Late last night the Securities and Exchange Commission finally got around to releasing the new, emergency short-selling rule Chris Cox announced in the middle of the trading day yesterday. Cox's announcement has been largely criticized because it initially left traders guessing about what the SEC was actually doing.
Now we know what the new rule is. Basically, it could be called the Paperwork Production Act of 2008. It requires short sellers to have not just located the stocks they want to borrow in order to short, but to actually borrow. From our read, 100% delivery of the stocks at settlement is required. The rule doesn't, of course, cover every share of every public company. It offers this special protection to just 19 financial firms.
The move seems aimed at increasing the marginal cost of shorting stocks. It throws red-tape transaction cost and creates enforcement risk for short selling. Increasing the cost of short-selling should have the effect of making shorting some stocks, particularly stocks that have already dropped precipitously, less attractive as an investment strategy.
To the extent the rule is effective, the move seems certain to obscure the signaling effects of pricing for the financial firms. To the extent that investors understand that pricing no longer reflects market processes, the move could ironically create more uncertainty about the health of these firms.
SEC Enhances Investor Protections Against Naked Short Selling [SEC Press Release]
Posted by DrederickTatum , Jul 16, 2008 10:43AM
What a complete waste...
to the SEC, I say Boo-urns
Posted by guest , Jul 16, 2008 10:59AM
who's this representative wit tha tick brooklyn accent grilling 'nanke
Posted by StMarc , Jul 16, 2008 11:02AM
I love this plan. I'm excited to be a part of it. Let's do it!
And next I would like the Government to ban all forms of advance deposits on the purchase of any kind of good or service.
I mean, sure, Amazon can SAY they shipped me my softcore DVD's, but until I actually have them IN MY HANDS, how will I know they're telling the truth? And how do I know the car dealer will actually ORDER AND THEN DELIVER my new hybrid Hummer, and that they aren't just trying to drive the prices up by inflating orders they can't deliver on? Huh?
Okay, failing that, I'd like the rule applied to all non-industrial users of commodities. No naked shorting ten thousand ounces of gold the day before the BOE decides to sell it, George Soros: you must HAVE ten thousand ounces of gold before you can so much as promise to sell a bangle.
M
Posted by lemmerdeur , Jul 16, 2008 11:02AM
Perhaps they will also kill the Put option market on these firms, as well as ban short sales of their calls.
Why don't they just set a fixed price of $1000 for their shares and call it a day? I mean, who gives a shit anymore, Free Markets are only free until rich people stop making money, then we switch to Jackboot Markets (and eventually just Jackboots).
The only thing that makes me feel better is that the folks implementing all this have excellent odds of dying a very slow, painful death by cancer.
Posted by guest , Jul 16, 2008 11:06AM
How about passing a law that requires everyone to buy stocks in certain companies, failure to do so resulting in execution? That would really get the market moving.
Posted by guest , Jul 16, 2008 11:07AM
How about passing a law that requires everyone to buy stocks in certain companies, failure to do so resulting in execution? That would really get the market moving.
Posted by guest , Jul 16, 2008 11:08AM
How about passing a law that requires everyone to buy stocks in certain companies, failure to do so resulting in execution? That would really get the market moving.
Posted by guest , Jul 16, 2008 11:15AM
How about passing a law that requires a finger to be cut off for each additional duplicate post? In the case of Guest @ 11:06, 11:07, and 11:08 it would be 2 fingers.
Posted by guest , Jul 16, 2008 11:15AM
I disagree with the 'pricing signals' bit though. There is still an outstanding float and the folks who are long the stock are free to unload it at no incremental cost.
Irrespective, in this day an age I simply do not understand the 3-day settlement period. Most orders are placed electronically, no physical money exchanges hands and neither do paper copies of stock certificates need to exchange hands.
Hence, settlement should be instant. Debit money from my account, credit it to the other person and transfer the shares electronically. There - would take less than a second.
The problem here is the the shorters are also gaming an inefficiency loophole in the market - the 3-day settlement period. For truly efficient markets, one needs to move to instant settlement.
Posted by guest , Jul 16, 2008 11:22AM
For truly efficient markets the rules don't change, mid game (and only for 30 days with an extension clause), for only "certain companies".
The SEC in an attemot to prove its relevance has made the USA look like a banana republic.
ps - maybe that is what happened to paulson's pinky, it is funky as a consequence of too many duplicate db posts?
Posted by Anal_yst , Jul 16, 2008 11:28AM
Agreed with 11:15, can't for the life of me figure out why (besides the effort/cost of upgrading tons of computer systems) this isn't the case already.
This retarded shit from teh SEC is one small step away from the Pakistani's efforts "to ensure that equity markets consistently go up", jesus h. christ already!
Posted by guest , Jul 16, 2008 11:28AM
11:22, I never said that truly efficient markets exist,
All I am saying is that if an inefficient move was made in an inefficient market, crtiticizing it as a creator of market inefficiency is moot. The market is ALREADY inefficient.
And what makes you think that the US is any more a banana republic than what it has been? If anything, it is not much better than the almost total banana republic state it reached during the great deal and great society phases.
You can call the bailing out of the agencies as an inefficient move, but the very existence of the agencies is already banan-republic like.
Posted by guest , Jul 16, 2008 11:28AM
that should have been 'new deal' not 'great deal'.
Posted by guest , Jul 16, 2008 11:28AM
Can someone with more knowledge of the nuts and bolts of short sales explain to me why people who want to go short can't just buy puts? It always seemed inefficient to have all of this borrowing if the same result can be achieved with a contract. Am I really missing something?
Posted by guest , Jul 16, 2008 11:33AM
because you can keep your short as long as you want, no maturity risk, plus you're also paying for some of the optionality (or extrinsic value) of the option in the premium
Posted by guest , Jul 16, 2008 11:42AM
11:28AM- No one will be willing to sell you puts if they can't short stock and cover his delta.
Posted by guest , Jul 16, 2008 11:44AM
How hard is it to locate stocks to short? Are the short's systems that terrible that they have such a hard time finding a stock to borrow?
Posted by guest , Jul 16, 2008 12:06PM
Red Tape Holds The Nation Together
Posted by Suits , Jul 16, 2008 12:08PM
Also, put and call prices are affected by the availability of the borrow.
Posted by guest , Jul 16, 2008 12:19PM
Let's see. Analysts don't know how to value financial firms anymore but that doesn't stop them from issuing almost daily downgrades on each other so that their trading desks can naked short-short-short and pound firms into the ground. There should be no rules if they have the potential to impede the trading desk from making money. Let the masses eat cake, but you better stop at the gun shop on the way home so you have the means to protect your 'positions.'
Posted by guest , Jul 16, 2008 12:28PM
To enter a trade you need to look at the direction, timing, volatility and leverage.
You can express a bearish view by shorting, buying puts or selling calls. The above mentioned factors guide your decision.
Posted by guest , Jul 16, 2008 12:39PM
I guess the Free Market isn't as free as everyone assumed it was.
Posted by Headless Horseman , Jul 16, 2008 1:03PM
It's almost hard to believe that this is really happening.
In addition to any unintended effects from the signaling angle addressed in the article, isn't the SEC kind of doing a disservice to the 19 firms that have apparently been granted this additional protection by virtue of having established a specific list? Not exactly a shining endorsement.
SEC to Wall Street: We've identified 19 firms that you've decided to punish for various misdeeds. In a stunning show of what can only be described as our committee’s omniscience and omnipotence we've elected to take unprecedented measures to temporarily stave off any hasty executions of covered offenders by effectively creating the financial equivalent of a five-day waiting period.
It's a little like the nut jobs at PETA somehow passing legislation requiring fat people to be preapproved for certain purchasing levels before being granted admission to a barbeque cook off. In either instance, I'd suspect that nobody is going to lose their appetite because of a little paperwork...and the greedy little piggys still find themselves on the chopping block.
Posted by guest , Jul 16, 2008 1:34PM
one word: swaps
Posted by guest , Jul 16, 2008 2:36PM
All of you clowns are just whistling in the dark and whining to one another about yesterday's SEC action. I guess that the elimination of the 'UpTick' Rule one year ago wasn't a "midgame" change at all. Was it Guest@11:22am?
In the very near future, look for an extension of and an expansion of yesterday's rule as well as a restoration of that 'UpTick' Rule.
The past year (especially June 2008) may have been a very good one for the shorting clowns, but it sure as hell wasn't all that good for the rest of the financial country/world.
Also, keep on whistling because the commodities markets are about to get more attention from Washington soon. The IB/HF/PE goons will no longer be kcufing up those markets either.
Hey, laugh at me some more. I'm telling you what's going to happen. Believe it. Don't believe it. WTF should I care?
Markets are all up nicely today though. Commodities down. Good signs that a positive, meaningful action from Washington is generally well received by the investment community.
The Guy from Delaware
Posted by guest , Jul 16, 2008 4:01PM
the chickens are coming home
Posted by guest , Jul 16, 2008 4:10PM
i challenge any person on this blog to place forth a reasonable justification for value of the largest financial companies in the world to change 25 or 30 percent DAILY, and then tell us all how there's not manipulation occurring on "wall street"
nugga, please.
Posted by FUNdamental , Jul 16, 2008 4:20PM
The guy from dela-where??
The uptick rule isn't that significant, even before the marketwide lift of the rule, there were many stocks(financials included) that were able to be shorted on minus ticks. There is a great deal of evidence that suggests there is little change to intraday volatility based on this rule. To think that could or would settle the market at all is extremely short sighted. To assume that leh is really worth $50 but is trading at $16 because of an sec rule? Rediculous.
Isn't there another cox weighing down shorts rule? Heeeeyyyooooo