5 Thoughts About This Week's Short-Sale Vote
- Joshua M Brown
- February 22nd, 2010
The Securities and Exchange Commission is expected to vote on rules that would restrict short selling in a company's stock if that stock fell precipitously, a person familiar with the SEC plan said.
Here are some of my initial thoughts...
1. Bringing back the uptick rule is a no-brainer, it was removed at the top of the market and it's absence proved lethal.
2. If we're enacting new short-selling rules with the intention of protecting companies from stock raiders, then let's keep it real - Credit Default Swaps are every bit as dangerous. If you're looking to create the impression of fear and instability, it is a lot easier in most cases to rattle the markets by manipulating CDS spreads, which are more thinly-traded and grab the attention of the bond market.
3. Contrary to some of the language I've heard in connection with this proposal, Lehman and Bear would NOT have been saved by any uptick rule. Rather, Lehman and Bear would've been saved if they weren't run and staffed by complete bourgeois pigs gorging themselves at the mortgage/real estate trough. When you have a few billion in cash and a trillion in derivative and debt exposure, the trading in your stock is the least of your troubles.
4. So they're going to focus on an intra-day percentage drop as being the trigger of a short-selling curb. I don't like it. Blocking shorts from selling more shares of a stock that is already down, say, 10% would only make a decline longer and more drawn out, dragging the misery for shareholders into a second trading day.
5. I highly recommend that whoever is voting on this thing look at the performance of financial stocks during the 2008 short-selling ban that they hastily enacted to prevent a banking system collapse. For the most part, it was irrelevant and may have even contributed to the lack of bids due to there being an entire class of natural stock buyers missing from the picture - the short-sellers themselves!
We'll see what they come out with, clearly something is better than nothing in this situation, but I don't see the need for anything drastic.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.blog comments powered by Disqus
The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.