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one perspective on shorting and the uptick rule debate

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September 30, 2009 – Comments (31)

I am making a blog out of my thoughts on short selling and the arguments that proponents of short-selling (almost inevitably people who trade or like to short) make against the uptick rule and in favor of shorting.  This blog is not meant to debate that shorting should be allowed (although, frnakly, if you want to you can go short via the options market by buying a put and selling a call at the same strike price, this is called a "synthetic short" and has the same effect in most cases).  

I should also disclose that I have made a nice profit in real life... by borrowing shares of levered ETFs (bear ones, maybe some profit on the bull ETF shorts I have out right now) and shorting them.  The old "red thumb" to levered ETFs here on CAPs works in the real world too.  

Proponents of short-selling like to mention that "bull-raids" or "pump-and-dumps" are more common and more commonly successful than "bear raids" or "short attacks".  And I don't dispute that or doubt that it is true.  

I am not, in making this note, saying that pump and dump isn't a problem (it is, remember the ARNA situation a while back when that hyped up email went out everywhere, i got like 10 copies, the price rallied only to crash again).  And pump and dump is probably a significant part of how "pros" transfer money to them from "individuals".  I do not deny manipulation on the long side and I don't dispute everydayinvestor's insinuation that this is more common than short side manipulation.

 

But it is worth mentioning several points:

A)  pump and dump cannot cause permanent harm to a company or its shareholders.  in the fullness of time the shares will be worth what they will be worth and will gravitate towards something resembling fair value.  if they baloon over that for a time, ... no actual permanent harm is done to the whole, although significant harm may befall the few who buy the irrational top. 

 

B) short selling can cause permanent harm to shareholders and a company.  Take a case like what may hav ehappened to MGM earlier this year.  The shares hit $14, the announced a secondary, the shareddropped dramatically in hours, and the secondary wound up being priced at $7.  The net result of this is that MGM shareholders were diluted mor ethan would have been necessary, a permanent harm.  Also the company loses some incremental ability to raise equity in the future via this dilution, a permanent harm.  Was that the result of a bear raid, a short attack? I haven't any clue, but if a company announced a secondary and I was short I'd be real interested in knocking the offering price down for the reasons above.  

Similarly, companies like REITs and BDCs which rely on share issuance for basic operations and growth.  The model is to issue shares, invest the proceeds from the share offerings, then turn around and distribute the profits from those investments to shareholders.  An assault on a BDC - which have hardly been infrequent from what I gather over the years - risks permanent damage to the business model and with it permanent damage to the small businesses that it services.

Pump and dump does not create a potential for permanent harm to a whole of an organization, its risk is limited to permanent harm to the "suckers" that bought into the pump.

That is a fundamental and sweeping difference that should not be ignored.

 

C) rising stock markets create wealth and in more ways than just the on paper marmket cap of the NYSE.  They instill confidence, they empower companies to invest (as with share prices at reasonable levels they have reasonable means of raising capital should need be), they empower consumers and others to spend and invest, they create the opposite, to an extent, of a Keynesian downward spiarl.  A crashing market, on the ohter hand, creates a distinct loss of confidence at both business and consumer levels, reduction of investment and reduction of everything good.

It is fundamentally better for a society to have its markets higher.  And stable.  Bubbles are wildly bad (more on that later).   (more on bubbles and stability later).  For nonw I will leave this point to stand uncontested in my commentary:  an S&P at 1060 is better for the economy, country, and world than an S&P at 800.  

 

D)  naked short selling is absolutely preposterous.  you have, literally, in naked shorting a stock diluted it and reduced its value by increasing the float.  You've created shares that don't actually exist (same effect as dilution, net effect is to at least unti you cover, provided naked shorts do always cover, you have actually lowered the value of each share).  Any argument to this is folly, in my view.  Naked shorting is severely not good.

 

These are my core points:  a pump and dump cannot harm a company or permanently harm shareholders en summe, shorting can (as explained above).  

I will nown take a look at a couple potential arguments in favor of shorting, arguments that presume that shorting offers advantages to the market.  

 

1)  shorting could work to prevent bubbles.  Savvy short sellers could see prices rising unreasonably high, and short them, and in doing so work to prevent a bubble.  This would prevent the greusome aftermath that bubbles can leave.

And indeed the aftermath of a bubble can be greusome.  The loss of wealth in the nasdaq bubble crash probably plays a role in where we are at today, that was probably the first catalyst.  The loss of wealth and systemic problems caused by the housing bubble are well known.  

But lets face it, short selling didn't prevent the Nasdaq bubble from occuring.  And short selling didn't prevent the bubbles around 2007 in Casino, REIT, BDC and private equity stocks and more, did it?  Did it prevent teh great commodity bubble of 2008?  nope.  Could the ability to short-sell housing prices have prevented the housing bubble?  Why on earth would we believe that when it doesn't appear to have prevented any other bubbles throughout history?

Indeed, basic psychology and market dynamics and the tendency of traders to follow momentum create a situation that in rising markets (that may create bubbles) people are very shy about shorting.  They are aggressive about shorting as the market crashes.  This tendency to short a tumbling market excacerbates volatility, it doesn't mitigate it.  Record short levels at the march bottoms, they have been falling ever since.  

 

2.  Short sellers provide needed liquidity.  What % of liquitity is provided by short sellers?  is it even remotely significant?  If so, fine, but I doubt that it is except during epic crashes.  

 

3.  it helps price discovery.  BS, see my comments on it preventing bubbles above, it exacerbates errors in pricing on the downside and does little to prevent excessive pricing on the upside.


Now, moving on to my last point and one I'll label with a roman numberal, I, ...

 

I)  volatility in markets works against the greater good.  The good part of the capital markets and commodity markets and so forth is that they provide capital for investment, which in turn provides employment, and also provide a way for people to invest in economic growth (and they are very efficient at doing this over long periods of time).  

But in times of irrational upward volatility (the pump and dump) money is transferred from many to few (the many who jump on the train to the few standing there to short it when the party ends or sell before the top).  

In times of irrational downward movement, the same thing happens (in theory, feel free to debate these two points).  Panicked investors sell out and lose permanent money by missing the wave up.

These points are perhaps only modestly made above.  It has been discussed here and eslewhere that a fundamental flaw of the markets is that the facilitate the transfer of wealth from the many (where it tends to be productive) to the few (where it tends to be hoarded), this is fundamentally harmful to the greater good of a society because great welath is attained WITHOUT ANY PRODUCTION, and money is moved from productive persons to non productive persons.  

Some of this will always occur, it cannot be avoided.  But epic sweeping scary volatility (bubbles and crashes and bubbles, oh my!) enhance the magnitude of this transfer and that is a very bad thing.

Frankly, I think restrictions on short selling would help reduce volatility and, frankly, I think that the elmination of the ability to use big margined positions would also help (and help mitigate "bull raids" or "pump and dump" scenarios, perhaps).  A minimum holding period could be considered.

Volatility works to reduce the value of the capital markets and transfer wealth from productive areas of society to non productive areas of society.  

Uptick rules and margin limitations and many other things may well work to reduce volatility and improve society.  Funds should be limited in size, any measure that could be taken to reduce volatility (both bull bubbles and bear bubbles) to a normal healthy level from the manic insanity of the last 10 years IS A VERY GOOD THING FOR THE GREATER GOOD.  

 

 

In sum, short selling does carry actual fundamental risk and can cause permanent harm to companies and individuals in addition to a sort of transfer-of-wealth-effect from peopel nerviously selling out as prices drop.  Pump and dumpcan only cause the transfer-of-wealth damage and is not as great a potential evil as short manipulation.  A bull raid cannot cause as much harm as a bear raid.

here endeth the commentary.

reinstate the uptick rule.  People who are in the "transfer" business -vs- the "investing" business like it, people who want to see a market crash like it, so its gotta be undesirable.  and while you're at it consider some of the other limitations and restrictions I suggest above.  While (everydayinvestor in ibvalueinvestings blog today) people have argued that the uptick rule isn't effective, that is not a viable argument against it.  

31 Comments – Post Your Own

#1) On September 30, 2009 at 12:45 AM, portefeuille (99.66) wrote:

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#2) On September 30, 2009 at 12:50 AM, checklist34 (99.73) wrote:

porte, ackmans arguments just don't hold water to me, although I do love to listen to him talk.  frankly he is one of the most impressive speakers I have seen on youtube. 

Einhorn didn't write a book and numerous slanderous articles (i think) and give that big speech you like to link for the greater good, or for any form or sense of altruism or for any form or sense of anything other than...

...wait for it...

...to help his trade profit.  

Ackmans argument that its more common and never criticized for people to say why they like a stock is also a bit shaky.  People ROUTINELY give reasons why they like or don't like a stock.  Just watch fast money or mad money any given night on CNBC.

These short sellers make a crusade out of it, work endlessly to publicize their position and slander their target.

 

He is right, as is EverdayInvestor, that the "pump and dump" also causes harm and is frequently (maybe more frequently) manipulative, but per my comments above itis ultimatley less harmful.  It causes transfer of wealth, potentially to unrpdoctive people, but it does not cause permanent harm to any potentially productive company.

 

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#3) On September 30, 2009 at 12:52 AM, checklist34 (99.73) wrote:

i should say...

i don't know what einhorns mind thinks at any given time.  I'm just observing my opinion which I think to be extremely probably close to reasonable.

additionally, Einhorn was WRONG about ALD.  It took an epic once in a lifetime credit crunch and future significant mistakes by ALD to bring ALD down and cause Einhorn to profit.  He was wrong.

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#4) On September 30, 2009 at 12:58 AM, starbucks4ever (97.86) wrote:

I give you a rec, but I disagree with your post because I am one of those people who want to see another market crash. In addition, I also happen to believe that S&P 150 would be a much better thing for the society as a whole than S&P 1050. Besides, no amount of shorting can crash the market as dramatically as we saw last year. It was not shorts, it was banks dying and dumping all their assets at the same time. BTW, for the sophisticated players shorting is a part of the overall strategy, they must open some short position whenever they open a long position.

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#5) On September 30, 2009 at 1:06 AM, checklist34 (99.73) wrote:

besides personal gain from shorting it on the way down or buying in cheap to ride it back up...  what would your motive be for wanting a crash?

and why would society benefit from S&P 150?  I can't see it.

Shorting as a hedge is invaluable to many, yes, and I did not, zloj, mean to argue against shorting as a tool, just against its role in creating or exacerbating crashes and argue for restrictions on it (and on tools that could create long bubbles if you note).

thanks for the input, i'm awesomely curious how society could benefit from S&P 150

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#6) On September 30, 2009 at 1:24 AM, Tastylunch (29.50) wrote:

 I firmly firmly disagree Checklist. Look at Shanghai's market ($SSEC)if you want to see what a crash looks like without shorts. Maybe you like that rollercoaster (up 200%, down 80% , up 100%) but I sure don't.

the Uptick rule is completely obsolete in my opinion. I sincerely doubt Flash traders or IB's will even flinch. It will be annoying for retail traders like me but whatever I've traded with it in the past.I'll deal.

re: point A

Really? I don't think that's true

many pumps and dumps I've seen never ever recover. It destroys confidence in the stock and harms their ability to raise capital. In fact I've yet to see any recover to their old highs of the couple hundred I've followed in the last ten years,

and in most cases the dump phase starts a panic selling of legitimate investors that never come back.

I'd say that harms the company long term.

re: point B

Short sellers had little to do with MGM or Las Vegas Sands problems.

and with Citigroup shorts were NEVER more than 2% of float.

 

That was regular old sellers worried about their ability to handle their debt. Everyone at the time thought debt loaded companies were toast. It was across the board in all sectors. Obviously that was wrong as evidenced by the huge rally but it wasn't short driven. LIBOR was nuts back then.  

the short float never got that high on MGM to my recollection. More shorts could have potentially slowed the fall by creating buyers (when they cover) as the stock price fell. and you know what the shorts that were there scrambling to cover their shorts provided valuable fuel for it on the way back up.

re: point C

shorts keep markets stable by adding liquidity and information. Let's face it a lot of longs are not as thorough as shorts are in their research. Why? cause shorts have to be. Their risk is far greater than their reward. being wrong when you are short is extremely costly.

Also When we've had short bans we've had greater volatility.

It's precisely when you crash that you need shorts to create liquidity to slow it down.

Can we not agree that the crash in 2008 was far scarier than the 2000 crash?

we had a short ban in fall 2008. It only made it worse. We did not have one in 2000 or 1987.

 They will not stop bubbles but they will slow the descent as they did in 2000 unlike 2008. removing shorts creates bigger busts.

if I buy your argument that shorts are small % of liquidity than you are saying they couldn't hurt stock prices much anyway.

re: point D

naked shorting has always been illegal and doesn't happen nearly as often as people claim. Most of the biggest whiners I've heard about naked shorting (such as OSTK) aren't even on the reg SHO list.

very few say naked shorting is a good thing.

 

I dunno Checklist you say shorting hurts but you never prove how it does if you ask me.

We all know low stock prices hurt companies but you never proved that shorts are to blame for that.

Did shorts write those cruddy subprime loans for Wamu? did Shorts use bogus accounting at OSTK? Did Shorts run that horrible CDS division at AIG? Did SHorts make Dick Fuld hold onto Lehman for far longer than he should have? Did shorts overbuild homes?

no they didn't.
If you ask me the companies

The real enemy here is Credit default Swaps and their ilk. That's what's new and different. A Short can buy CDS with little to no risk and make tons and tons of money like a long if right.

Like what Goldman is rumored to have done to Bear stearns. They shorted Bear, bought CDS on them and then pulled accounts from them to make sure a panic started. Now that's a bear raid in 21st century.

It also wouldn't hurt to reduce the maximum allowed leverage on the commodities market as well. if you ask me.

 I do not want a crash (although we do need some creative destruction lest we want only zombie banks like Japan). I want a functioning market which requires transparency. You have less transparency without shorts.

It's just like an ecosystem , herbivore population levels are not stable without predators

 

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#7) On September 30, 2009 at 1:26 AM, Tastylunch (29.50) wrote:

ah didn't mean to sound so fired up. Been a long day :)

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#8) On September 30, 2009 at 1:43 AM, checklist34 (99.73) wrote:

its all good tasty, i posted for debate not a sermon.

markets can crash without shorting sure, and without leverage, and all of this, but whatever can stabilize them and reduce "manipulation" or manic speculative swings is worth talking about.

my point A:  i defend my statement by saying that in the fullness of time stocks tend to gravitate towrads fair value.  short manipulation can materiallyharm companies by forcing dilution at lower prices than otherwise would occur or by forcing their business model out of function as noted.  A loss of confidence may occur, but if the company makes money, functions, gets an FDA approval i'd love you to show one case where it simply never recovered to anywhere near fair value.  

my point B:  from 2007 to now wasn't what I was talking about, and the example I offered for MGM was a hypothetical.  If a rapid short attack on MGM caused the precipitous (nearly 50% in a few days) drop in share price prior to their secondary in may, then the company and its shareholders would have been permanently harmed by this.

my point C:  "shorting helps slow a crash" by offering liquidity is more than a bit of a stretch tasty.  more than a bit.  shorting = selling.  so you are providing more down liquidity.  selling cannot raise prices or mitigate crashes.  selling into illiquidity can for sure cause horrible things, but MORE selling intoilliquidity won't help.  its liquidity on the buy side that could mitigate a crash, tasty, think about it.  :)

and the argument that shorts could support the market by covering, well they have to sell first, right?  so that creates a zero sum for supply/demand.  PRE-EXISTING SHORTS PRIOR TO THE CRASH may cover and provide support or some kind of positive liquidity, but thats a bit of a different example, Tasty.

That assumes the shorts were rational and shorted when it was way to high and then cover as it falls to or slightly below fair value.  No historical evidence that this is how it works.

 

Tasty, I was not against shorting, I was for regulation of it.  You offer no reason why bringing back the uptick rule could hurt anything, you just rant against it.  If its out of date, who cares if it comes back unless someone can produce reason to believe it would facilitate short attacks or other problems.

I offer a clear case (several) of how excessive short attacks or bear raids could harm a company.

 

The end of your post isn't really on the subject as far as I can divine. 

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#9) On September 30, 2009 at 1:49 AM, checklist34 (99.73) wrote:

it doesn't matter waht caused the recession and I'm not arguing that markets can ever be truly stable.

I'm just saying that the wild, overdone volatility in markets over the last 12 years is plain harmful to the greater good.  

nas from 1000 to 5000 to 1100 to 2800 to 1100.  fundamentals didn't change that much and excessive long leverage, short leverage, short attacks and pump and dumps all probably played a role.

I can see no harm in bringing back the uptick rule and nobody arguing against it except people that stand to profit from shorting or volatility.  

I am in favor of short selling existing, I have never said that I wasn't.  But it can do more harm than long maniuplation when used as a manipulative tool, as noted above, andI can't recall seeing a solid argument against the uptick rule.  "its out of date" doesn't mean that it does harm, and if it can do no harm and may in the view of some do good, then why not bring it back?

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#10) On September 30, 2009 at 1:52 AM, checklist34 (99.73) wrote:

and i didn't say short selling caused the entire crash, I am saying that it sure as heck helped.  To argue that MGM or LVS didn't have huge short interest at the bottom is maybe a bit silly.

RCL, OSK, ASH, the casinos, every financial on earth, basically everything I was long at the bottom had massive short interest as far as I can recall.  Where can one find that historical info I wonder?

I used to sit and stare in awe of the short interest in some of my names at times.  One was like 16 trading days volume to cover, one was 5 days, etc etc etc.

now short interest is largely gone.  

any positive ability of short sellers to provide upward liquidity in a market crash or prevention of a buble would rely on them BEING RATIONAL AND SHORTING MARKETS WHEN THEYA RE UP AND COVERING THEM AS THEY CRASH THIS CLEARLY DIDN'T HAPPEN THIS TIME AND FRANKLY I DON'T THINK ITS EVER HAPPENED.  

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#11) On September 30, 2009 at 1:54 AM, starbucks4ever (97.86) wrote:

"i'm awesomely curious how society could benefit from S&P 150"

We would then have a viable savings instrument that would be reliable (nowhere farther to drop) as well as profitable (dividends of 10% and more). Capital gains wouldn't be needed then, and when you buy a stock you would have a clear idea that you're buying a cash flow, rather than some "greater fool" calculation. What we have now is not a functioning market, but a bunch of speculators guessing about the direction of interest rates, because it's only in this rate environment that S&P's dividend yield of 2% can be justified.

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#12) On September 30, 2009 at 2:10 AM, Tastylunch (29.50) wrote:

ah well in point a: by the very nature pump and dumps are usually small poor quality companies. It's pretty hard to pump and dump a GE or a PG

so no argument there. But being fairly valued would constitute as harm for many scam companies :)

point b: my mistake I thought you were saying that was the cause of MGM's fall. 

But that's just the thing though. No one has been able to show an example of where shorts were actually the root cause of the stock's fall. getting punished for something the company actually did or didn't do doesn't seem unfair.

and you know what an a huge equity offering by MGM should cause the price to go down (maybe not 50%) because their shares are diluted and there is more supply. Nothing malicious there. Just when they did probably spooked people.

until we see proof it's just hypothetical. Unlike short bans which there has been academic research to back up that they are in fact harmful.

point c: only if there is net increase in shorts than you would be right. When a stock crashes it's short float almost always decreases as shorts cover. . That's net buying.

There may be points on the way down where as you describe you net selling if lots of new retail daytrader shorts pile in (and they usually are a much smaller % of shorts than the big funds) but that almost always changes by the end of the fall. as each successive bounce clears out shorts until the price stabilizes.

I can't short as much as Einhorn or  Ackman or whomever does. Those guys are usually too big and slow to short into a crash and they outnumber the guys who can.

perhaps some of HFT houses now can. Truthfully i don't know if Getco does or not. If true that would be a big problem.

But that didn't happen anyway in the fall of 2008 since you weren't allowed to short. And what happened once the shorts were let back in? well the market still went down for a couple more months but it slowed down a lot until it finally bottomed.

 I'm aware I don't provide empirical evidence to back up a lot of this

But I have to be honest checklist you don't provide proof either that the shorts actually did any of the hypothetical you described and you didn't provide proof that the uptick rule would have stopped any of it either.

Really I think Shorts are a scapegoat for all the IB's have been doing behind the scenes. Dark Pools, CDS, CDOs, SIVs, breaking old leverage rules are all new in the last ten years . They all obscure transparency and allowed banks to get heavily overvalued relative to their risk.

They are the true cause of instability not shorts who are just perennially unpopular for the same reason people don't like Police and negative people.

Shorts are just a politically acceptable target that big money bank lobbyists have no interest in protecting unlike say dark pools.

That's why it's on subject. The Uptick rule is feint  not an actual solution since it ignores the real problems in default swaps market etc.

I really AIG would likely still be private today if the CDS market was regulated at all.

 

 

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#13) On September 30, 2009 at 2:14 AM, awallejr (75.87) wrote:

"LIBOR was nuts back then."

Yay, someone else looks at LIBOR besides me ;p 

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#14) On September 30, 2009 at 2:20 AM, checklist34 (99.73) wrote:

zloj, it'd be good to buy into at that price.  but the wealth destruction that would have occured to get to that price would, in my view, grossly outweigh any potential good that would come from having higher dividend yields. 

the S&P going to 150 alone would ensure a greusome economic environment (assuming it stayed there for any length of time) regardless of home sales or wahtever else, the loss of wealth would be just too great for too many.

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#15) On September 30, 2009 at 2:22 AM, Tastylunch (29.50) wrote:

I am in favor of short selling existing

my mistake I thought you weren't. 

and if it can do no harm and may in the view of some do good, then why not bring it back?

Well selfishly it just harms the retail trader like me who has to pay a higher cost to get shares. That's all.

But if there are really bear raid predators it's not going to stop them.

Like I said I don't care if you bring back the uptick rule. Just don't expect it to actually work when the problem is CDS and darkpools and obscure acconting.

You can't treat the illness if you don't make the right diagnosis of the ailment

RCL, OSK, ASH, the casinos, every financial on earth, basically everything I was long at the bottom had massive short interest as far as I can recall.  Where can one find that historical info I wonder?

hmm good question. shortsqueeze.com might have some but it's probably pay.

RCL, OSK, ASH, the casinos, every financial on earth, basically everything I was long at the bottom had massive short interest as far as I can rec

Well if you are right (Which on this I'm beginning to tink you are) and I'm wrong the the shorts didn't get there till the damage was done anyway.

BEING RATIONAL AND SHORTING MARKETS WHEN THEY ARE UP AND COVERING THEM AS THEY CRASH THIS CLEARLY DIDN'T HAPPEN THIS TIME AND FRANKLY I DON'T THINK ITS EVER HAPPENED

and no one  buys low and sell highs either? :)

but seriously let's say you are right. the if they are shorting at the bottom and not at the top then the fall wasn't caused by short yes?

and likely wouldn't a high short concentration at bottoms be fuel on the way back up?

If you are going to blame the shorts for excarbating the fall do they get no credit for some the ralies that are now happening? The current rally is being lead by the most heavily shorted stocks. What does that tell you?

see here

 http://online.wsj.com/public/b/article/SB125417898739847555.html

But anyway how is this the Uptick rule's fault?

Sorry if I'm incoherent I'm very tired.

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#16) On September 30, 2009 at 2:24 AM, Tastylunch (29.50) wrote:

just to save you time I'm going to concede the point on short % of float decreasing as price decreases.

In a panic you are likely right, ina more orderly market I think my take is more typical. But I don't have research on hand to back it up

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#17) On September 30, 2009 at 2:27 AM, Tastylunch (29.50) wrote:

I imagine you already read these but here is Everydayinvestor's blogs on the uptick rule

 http://www.goodevalue.com/2009/05/03/the-traders-guide-to-the-uptick-rule/

http://www.goodevalue.com/2009/05/12/how-the-uptick-rule-abbetted-illegal-bear-raids/

http://www.goodevalue.com/2009/06/11/my-comments-to-the-sec-regarding-the-uptick-rule/

 

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#18) On September 30, 2009 at 2:29 AM, checklist34 (99.73) wrote:

tasty,

fiar value for most of those companies is pretty close to zero so permanent harm can't occur.  well said.

 

For point B, ...  i suppose it may be challenging to prove that short attacks had ever damaged a company.  We may(?) have seen some examples (like MGM above or some REITs or BDCs) this time around but I suppose proving it would be difficult.

 

for point C again, I debate.  As the market fell last year short interest ROSE.  Per Kass, short interest hit an all time high at the march bottom, not at the 2007 top.  So your thesis, while possible, is not born out in real life.

In MGMs case the equity offering was announced at 13-14, priced I think at 10, and the stock fell so rapidly it got re-priced at 7.  Witness no such behavior in any other secondary that I'm aware of recently and while I don't konw, I wonder.

 

I don't argue that IBs may well behind the scenes create some issues.

My grandest point is that regulators should strive for stability and strive to avoid having th capital markets primary purpose being transferring money from the "many" to the "few".  That is destructive.

And FWIW wasn't Goldman up yelping against the uptick rule?  they are a "transferrer", not a "producer", they no doubt profit from shorting, and they are on your hate list.

And they dislike the uptick rule, so why not like it?

From my perspective, it doesn't matter if I can prove that the uptick rule would help, if nobody can prove that it doesn't hurt and some think it would help why not bring it back?  it doesn't costanything, if there is no downside and some potential upside, why not take the action?

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#19) On September 30, 2009 at 2:35 AM, checklist34 (99.73) wrote:

tasty, i have to crash out to bed, but you said

"so nobody buys low and sells high either?"

thats not the right question, the right question is

"do most people buy low and sell high or is the average of that zero?"

and

"do most people really, honestly, just jump on the momentum bandwagon and perpetuate teh current trend?"

your question reads like an argumentative one that doesn't address the point.  I think the latter 2 are maybe "zero" and "yes".

 

I struggle to believe that a preponderance of crashes are mitigated by short sellers covering.  I'd be surprised if even one huge, substantial, long-running crash was mitigated by short sellers covering, and I'd bet they are all perpetuated, accelerated, and possibly extended by short sellers piling onto the sinking ship.

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#20) On September 30, 2009 at 2:55 AM, Tastylunch (29.50) wrote:

 re point C

I'll concede to you on that since, the more i think about the markets behave diffeently in crash than they do in regular markets.

And FWIW wasn't Goldman up yelping against the uptick rule?

Hah only after Morgan was supposedly doing the CDS/short it to them, :)

 And they dislike the uptick rule, so why not like it?

cause it hurts me more than them.I don't have million dollar software configured to beat the rule.

In the decimalization era it's pretty easy to do for the big boys.  When it was still fractional the uptick rule was moderately useful.

It's less of an issue now I suppose with Puts and those crazy ETFs as you have other vehciles. But when i go short I like the old way. I'm old fashioned.

 they are on your hate list

I don't personally hate them. I have a couple exes who ended up working for them but those relationships ended amicably.  I just was mentioning the allegation which I think is plausible, but very hard to prove.

Really though it's hard to fault Goldman for doing something that's legal even if it's dirty. If Goldman didn't do it Morgan would have.

It's the bumbling SEC who is asleep at the wheel.

it doesn't costanything, if there is no downside and some potential upside

It increases your borrow cost, theoretically reducing liquidity.

It's wasted effort mainly, diverting the SEC from real serious problems.

all this work to bring the uptick back meanwhile Goldman and Morgan have releverd up to very unsafe levels and are taking bigger bets than ever thanks to bailoust. Heck John Mack of Morgan just got canned because he isn't taking as much risk as Goldman.

your question reads like an argumentative one that doesn't address the point.  I think the latter 2 are maybe "zero" and "yes".

well it wans't meant that way.

I would agree momentum trading is a zero sum game. I do not know if investing over decades itself necessarily is.

I struggle to believe that a preponderance of crashes are mitigated by short sellers covering I'd be surprised if even one huge, substantial, long-running crash was mitigated by short sellers covering,

I always felt that's why 2000 didn't feel so horrible, shorts did drag it out, but they gave you ore time to get ou before you got your face ripped off. Compare that to 2008.

I'd bet they are all perpetuated, accelerated, and possibly extended by short sellers piling onto the sinking ship.

That would not be 2008. Since shorting was banned in the worst part of the crash. Hard to blame shorts for something they weren't even  allowed to do. Maybe they drug it out a little longer but by then the bulk of the damage was already done.

have a good night!

 

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#21) On September 30, 2009 at 9:32 AM, Quantemonics (98.51) wrote:

CHECKLIST34,

Nice effort, but most investors and money managers do not appreciate the overriding enormity of the short-selling problem.

If the government doesn't bring back the uptick rule (or something similar - an up bid rule perhaps on all the ECNs) for new short selling by the end of the year, I am likely to liquidate ALL OF MY STOCK HOLDINGS AND MOVE TO CASH AND COMMODITIES for next year's trading, as a large downmove will be all but guaranteed from renewed, out-of-control selling of other people's assets (stocks), using the brokerage and bank's money (margin).

The stock market is the only place on the planet where you can sell something you do not own, with other people's money used as a downpayment, where you can directly and easily profit with the difference in price generated from mindless, computerized dumping of supply.

In every state of the union (except perhaps California) this activity is called fraud when executed on innocent parties on the opposite side of a commercial transaction.  ON WALL STREET IT IS STILL BUSINESS AS USUAL.  Why would anyone want to own stocks long-term, that can be stolen from underneath you, and sold to drive the price down against your interests????  (Thievery is a better name for the operation than short selling.)

The stock market and my great country are dead in the water, if politicians, investors and voters remain unaware of this situation or unwilling to act appropriately in the interest of fairness and the nation’s long-term well being.

With the advent and expansion of the internet, and discount brokerages including computerized trading, any rational outside observer can review for themselves the negative effect of the explosion in short-term emotion based trading activity in stocks the past 15-20 years.  Especially since the end of the uptick rule in July 2007 was THE root cause of the biggest drop in equity prices since the depression, it should not be lost on investors that the last few decades have seen the worst (real rate, inflation adjusted) overall returns from the stock market of ANY 15-20 year period in the nation’s history.  Just the threat of bringing back the uptick rule by Finance Chair Barney Frank was able to reverse the short selling debacle into actual short covering in March and encourage large traders, brokerages and mutual funds to begin buying with their cash at the same time.

Without limits to selling stock you do not own, the country’s fate is basically sealed and my great democractic and capitalistic nation building experiment will soon be a relic left to the history books.  At this critical juncture every investor and voter must decide the future they wish to live in...socialism and communism will be the assured outcome for us all WITHOUT AN UPTICK RULE.

Note to wise guys, please review the empirical evidence before posting a response.

-TJ

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#22) On September 30, 2009 at 10:02 AM, checklist34 (99.73) wrote:

bullmarket, that was an interesting write-up and vastly different from the perspective of many ohters who i've read comment on this topic. 

I cannot offer argument against the fact that its not legal to sell your neighbors Porsche betting that the values of used Porsches will fall.  Or your neighbors house, etc.  If it was i'd sell every new car that anybody bought.  Because you know those are going to lose value. 

I am going to think a bit about your perspective here.  We absolutely need to limit the wild volatility in the markets.  This reduces confidence in them on Main Street and, I believe as offered above, benefits the few at the expense of the many (and the few tend to be less productive with that money than the many)

Another severe crash at this juncture would have sweeping and long lasting negative effects to all of us.  Except whichever few profit from it on the short side.

 

Tasty:  frankly I think one should pay at least the going mortgage rate in interest for borrowed shares + any dividends.

Why does the uptick rule increase borrowing costs?  Either way you borrow a share, the uptick rule just regulates the conditions under which you can sell it.

I think the Nasdaq bubbles  decline was mitigated by people still drunk from the big run-up thinking it would begin again far, far more than short sellers covering.

 

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#23) On September 30, 2009 at 10:34 AM, starbucks4ever (97.86) wrote:

"zloj, it'd be good to buy into at that price.  but the wealth destruction that would have occured to get to that price would, in my view, grossly outweigh any potential good that would come from having higher dividend yields. "

checklist,

This is an admission that there is a problem with these valuations. In other words, corrent holders are NOT rich because the yields are high, they are rich because and as long as they can flip this stock to some greater fool. If the speculative component gets beaten out of the stock prices, all those investments made after 1995 will be underwater. Of course you'd like to avoid another 58% plunge, but that would require a steam of new buyers. Don't you think you might be doing these buyers a disservice? Or do you really believe that they are going to see 7% returns from the 1050 level?

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#24) On September 30, 2009 at 12:39 PM, checklist34 (99.73) wrote:

zloj, yes, I do think that from 1050 returns will be 7% in the fullness of time.  I don't doubt that another cyclical bear will occur before this monstrous secular bear is over and that at some point from here in the future we will not have made 7%.

but yes, i do.  Assuming dividend yields come back (banks, insurers, no end of manufacturers have all cut dividends now in one of the biggest divi-cutting sprees ever, leaving the yield on SPY at a reported 2.43% by yahoo finance).

so spy = 2.43%, lets say when divi's are returned it rises to 3-4%

sot he market has to return 3-4% over the fullness of time.

thats S&P 1100, 1140, 1190, 1240, 1290, 1340, 1400, 1460, 1520 (roughly)

so in 9 years, or 2018, we return to the 2000 highs.

i think its overwhelmingly probable that in the fullness of time stocks yield 7% from 1050. 

you've made me rethink my recent bearishness yet again.  I flop in my own mind more often than... famous stock show hosts do on TV.  lol

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#25) On September 30, 2009 at 3:42 PM, Tastylunch (29.50) wrote:

BullMarketN09

dunno if this was directed at me or not.

Note to wise guys, please review the empirical evidence before posting a response.

I have read 8 or 9 academic papers full of empirical evidence on the matter.

If you have your own sources I'm open to reading them,if you want to do the quid pro quo thing.

I've read your comments here

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=178740&t=01001529370998141183

and I completely disagree. Correlation does not equal causation. comment 30 from zzlangerhans more or less empitomizes my poistion.

I really think your anger would be better directed at Dark Pools, and all the crap the IB's pull with the hoodoo accounting dodges.

There are definitely villians here and they are getting away with it.

Oh and you should know that your stocks cannot be legally shorted if you don't have a margin account. Pretty simple to stop if you want. So your stocks cannot be "stolen" from you unless you permit it. This is a major reason why shorting .ob's is tough to do.

Good to luck to you

 

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#26) On September 30, 2009 at 3:51 PM, Tastylunch (29.50) wrote:

checklist34

Why does the uptick rule increase borrowing costs?

Shoot I lost the calculation Luvb2b ran that shows how it works. And it looks like Everydainvetsor deleted the blog where he laid it out. The math is fairly complex. Ah well hopefully he will come by and explain it again. Or Portefeuille he seems OCD enough.I'm too lazy to hash it all out again.

frankly I think one should pay at least the going mortgage rate in interest for borrowed shares + any dividends

last i looked it was already higher 7.75% at scottrade.

I havent shorted in a good long while on margin. When I go short I keep it pretty small and usually pretty short term.

I think the Nasdaq bubbles  decline was mitigated by people still drunk from the big run-up thinking it would begin again far, far more than short sellers covering

I would say a combination of the two among other factors (including the fact that it wasn't banks that were crashing and the credit markets were alright)

nonetheless I would say the shorts were useful.

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#27) On October 01, 2009 at 3:09 AM, checklist34 (99.73) wrote:

i doubt shorts have ever been useful in raising market prices.  its just so wildly counter to the nature of shorting.  Frankly, i think thats an argumet shorts raise to justify their mojo.

one could justify why cheating on your wife is good for the relationship, or why cooking meth is good for the neighborhood, or why welfare is good for society or whatever you wish.  fact of the matter is selling share you don't own serves to depress the market...

one could justify bombing a country with some logic or other.

i doubt short sellers are ever useful to the "long" view of the market where a higher more stable market is better.  Ever, doubt, I doubt short sellers are ever useful to the greater good.

 

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#28) On October 01, 2009 at 12:33 PM, Tastylunch (29.50) wrote:

checklist34

then we'll just have to agree to to disagree then. I doubt anything I could add would persuade you.

where a higher more stable market is better

In my view that's exactly what shorts make happen.

That's all I want as well. Excessive Volatility isn't good for markets or our economy.

 

 

 

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#29) On October 01, 2009 at 4:03 PM, checklist34 (99.73) wrote:

tasty, i would guess that the crash in the market after the ban on short selling was...

hedge funds dumping long positions as their strategy of long/short got blown up.  

i'm long BWW and short BAC, i'm largely market neutral as i'm long and i'm short.  

if i can't be short BAC i'm exposed to the market as i can only be long BWW, and my reaction is to sell BWW.

I think thats why the stocks of quality companies with no real trouble (not that a recession isn't trouble but i mean potentially material trouble, like bankruptcy or something) got cheapest on Nov 20, NOT AT THE MARCH BOTTOMS.  BWW, DRI and many  more saw their lows last fall not this march.

this march saw the lows for, largely, companies facing real trouble.

or another circumstance like maybe just the market crashed big time right then.

 

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#30) On October 01, 2009 at 6:21 PM, TigerPackFund (< 20) wrote:

checklist and Tasty,

Our TigerPackFund creation continues to do well, but I want your help to make it an even better collective conscious web destination for serious and novice investors alike. The goal is to establish free and honest initial stock research ideas from 40 of the best financial brainiacs in America (and the world), regardless of overall market views or trainining/background/experience issues.

Please send some of your brightest ideas our way...

-TigerPack

 

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#31) On October 05, 2009 at 1:09 PM, JaysRage (88.72) wrote:

I definitely gave a rec to the post.   It has a lot of interesting ideas on a topic that can be hot-button.    I have no problem with shorting, and I think that putting rules on it just inflates the panic layer associated with certain situations and causes even more fear and irrational behavior.   Let the markets work their way through it. 

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