Today, Citigroup begged the U.S. government to reinstate the ban on short selling in the financial sector. CNBC ran an interview piece on shorts yesterday, with experts generally agreeing that drops of over 15-20% per day in a stock was not because of value, but could only be because of shorting.
A day earlier, a US investment expert (in London at the moment) exhorted the US audience at MSNBC to reinstate the “uptick rule”, one of the many regulations cleared away in the last few years, which prevented shorts from just piling on without an interim uptick. Citibank asked for the same assist today.
Finally, John Bogle (Vanguard co-founder) has now come out strongly against what I’ve been calling Vampire Investors; he figures they take about $600B a year out of the US financial system, without adding value. He actually says they subtract value.
One of these classes of Vampires are a certain category of shorts.
One view of shorts is that they are the other half of a natural balance: long vs. short. Simple, eh?
Another is that they form a necessary part of any arbitrage play, and so provide natural risk aversion and stabilization to — to what? To individuals, hedge funds, or the market?
I would suggest that the natural balance of things is represented not by long vs. short, but by buy vs. sell.
Shorts operate in various ways, but the most insidious, I think, is the Jackal Trade, where you see a whole bunch of jackals pick a target (in the last few weeks, we’ve seen a long list of examples in the financial sector), and then attack it in concert, driving the price down even as they make money on the decline.
Does this add value? No. Does this stabilize the market? Just the opposite: it is perhaps the primary danger equities markets face today. Can we count on the self-interest of shorts to stop doing it when it endangers otherwise-healthy companies, or even whole market segments? Obviously not; they won’t stop as long as there is money to be made – and why should they?
Australia outlawed shorts in September.
I think it is time for serious consideration to be given not just to stopping shorts in the financial sector, but in the markets. Perhaps there is some alternative way to provide some hedging range of offlaying risk, without allowing shorts to drive global banking stocks down 40% in a day. If so, fine.
But the SEC and friends have to bring this carnage to a stop. It has nothing to do with capitalism, everything to do with market manipulation, and it is wreaking incredible damage at a time when we need serious repairs.