In defense of short sellers

Paul:

I entirely agree with the value you give to short selling as a market mechanism to identify overvalued stocks, and also think that it’s essential to balance the market by finding companies that are overvalued. Therefore, under no circumstances should short selling be banned outright.

And…as most other readers have asserted, the real issue is naked shorts. It would be quite simple to target naked shorts with better rules, and some real enforcement, while allowing the kind of productive and beneficial short selling you champion.

Those who argue for less regulation (until very recently, Mr. McCain was one such person) on the basis that it’s detrimental to business don’t grasp the concept of what wholesale lack of confidence in a market can lead to. See Russia for one vivid example, and call it the Wild East.
Now, alow a different bunch of crazies to run naked shorts in the market, without the protections of law to stop them, and you have your Wild West scenario in the US right now.
In both cases, investor confidence is being sorely tested, and there is ample evidence to suggest that rational analysis is out the window. At times like these, naked short selling serves only one purpose: to exacerbate the situation further so that a handful of greedy financial rapists (a term not coined by me, but lovingly adopted on sight) can make a quick buck.
Enough is enough, and to secure the confidence of investors, this practice of naked shorts should be banned outright without delay. And those who might attempt it in future ought to be effectively disciplined.

I didn’t know short selling was even an issue. Did you came in late this morning?

Naked shorts (or naked of shorts), as well as any speculating where a small % of the cost has to be put up is a problem. It allows people with the means to do it to make huge margins when they win their bets. But when they lose their bets, they lose more then everything and someone else pays for most of the loss.

This is the problem. Whether it is short selling, buying oil futures or no-money-down real estate buying. When people have the means to make a lot and give part or most of the risk to someone else, they are, well, less then prudent in their dealings.

Across the board, it would be better for the free market in general if people have to bare the full consequences of their bets.

There seems to be an attitude that the system has to allow the select few to make huge margins. Someone a while back in this feedback directly said that. Claiming that commodities speculators had “not choice” but to push around the price of the basic stuff needed to survive because there was no where else they could make 20% on their investments these days.

Those who pay the price for people making 20% and more off of their money are going to get cranky about it if we start actually going hungry.

Pop quiz: Are so-called investors going to stop short of that point?

The other posters replying to Paul are dead on: no one faults short-selling and over time even retail “trading from home” at lunch guys like myself might try it. The real issue is NAKED short selling; that is short selling shares that you don’t actually have. That practice is absolutely detrimental to the market and absolutely needs to be regulated out of practice, and only allows the utter destruction of value of a company stock totally disproportionate to it’s financially justifiable underlying value and/or performance. THAT is the issue here, and should not be clouded by opinion based on incomplete understanding of the subject: short selling vs naked short selling.

I believe that one or more financial firms have large short sale positions on Lehman,GM, Fannie,Freddie and others. They then spread rumors to get the price down to unbelievable lows and get out at a handsome profit. Look at what the liquidity rumors did to National City this week which is now one of the best capitalized banks in the country. One would think any analyst would be aware of this, yet the rumor spread.

Short Selling is not the issue, Naked Short Selling is. It is Illegal to sell shares unless you have Real certs to borrow against. Naked Short Seller have been abusing the law for about 10 years now and the Security and Exchange Commission has not done a thing about it.

Regulation Sho is a JOKE everyone kows it.

Now, this criminal abuse has worked it’s way up the food chain to our National Banks. Thanks SEC job well done..(not).

Paul,

The aim of the regulation is to prevent naked short selling, not short selling.

It isn’t even anything new either. The increased “restrictions” are basically holding traders to the law. Don’t sell stock you don’t have possession of.

Are you implying the the Reg SHO threshold securities list is some sort of fantasy record generated by nutjobs at the SEC? It is a real problem in the market and has the potential to be yet another form of systemic risk.

Poor article Paul. Even the tone of your writing indicates that you are just another financial media pundit towing the party line.

When a poor person does it, selling something not owned is fraud and a criminal act. When the speculators do it, it is legal since the speculators have bought the lawmakers. American justice in action.