Five Questions About the Short-Selling Ban

The government's only answer: Shut up, we're in charge!

Brian Doherty | September 26, 2008

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Saut, on the other hand, noted that he’d seen those academic studies on the uptick rule, but is still sure that it does matter and that highly capitalized hedge funds, once they get rolling with shorts, can and do wreck companies. Such drama about the short-seller’s occasional role as wrecker is well exemplified by this 2005 Time article. However, truer to the typical reality of the short-seller is this more sober account from 1996 in Business Week describing the slow, steady, important, and risky work in spreading economic information that the short-seller generally provides

5) What’s the problem long-term? Even with a ban on short-selling there are still other means to act on the belief that a security’s price is going down, including the option of a put option to sell a given thing at a given price for a certain time. (If the thing gets cheaper than your put option price, you buy it at that cheaper price, sell it at the higher put price, and profit from the downturn.) Heaton points out that in a world where those at the other side of the put—who are obligated to buy at the set price, who lose if prices go down and can’t hedge their own risks by short-selling—put options are apt to be harder to find.

Most people who short are not doing so out of any attempt to drive a price down; many of them, including huge hedge funds, are often doing so merely to hedge risk when they are otherwise imbedded in transactions that depend on asset prices going up. So, if the SEC tries to make the ban more permanent, they are limiting the ways actors in the economy can cover their risk and spread information—both bad things.

But whether or not the short sell ban continues or even becomes permanent in some form, damage has already been done. The real problem is the sort it might take a Debord or Vaneigem to fully parse: it’s that SEC chief Chris Cox and those who think like him have taken upon themselves, publicly and with violent quickness, to show that they are in charge of social and economic reality, able to reshape it to their desires with their will and imagination; that common and sensible practices whose overall effect is to reveal economic reality more quickly and smoothly are to be halted at their command.

The reification of this view of governance—common, of course, to nearly everyone who reigns in or hopes to reign in that unfortunate city, D.C.—in even the most minor contexts is alarming. It’s also, alas, in the short term seemingly not stoppable. Selling short naked government power in the current crisis is a good way to lose your shirt.

Senior Editor Brian Doherty is author of This is Burning Man and Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement.

Comments

|9.26.08 @ 3:59PM|#

Well, shorts are just so pessimistic it's unamerican. I mean, who would be happy (or OMG profit) from the misfortune of others. I laughed like hell when the Giants beat the Patriots.

Now if we'd all just hold hands and sing happy songs, I just know we can get this country moving in the right direction.

Djyrn|9.26.08 @ 4:04PM|#

Not to worry Citi has a derivative to work around the ban.

I'm not in favor of free markets, because of a deeply held belief in their goodness. They aren't they're amoral. I'm in favor of free markets because markets are inexorable.

|9.26.08 @ 4:10PM|#

I have no problem with the selling of short people. They're constantly getting into fights when drunk.

The Idiot Bastard Son|9.26.08 @ 4:24PM|#

Ban selling! It's selling that makes the market go down. From now on, buying only...

|9.26.08 @ 4:45PM|#

I have no problem with the selling of short people. They're constantly getting into fights when drunk.

I've got a Paul Williams and a Mugsy Bogues (he's on the right) if anyone is interested.

|9.26.08 @ 5:01PM|#

I'm not in favor of free markets, because of a deeply held belief in their goodness. They aren't they're amoral.

Perhaps, but a non-free market might well be immoral.

|9.26.08 @ 6:22PM|#

This action shows very clearly that the purpose of the SEC is, and has always been, to protect publicly-traded companies from their shareholders.

-jcr

|9.27.08 @ 12:46AM|#

Short selling gets a bad name.

Shorts are the closest thing out there to an inherently bubble-bursting market force.

Their job is to not buy the hype.

JMR|9.27.08 @ 5:44AM|#

Some shorts (coughSilvercough) seem to be "backed" by the taxpayers. The CFTC is investigating. I got suspicious when precious metals prices fell through the week the Russians/USSR invaded Georgia. It's not "a conspiracy theory" to say that governments intervene in markets, and precious metals markets HAVE AN EFFECT ON INFLATION CALCULATIONS which might just motivate said governments to do what they can to delay responsibility for too damn much government spending, say on something like a war that was supposed to "pay for itself."

Naga Sadow|9.27.08 @ 12:57PM|#

Damn you, Epi! Now I've got that damn "Safety Dance" song in my head!

|10.2.08 @ 8:07AM|#

Short selling should only be allowed when the market is going up and be suspended when the market is going down. Lets begin by defining a market upward trend is two weeks with an overall increase of 1%. On the other side of the cracker, a downward trend could be defined two ways: a) terroristic attack, b) President health is critical, and c) a downward trend of 2% in any two week period.

We can set the trading computers to handle the work automatically.

Don the libertarian Democrat|10.8.08 @ 2:54PM|#

From today's NY Times:

http://www.nytimes.com/2008/10/08/business/08short.html

"There's liquidity out of the marketplace," said H. Seth Berlin, the principal at Performance Thinking & Technologies, a hedge fund consulting firm. "Did the ban really do what it was supposed to do? Probably not."

Some investors said that bringing short-selling back to the market could actually bolster stocks. Andrew Fishman, president of Schonfeld Group, an asset manager in New York, said that some of his clients wanted to exit short positions in recent weeks, which would have meant purchasing shares, but they did not do so because they feared they would not be able to borrow the stock again to short it later on.

Mr. Fishman said short-selling has been wrongly blamed. The real problem, he said, is the weakness of financial institutions.

"You can never change the path of a stock," Mr. Fishman said. "If it's going to go down, it's going to go down."