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Limitations on short selling always concern and perplex me. Why is that a good idea? Isn't that preventing the market from properly adjusting to whatever circum

by Pyxl101 11y ago

Limitations on short selling always concern and perplex me. Why is that a good idea? Isn't that preventing the market from properly adjusting to whatever circumstances have occurred, or new information that has arrived? Limitations like this feel like "Let's all pretend that the truth isn't true". It astonishes me that in this day and age there are still so many arbitrary controls on marketplaces, such as the Greek stock markets shutting down due to their financial crisis. Isn't it important for the market to adjust and properly accommodate those events? (If the market simply cannot function due to the crisis itself, then that makes sense. I assumed it was shut down because people are afraid of how prices will change as a result.) Sure, some people might panic in an unreasonable way, and if they do, they will get taken to town by other people who go long during the same time period. Just like people who are overly confident will be taken to town by short sellers if there's a bubble and it bursts. I understand why there are controls on the marketplace like around prohibiting naked short selling, or reversing transactions that were obviously erroneous, but controls like preventing short selling seem absurd. If someone wants to bet that prices will decrease, let them! That's an important signal and an important correction to the market. Perhaps we would have fewer market bubbles if there was more continuous correction. Is anyone working on a bitcoin-based stock market with no limitations on trading? Could such a thing be legal? Perhaps actual shares of stock are not being traded, but rather some other kind of financial instrument that represents the right to the upside or downside of some shares without having to own them, but you own the upside or downside. Then the idea would be that anyone can buy these instruments using currency or bitcoin on a market that operates differently than today's conservative markets. I imagine this is probably illegal for a variety of reasons, such as "know your customer", but it's interesting to think about. How would the stock market be different if trades were unregulated, in the sense that there are no limitations on buying and selling shares. It operates 24/7 and never shuts down no matter what happens, and never imposes constraints on selling or short selling. I imagine this market would need to operate as a central authority or federation of trusted brokers (someone needs to verify that the seller actually owns the shares they've promised to deliver), but the authority or brokers would be willing to transact in both regular currency and bitcoin. Would this be a more effective market, or a dysfunctional one, and why?

dflock 11y ago
This would be true if people always behaved like Econs, not Humans. In normal times, the mass market averages out irrational behaviour (and there's less of it when things are calm) - but, occasionally the herd stampedes. Perhaps it's better in these cases to slow the panic until things calm down and people start behaving more rationally again. There are also cases where people individually rationally maximizing their individual financial interests is, collectively, devastating for society as a whole. Continuous adjustment sounds great, but sometimes we get crashes, which aren't.
- Pyxl101 11y ago
  Fair point. However, how do we know if that's better or not? Perhaps it's better for those who remain rational during a crisis to accumulate more wealth by enabling them to place bets opposite the stampede. When the next crisis happens, they'll own a greater percentage of the market, and will act to correct irrational behavior. By placing limitations on short selling, we are helping the irrational people at the expense of rational insightful people. I dislike the idea of these market closures or limitations on short selling because it essentially implies that people can't be responsible for themselves and their own decisions. People have agency and can decide what's best for them. If that's following a herd or opposing the herd, so be it. Perhaps the world would be better off if our systems were designed to more fully embrace meritocracy, moral hazard, and responsibility for one's self. My experience tells me that giving people more responsibility tends to help them grow: they make their own decisions and learn from them. Taking away that responsibility minimizes risk in the short term, but also minimizes growth and upside in the long term. Maybe this is true at a larger scale in our markets as well. Obviously it's hard to know for sure one way or another.
  - deleted 11y ago
    [deleted]
    - Pyxl101 11y ago
      I have been in a theater when someone yelled fire. Most people ignored the person yelling fire, and looked around for fire and smoke. They took the absence of those things, and the fact that the person was a teenager, as indications that the person was being a jackass and ignored him. I doubt a theater of people will respond to someone yelling "fire" unless the person was an authority figure of some kind, like a uniformed theater employee or police officer. Perhaps a person who yells fire very persistently and credibly will prompt a reaction: a few people will get up and look around, or inquire, but most people will wait for more information, especially if they see no evidence of a fire, and see other people investigating the alleged threat. (If anything, most people wait too long to flee from fires. They only begin to flee once the danger is imminent and nearby. This is often too late, given the ability of smoke to rapidly expand.) The visceral experience of being in a threatening environment can rob people of agency to a degree, I agree. Panic can do that specifically. I'm not sure that sitting in front of a desk and watching numbers tick on the screen is the same kind of visceral panic on which we should give people a pass for making good decisions though. That's an intellectual panic, not a physical danger-based panic. In any case, one question I'd ask is: how can we improve at this, as the human race? One way to improve is to allow there to be slight competitive pressures favoring people who are more rational. Over time, those folks will be more successful economically and will have a greater influence on the rest of the population. Over time we'll get better, an effect that will be lessened if we provide too many safety barriers.

by Pyxl101 11y ago

dflock 11y ago

This would be true if people always behaved like Econs, not Humans. In normal times, the mass market averages out irrational behaviour (and there's less of it when things are calm) - but, occasionally the herd stampedes. Perhaps it's better in these cases to slow the panic until things calm down and people start behaving more rationally again. There are also cases where people individually rationally maximizing their individual financial interests is, collectively, devastating for society as a whole. Continuous adjustment sounds great, but sometimes we get crashes, which aren't.

Pyxl101 11y ago
Fair point. However, how do we know if that's better or not? Perhaps it's better for those who remain rational during a crisis to accumulate more wealth by enabling them to place bets opposite the stampede. When the next crisis happens, they'll own a greater percentage of the market, and will act to correct irrational behavior. By placing limitations on short selling, we are helping the irrational people at the expense of rational insightful people. I dislike the idea of these market closures or limitations on short selling because it essentially implies that people can't be responsible for themselves and their own decisions. People have agency and can decide what's best for them. If that's following a herd or opposing the herd, so be it. Perhaps the world would be better off if our systems were designed to more fully embrace meritocracy, moral hazard, and responsibility for one's self. My experience tells me that giving people more responsibility tends to help them grow: they make their own decisions and learn from them. Taking away that responsibility minimizes risk in the short term, but also minimizes growth and upside in the long term. Maybe this is true at a larger scale in our markets as well. Obviously it's hard to know for sure one way or another.
- deleted 11y ago
  [deleted]
  - Pyxl101 11y ago
    I have been in a theater when someone yelled fire. Most people ignored the person yelling fire, and looked around for fire and smoke. They took the absence of those things, and the fact that the person was a teenager, as indications that the person was being a jackass and ignored him. I doubt a theater of people will respond to someone yelling "fire" unless the person was an authority figure of some kind, like a uniformed theater employee or police officer. Perhaps a person who yells fire very persistently and credibly will prompt a reaction: a few people will get up and look around, or inquire, but most people will wait for more information, especially if they see no evidence of a fire, and see other people investigating the alleged threat. (If anything, most people wait too long to flee from fires. They only begin to flee once the danger is imminent and nearby. This is often too late, given the ability of smoke to rapidly expand.) The visceral experience of being in a threatening environment can rob people of agency to a degree, I agree. Panic can do that specifically. I'm not sure that sitting in front of a desk and watching numbers tick on the screen is the same kind of visceral panic on which we should give people a pass for making good decisions though. That's an intellectual panic, not a physical danger-based panic. In any case, one question I'd ask is: how can we improve at this, as the human race? One way to improve is to allow there to be slight competitive pressures favoring people who are more rational. Over time, those folks will be more successful economically and will have a greater influence on the rest of the population. Over time we'll get better, an effect that will be lessened if we provide too many safety barriers.