Charging full speed ahead into a world of “up-only” equities, the SEC is back on the evils of short-selling band wagon. And you can believe we are going to get some results this time. Deliberate and thoughtful results. The kind of results that get results.
The head of the Securities and Exchange Commission said Tuesday she is making the issue of new rules restricting short-selling a priority as the agency hears from an array of interests about ways to limit trades that bet against a stock.
Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn.
“I have made it a priority to evaluate the issue of short-selling regulation, and ensure that any future policies in this area are the result of a deliberate and thoughtful process,” SEC Chairman Mary Schapiro said at the start of a public “round-table” meeting organized by the agency.
SEC chief says new short-selling rules a priority [The Associated Press]
Instead of banning short-selling outright, why not squeeze settlement times so tightly as to make it de facto impossible? Eddy Wymeersch, chairman of the Committee of European Securities Regulators pointed out that moving settlement from the rough European (and just about everywhere else) standard of T+3 to T+0 “would largely enable us to eliminate short selling.”
Of course, Wymeersch probably meant naked short selling, which delivery gaps tend to facilitate (stricter delivery requirements were among the recent efforts to curb the practice, in fact). But we think this a fantastic idea beyond just short selling restrictions. In fact, this approach could be the cure for financial crisis at large. It is true that the technology exists today to move to T+0 settlement. But why stop there? Why not move to T-1 settlement? Or, now that we think of it, T-3 settlement? The system we envision would work like this:
Trade Day Minus 5 (T-5):
After conversion of the Treasury’s NYSE Euronext, FINRA and owner/member preferred shares to common, the Treasury has become the DTCC’s majority shareholder and simply provides the bid and ask data for the day based on guidance from the Economic Recovery Advisory Board and recordings made during Paul Volcker’s late afternoon nap time. Prices are subject to the “uptick only” rule, meaning that no bid made at the same price as the last bid made may be made until there is first a bid uptick. This prevents stagnated pricing and undue “sideways” volatility.
Allotments and purchase assignments for the upcoming trading day are generated by rotation/capital balancing algorithm at DTCC’s headquarters. The resulting trade matches are netted and crosses harmonized to reduce the number of environmentally wasteful sheets of paper used in the printout.
T-4:
The final trade matches and prices are vetted by the Economic Recovery and Political Retribution Advisory Board. This body is currently run by Andrew Mark Cuomo, but he reportedly failed to press the “Door Open” button quickly enough when Rahm Emanuel was running for the elevator last week and Larry Summers apparently overheard Cuomo mutter “run you fucker, run” under his breath so the big AMC might be OUT.
T-3:
Funds are automatically deducted from checking and savings accounts (or added to the purchaser’s debt account at LIBOR + 11 plus “no cash” penalty. Overdrafts and related fees are a prime source of new “DTCC revenue” for those banking institutions currently favored by Tim Geithner). Trade confirmations are sent via USPS and should arrive by T+19.
T+0:
Shares are delivered to the lucky buyer. (Optional).
It will be seen that this system will pretty much assure the realization of the American Dream of Equity Ownership and prevent any of the pesky crashes or “corrections” we’ve been forced to live with until now.
Watchdog mulls new curb on short selling [Reuters]
And we thought the FDIC’s public comment period was comic. Try the SEC’s recent disclosure on comments that have flooded in for short selling rules. (And don’t forget to pick up a “Don’t Short Me Bro!” Mug before the rule returns. Here is but a sample:
Free trade must not be eliminated , however , pointedly aggressive short selling must end . I believe in free trade , I am a begining [sic] investor , I am an American Citizen and I lost on 900 shares of Washington Mutual . I would not like to lose again . Thank you , Ed .
My preferences are as follows
1. Prohibit short sales totally in US markets.
2. If US firms engage in short sales in foreign markets, profits should be taxed at 80%. Firms and/or individuals found in violation of the tax regulation will face jail-time not less than ten years per transaction. Foreign individuals will be deported for life.
The SEC needs to decide whether where the stock market belongs. Right now it belongs in Las Vegas. It is a casino. Investing has become syonymous [sic] with gambling. There is no difference. Investing should mean that you are buying shares in a company to help them succeed – and then reaping the reward from their success. Investing should not mean creatively buying or selling articificial [sic] tokens that are being artificially manipulated up or down by a community far removed from the companies that those tokens are meant to represent. Short selling is just another means of gambling. I can see no honorable reason for short selling whatsoever. Don’t restore the uptick rule – abolish short selling altogether. I would go further even. Investing in a company should be just that – if you buy shares, then you should be required to hold them for a reasonable amount of time or pay a significant penalty. Ultra short term gains should be taxed out of existance [sic] – its not investing it is gambling.
But for bold regulatory comment period audacity, you just don’t get any better than Benjamin N. Dover III, recreated in full, after the jump.
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In the never ending quest to design a system where stocks and commodities never go down (except crude oil, grain and the like, of course) it is not “will the uptick rule return” but “which uptick rule will dominate.” Clever, the inevitability of the rule that is implicit in offering four versions for consideration. Plenty of argument wasted on “which version” rather than “should the damn rule exist in the first place.” Someone was reading their Monier when they scratched up this plan.
“The past 12 months have seen dramatic increases in volatility of oil prices, bonds, and just about every other asset class. How can anyone believe that the higher volatility of stocks was caused by the repeal of the uptick rule when volatility is higher everywhere?” asks Mr Newman.
Ah, simple fool. Who wants oil prices to constantly drift upwards? (You, in the back. Yeah you. OPEC boy. Zip it).
Uptick rule given new lease of life [The Financial Times]
Of course we all know how to make that happen: Simply regulate short selling and the hedge funds who poison us with it.
“We believe that short selling should operate in a well-structured regulatory framework in the interests of maintaining a fair, orderly and efficient market,” said Martin Wheatley, chairman of IOSCO’s task force on short selling and also chief executive of Hong Kong’s Securities and Futures Commission.
Several European Union countries introduced curbs last year unilaterally, drawing industry criticism over a lack of coordination in a single EU share trading market. The slide in many financial shares continued in spite of the curbs.
We are absolutely thrilled to see some action on this front, let us just tell you.
Regulators seek global approach to short selling [Reuters]
The FSA has released a report on short selling and, to our way of thinking, the renewed interest (did it ever fade?) in regulatory intervention is worrying. From the report:
Clearly, the most radical option for constraining short selling would be to impose a complete or partial ban.This section considers the various prohibition options and their associated costs and benefits; a prohibition would only be justified where we are satisfied that there are net benefits.
Of course, several less intrusive options for “potential constraints” are discussed. Time will tell if these are merely window dressing.
FSAShortStudyFeb09.pdf
Amid all the head scratching and hand wringing in yesterday’s Morgan Stanley crisis review piece in the Wall Street Journal, an interesting series of data points seem to have largely gone unnoticed. They are here:
You will notice that the lethally dangerous brew of frozen, toxic evil concentrate that is short selling delivers a blow reminiscent of the impact made by a down pillow during a teenage girl’s slumber party. The stock opens at $22.83, that price having been set by the market way before a slew of short selling and already down from the prior day’s close of $28.70. From there, and despite taking what looks like rather significant short volume all day, peaking at 500,000 shares sold short per minute just before the lunch hour but hitting 300,000 shares per minute again by the close, it closes at $21.75. Even the massive spike and the consistent 200,000 shares short per minute rate in the hour before lunch only pulls the stock from $23-$24ish down to $18 or so. On top of this, during the last two hours of trading, which saw the most sustained short selling volume for the day, the stock recovered from $17ish to $21ish.
So, on what frantic anti-short parties insist is the worst most manipulation-laden day the stock had seen and when the stock was supposedly most vulnerable to rumor and innuendo, this is the best short selling could do? This is the evil bear raid tool we are supposed to be terrified of? Not only had the damage already been done (and not by short selling or even the $25 billion Deutsche Bank credit line revocation rumor) but the stock was essentially flat compared to the prior day’s open, which was $23.89.
But none of that matters. Nor does the fact that the firm alienated and lost so many of its cash rich hedge fund clients by scape-goating them, and required $9 billion in equity followed by another $10 billion from the government. It was the evil shorts who killed Morgan Stanley. Right?
Anatomy of the Morgan Stanley Panic [The Wall Street Journal]
