose of having a free market.

Anyway, I disagree with eliminating short positions (after all, I like being able to make money when things go down just as much as when they go up) but such blatant manipulation of the markets should be reined in for sure. Also, borrowing to cover short positions (leverage) should be limited. Just my $0.02, whatever that's worth these days.

[grudk]

Blaming the shorts is a distraction. They are not the problem

[Britwrench]

While it is a distraction, and I probably don't understand enough about, which I should.
Can anyone explain why dealing in something you don't actually own or have access to,
is considered a good idea? In the long term it doesn't appear that way.

[Jim2]

Originally Posted by milt

If i had my way, you'd have to actually have the stock certificate in hand before it became negotiable. That'll fix any rapid buying and selling as well as most manipulations.

+1

I felt this way watching the tech bubble. Now lets go back to the days when average joe used the newspaper for quotes.

Nowadays it's like machine gun fire, from the hip no less!

[jyl]

Short-selling restrictions were imposed before market open today, see news for details.

Drove some crazy market action. We'll see if short covering continues next week.

[jyl]

And the SEC will require hedge funds and others to disclose their short positions and their CDS positions, for financial stocks - under oath. This is presumably a precursor to imposing a recurring disclosure requirement.

Hedge funds actively involved in financial stocks have got to be worried. The govt is looking for someone to hang.

I do suspect there is some coordinated shorting and CDS manipulation going on. Maybe not a lot, but some. Even if a fund is not doing anything wrong, why would it want the risk and exposure?

[nota]

AS I UNDERSTAND SHORT SELLIN
a person goes to a CORP owning a stock
says let me hold the stock to sell it and hope to drive down the price
so they can later rebuy the stock cheaper and return it to the CORP

WHAT I COMPLETELY FAIL TO GRASP
is why on earth a CORP would want to do this
as I understand the CORP is paid a very small fee for this
as best case [for the CORP] the short seller loses his bet
and the stock in question goes up or stays about the same
and there is some question on how fast the CORP gets its stock back
worst case the CORP's stock holding has lost value

[legion]

Blaming short sellers is a lot like blaming fleeing rats for sinking a ship.

HOWEVER...

If enough rats all jump from one side at once, they can sink a ship. And I think that may actually be the case for 1 or 2 of the recent examples.

[rammstein]

This whole thing, I don't know how to feel about it. I mean, I understand the fed wanting to prevent an economic collapse, but on the other, I feel like perhaps people need a collapse to rearrange their spending ideas. I am truly undecided on this decision.

[tabs]

Simply put when one drives a car one recognizes that there is a need for stop signs and stop lights. It is not only for one own safety but that of others. There have to be rules of the road to promote and maintain a safe and orderly flow of traffic.

[tabs]

If the Shorts were not in there AIG would never have collapsed in 3 days. They would have had the time to arrange private financing. It was the inpending fall of AIG and the implications of diaster befalling the world financial markets that finally got the govt and Fed to realize that they needed to take action. Up to that moment they thought the system could right itself.

[speeder]

Originally Posted by tabs

If the Shorts were not in there AIG would never have collapsed in 3 days. They would have had the time to arrange private financing. It was the inpending fall of AIG and the implications of diaster befalling the world financial markets that finally got the govt and Fed to realize that they needed to take action. Up to that moment they thought the system could right itself.

Up until that point, it did right itself. I believe in capitalism, but I've always compared it to a football game. In any kind of competition, you need rules unless you want some barbarian to rip your head off your shoulders and spike it in the endzone. "Survival of the fittest" takes on a special dimension when some are fitter due to unfair advantages, such as the power of these funds to manipulate markets and individual stocks which the regular joe investor does not have. It's the raping of America, and the world, for the benefit of very few.