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This is the biggest WTF moment. Ever. Without the ability to short sell, the market can't even function effectively. Convertible/Risk arbitrage people cannot

This is the biggest WTF moment. Ever. Without the ability to short sell, the market can't even function effectively. Convertible/Risk arbitrage people cannot do their job wihout short selling. The risk-free spread is there for the taking, but you can't take it. Options market makers cannot hedge their PUT writes without short selling. This is what I envision: We'll see a massive short covering rally caused by a dry up in volumes by next week. Option traders will stop trading as they cannot properly hedge their postions, as will all risk arbitrage, debenture, derivative and ETF traders. Traders of all financial products will not trade if they cannot hedge their positions. Liquidity will dry up and volatility will increase drastically, which is exactly what the SEC wants to avoid. The USA has decided to follow their Russian and Pakistani comrades in artificially controlling the market. It's over fellas. We've killed the banks. Now we'll kill the hedge funds and the options houses.

furiouslol 18y ago
Oh yes, if the hedge funds are forced to cover, this could conceivably lead to some blowups, putting even more pressure on the banks that finance them. Wonderful.
mattmaroon 18y ago
Are you an economist? How informed is this conjecture? Would you guess more or less than the people who made the decision?
- furiouslol 18y ago
  I'm totally serious. You can ask anyone who knows about the market and get their candid opinions. I don't know how long they're going to effect this ban but to give you a preview of what banning short sell can do, just take a look at the China stock market. The chart is like the Eiffel tower. The shorts make the market effective as they provide a floor at a bottom where no one else may be willing to buy. I'm all for a permanent ban on naked short sells but to have an outright ban of all short sells is plain stupid.
  - mattmaroon 18y ago
    It's not that I disagree with you, I really don't have enough knowledge to decide. I haven't the slightest clue how long they want to prevent short selling for (I think the article got cut off since I don't subscribe) or what sort of effect that short term action might have. I was just wondering how you came to the decision that it's stupid. It seems you'd need a lot of knowledge to be reasonably sure of that, given that other people with a lot of knowledge made the decision.
    - furiouslol 18y ago
      I would argue that this was a political driven decision rather than an economical one.
      - mattmaroon 18y ago
        How so?
        furiouslol 18y ago
        It's too much of a coincidence that this move is effected a few days after McCain publicly chastised SEC Chairman Chris Cox and said he would fire him if he were president.
        mattmaroon 18y ago
        Has McCain spoken out in favor of something like this? This would seem to be pretty out of line with typical Republican doctrine. I don't see this as being an attempt to save his job, it's clearly not going to happen if McCain is elected.
        byrneseyeview 18y ago
        McCain is often pretty out of line with typical Republican doctrine. I'm not sure the ban is specifically a McCain thing, but it does seem very political. Far fewer people complained about rich Wall Street fat cats when those fat cats got rich by making mortgages cheap; now that a few of them have gotten rich by betting that mortgages would be priced rationally again, folks are upset.
- nostrademons 18y ago
  Data point: In China, retail investors are not allowed to short-sell. China's stock market has had an unprecedented rally over the last 2 years (up 600% from Jul 05 to Oct 07) and then an unprecedented collapse recently (down 66% since then). http://finance.yahoo.com/echarts?s=000001.SS#symbol=000001.SS;range=5y http://finance.yahoo.com/echarts?s=000001.SS#symbol=000001.S... In econ & finance textbooks, the theoretically predicted result of this is that it exacerbates market swings. When the market is overvalued, there's no check on its upward movement caused by short-selling. When it's undervalued, there's no check on its downward movement from short covering. It's always hard to sort out causation from correlation - there could be dozens of other factors at work - but China's experience seems to support the theory. As for your appeal to authority, it's possible for the SEC to know more than furiouslol and still do this, as long as they're incentivized to do so. Byrneseyeview's comment on another story here explains how: http://news.ycombinator.com/item?id=308539 http://news.ycombinator.com/item?id=308539
- deleted 18y ago
  [deleted]
fnazeeri 18y ago
Kill 'em all. That's how a lot of folks feel, but in reality what we need to re-think is compensation. Hedge funds being paid 1-and-20 and company management getting 99% of comp in call options provides a huge incentive for taking on absurd risk.
- furiouslol 18y ago
  Ok. You'll not only be killing the hedge funds but you'll also be killing the ETF issuers who needs to short sell in order to keep the ETF price in line with the underlying basket of stocks (Some ETF issuers use OTC swaps but at the end of the rope, some party still need to short the stocks to keep the price efficient)
  - fnazeeri 18y ago
    $200MM payout to top 3 MLCO exec? Seems like found money that ought to be taxed at something other than cap gains rate to me... http://www.americablog.com/2008/09/top-3-merrill-lynch-execs-to-receive.html http://www.americablog.com/2008/09/top-3-merrill-lynch-execs...
    - furiouslol 18y ago
      I don't get it. What does that got to do with short selling? If they effect a blanket short sell ban, you're going to see quite a number of business going bust. The ETF business will be derailed. So will the options business. Companies shut down. People get laid off. If they really want to stop the carnage inflicted on the financials, the should just ban short sells on the financial sector alone.
- byrneseyeview 18y ago
  My goodness. I don't understand why you invested in those hedge funds in the first place if you thought the managers were overpaid. I wouldn't mind giving Jim Simons his 5% of assets and 44% of gains if I could invest in Rentec. Unfortunately, I'm not a Rentec investor, so his compensation is literally none of my business.
kqr2 18y ago
What about other derivative financial "instruments"? There has been a lot of talk about the shadow banking system and their ability to avoid regulation. Won't these players just step in and sell these "hedges" privately and probably further exacerbate the problem? http://en.wikipedia.org/wiki/Shadow_banking_system http://en.wikipedia.org/wiki/Shadow_banking_system
- furiouslol 18y ago
  One alternative to short selling as a hedge is a structured note linked to inverse performance of a stock. But how scalable is this option? If anything, we are moving backwards with this solution as there would be less transparency in this "unregulated market". Who knows what kind of risk these counterparties will take?

furiouslol 18y ago

Oh yes, if the hedge funds are forced to cover, this could conceivably lead to some blowups, putting even more pressure on the banks that finance them. Wonderful.

mattmaroon 18y ago

Are you an economist? How informed is this conjecture? Would you guess more or less than the people who made the decision?

furiouslol 18y ago
I'm totally serious. You can ask anyone who knows about the market and get their candid opinions. I don't know how long they're going to effect this ban but to give you a preview of what banning short sell can do, just take a look at the China stock market. The chart is like the Eiffel tower. The shorts make the market effective as they provide a floor at a bottom where no one else may be willing to buy. I'm all for a permanent ban on naked short sells but to have an outright ban of all short sells is plain stupid.
- mattmaroon 18y ago
  It's not that I disagree with you, I really don't have enough knowledge to decide. I haven't the slightest clue how long they want to prevent short selling for (I think the article got cut off since I don't subscribe) or what sort of effect that short term action might have. I was just wondering how you came to the decision that it's stupid. It seems you'd need a lot of knowledge to be reasonably sure of that, given that other people with a lot of knowledge made the decision.
  - furiouslol 18y ago
    I would argue that this was a political driven decision rather than an economical one.
    - mattmaroon 18y ago
      How so?
      - furiouslol 18y ago
        It's too much of a coincidence that this move is effected a few days after McCain publicly chastised SEC Chairman Chris Cox and said he would fire him if he were president.
        mattmaroon 18y ago
        Has McCain spoken out in favor of something like this? This would seem to be pretty out of line with typical Republican doctrine. I don't see this as being an attempt to save his job, it's clearly not going to happen if McCain is elected.
        byrneseyeview 18y ago
        McCain is often pretty out of line with typical Republican doctrine. I'm not sure the ban is specifically a McCain thing, but it does seem very political. Far fewer people complained about rich Wall Street fat cats when those fat cats got rich by making mortgages cheap; now that a few of them have gotten rich by betting that mortgages would be priced rationally again, folks are upset.
nostrademons 18y ago
Data point: In China, retail investors are not allowed to short-sell. China's stock market has had an unprecedented rally over the last 2 years (up 600% from Jul 05 to Oct 07) and then an unprecedented collapse recently (down 66% since then). http://finance.yahoo.com/echarts?s=000001.SS#symbol=000001.SS;range=5y http://finance.yahoo.com/echarts?s=000001.SS#symbol=000001.S... In econ & finance textbooks, the theoretically predicted result of this is that it exacerbates market swings. When the market is overvalued, there's no check on its upward movement caused by short-selling. When it's undervalued, there's no check on its downward movement from short covering. It's always hard to sort out causation from correlation - there could be dozens of other factors at work - but China's experience seems to support the theory. As for your appeal to authority, it's possible for the SEC to know more than furiouslol and still do this, as long as they're incentivized to do so. Byrneseyeview's comment on another story here explains how: http://news.ycombinator.com/item?id=308539 http://news.ycombinator.com/item?id=308539
deleted 18y ago
[deleted]

fnazeeri 18y ago

Kill 'em all. That's how a lot of folks feel, but in reality what we need to re-think is compensation. Hedge funds being paid 1-and-20 and company management getting 99% of comp in call options provides a huge incentive for taking on absurd risk.

furiouslol 18y ago
Ok. You'll not only be killing the hedge funds but you'll also be killing the ETF issuers who needs to short sell in order to keep the ETF price in line with the underlying basket of stocks (Some ETF issuers use OTC swaps but at the end of the rope, some party still need to short the stocks to keep the price efficient)
- fnazeeri 18y ago
  $200MM payout to top 3 MLCO exec? Seems like found money that ought to be taxed at something other than cap gains rate to me... http://www.americablog.com/2008/09/top-3-merrill-lynch-execs-to-receive.html http://www.americablog.com/2008/09/top-3-merrill-lynch-execs...
  - furiouslol 18y ago
    I don't get it. What does that got to do with short selling? If they effect a blanket short sell ban, you're going to see quite a number of business going bust. The ETF business will be derailed. So will the options business. Companies shut down. People get laid off. If they really want to stop the carnage inflicted on the financials, the should just ban short sells on the financial sector alone.
byrneseyeview 18y ago
My goodness. I don't understand why you invested in those hedge funds in the first place if you thought the managers were overpaid. I wouldn't mind giving Jim Simons his 5% of assets and 44% of gains if I could invest in Rentec. Unfortunately, I'm not a Rentec investor, so his compensation is literally none of my business.

kqr2 18y ago

What about other derivative financial "instruments"? There has been a lot of talk about the shadow banking system and their ability to avoid regulation. Won't these players just step in and sell these "hedges" privately and probably further exacerbate the problem? http://en.wikipedia.org/wiki/Shadow_banking_system http://en.wikipedia.org/wiki/Shadow_banking_system

furiouslol 18y ago
One alternative to short selling as a hedge is a structured note linked to inverse performance of a stock. But how scalable is this option? If anything, we are moving backwards with this solution as there would be less transparency in this "unregulated market". Who knows what kind of risk these counterparties will take?