Should Short Selling be banned period?

OK. Short selling. The history.

1. People or banks are trusted.
2. They are allowed to take out an infinite liability on their trust. (That means if I sell one of your shares for $1, and it goes to $1000, I have to buy it back at that ratio before the books balance).
3. They were never involved in the company before.
3 1/2. They short sell.
4. They add to volatility.
5. Capitalist companies want stability and certainty.
6. Short sellers by making things more volatile are reducing certainty and stability.
7. The point of short selling is that it evolved, it was not necessarily beneficial. You had to declare your books once a month, not before.
8. We want everyone solvent all the time.
9. Forcing people to be solvent all the time is not a bad thing, ban short selling.

Is this reasoning wrong? Facts wrong? I thought that the arguments for short selling was that it was inevitable, not good. I think it's about solvent books. What is economically wrong with all of this?

Not quite sure I get where you are coming from OP. Sure there are plenty of things about short selling that could be tweaked. I'd like to see the FTD issue addressed. I also don't think anyone should be able to naked short.

Short selling should not be banned however. You might as well make it illegal to sell stocks, that way the market would only go up right. Short selling benefits the market in several ways. It adds liquidity to markets. It allows better price discovery. It incentivises those of a skeptical demeanor to seek out companies that are quite frankly turds and profit from there fall. It does put some support on prices as shorts must cover (which means buying a stock) to close a position, sometimes even to the point of a short covering rally. With no shorting several hedging strategies are not viable.

There are some things I'd like to see better enforced. Market rumors that damage a stock and are unsubstantiated as well as market rumors that could pump a stock (ie Buffet buying something like last fall) and are unsubstantiated should be prosecuted with equal vigor.

Shorting is currently forbiden against almost all financials yet the XLF fell over 13% today and most if not all stocks in that etf are currently unshortable.

Originally posted by jefwane
Not quite sure I get where you are coming from OP. Sure there are plenty of things about short selling that could be tweaked. I'd like to see the FTD issue addressed. I also don't think anyone should be able to naked short.

I disagree.

Short selling should not be banned however. You might as well make it illegal to sell stocks, that way the market would only go up right. Short selling benefits the market in several ways. It adds liquidity to markets.

via volatility.

It allows better price discovery. It incentivises those of a skeptical demeanor to seek out companies that are quite frankly turds and profit from there fall.

We need better price discovery..... before the event and through regulation.

It does put some support on prices as shorts must cover (which means buying a stock) to close a position, sometimes even to the point of a short covering rally. With no shorting several hedging strategies are not viable.

No, the point is that there is no need for it if the brokers books are real-time. That's not socialist mate, the market decrees that it is real-time.

There are some things I'd like to see better enforced. Market rumors that damage a stock and are unsubstantiated as well as market rumors that could pump a stock (ie Buffet buying something like last fall) and are unsubstantiated should be prosecuted with equal vigor.

Shorting is currently forbiden against almost all financials yet the XLF fell over 13% today and most if not all stocks in that etf are currently unshortable.

Hit volatility where the profit in it starts........

[edit on 29-9-2008 by redled]

I'm not getting your argument at all. If I choose to short a stock, I'm taking a big risk if I'm wrong. Even more than if I buy (=go long) a stock. If I buy a stock my downside is limited to if the stock goes to zero, a defined risk. If I short a stock and am wrong my potential losses are infinite. Example I buy 1000 shares of xyz at $10 for a total long of $10,000 my maximum risk is $10,000 if the company goes bankrupt with my upside only limited by the rise of the stock. If i short xyz 1000 shares @$10 a share i borrow those shares sell them for a $10,000 credit to my account i now have an open short position. If XYZ goes BK and to zero per share I make 10,000. If xyz goes to $5 a share and I decide to cover I have to buy 1000 shares @$5 a share leaving me a credit to my account of $5,000.If xyz suddenly finds a donkey that poops gold I must buy shares to close my short. If those shares are now $15 a share I must buy 1000 shares for $15,000 (10,000 of the initial credit + another $5,000 of my money) to cover. Shorts put potential infinite losses on the line for a defined maximum gain.

There is a place for the short seller in our system. I'm all for certain reforms, but removing the abillity to short is a desperate attempt to 1) Find a scapegoat 2) keep things together 3) Protects dead and dying institutions from the vultures who play an improtant role in the ecology of free markets.

What is wrong with volatility? I know it can cause some heartburn at time, but at the end of the day I'd rather buy a stock that has a higher average volume of shares traded than one that is thinly traded. The bid ask spreads on the thinner issues can be larger, and thinly traded stocks are easier to manipulate.

[edit on 29-9-2008 by jefwane]

Originally posted by jefwane
I'm not getting your argument at all. If I choose to short a stock, I'm taking a big risk if I'm wrong. Even more than if I buy (=go long) a stock. If I buy a stock my downside is limited to if the stock goes to zero, a defined risk. If I short a stock and am wrong my potential losses are infinite. Example I buy 1000 shares of xyz at $10 for a total long of $10,000 my maximum risk is $10,000 if the company goes bankrupt with my upside only limited by the rise of the stock. If i short xyz 1000 shares @$10 a share i borrow those shares sell them for a $10,000 credit to my account i now have an open short position. If XYZ goes BK and to zero per share I make 10,000. If xyz goes to $5 a share and I decide to cover I have to buy 1000 shares @$5 a share leaving me a credit to my account of $5,000.If xyz suddenly finds a donkey that poops gold I must buy shares to close my short. If those shares are now $15 a share I must buy 1000 shares for $15,000 (10,000 of the initial credit + another $5,000 of my money) to cover. Shorts put potential infinite losses on the line for a defined maximum gain.

That does not make them virtuous. We are talking about the phenomenon itself, not the basic bookwork that makes them a result of allowing it in logic(k). The point is that you go short on a company, you had no prior interest. Why should you be allowed to affect your views on that company?

There is a place for the short seller in our system. I'm all for certain reforms, but removing the abillity to short is a desperate attempt to 1) Find a scapegoat 2) keep things together 3) Protects dead and dying institutions from the vultures who play an improtant role in the ecology of free markets.

You are apologising for something that is not needed.

What is wrong with volatility?

Try to stop being anything right wing economically. Businesses seek stability and an environment that helps it. Check out history and old Ronnie Reagan's commitment to democracy.

I know it can cause some heartburn at time, but at the end of the day I'd rather buy a stock that has a higher average volume of shares traded than one that is thinly traded. The bid ask spreads on the thinner issues can be larger, and thinly traded stocks are easier to manipulate.

I think 'manipulate' is the most pertinant word.

reply to post by redled

That does not make them virtuous. We are talking about the phenomenon itself, not the basic bookwork that makes them a result of allowing it in logic(k). The point is that you go short on a company, you had no prior interest. Why should you be allowed to affect your views on that company?

Yes it does make them virtuous. They are putting their capital at infinite risk for a defined maximum profit. Were it not for the efforts and research of short sellers no one would have known about Enron/Worldcom/pets.com and a plethora of other bad stocks. Say for example I start researching a company I'm thinking of buying stock in. After pouring over publicly released financial statements I find serious problems in how they value their assetts. After this due dilligence I decide I'd rather short them than buy. How is my decision morally inferior to deciding to buy the stock? If I'm wrong I stand to lose potentially more than if I bought the stock, if I'm right the limit to the amount I will make is a defined and finite amount.

reply to post by redled


You cannot put measures against a market and expect it to behave correctly, or even naturally..

Taking away Short Sales actually takes away a buyer, and instead of short selling, they would dump the stock..

Just because the market does not do what you want it to do, does not mean you have to grab it round the neck and try and force it to do what ever it is you want..

We see enough meddling in he economy by our government, and it's effects are sometimes quite noticeable.. in the many many years short selling has been around, it has never once been the cause of the economy crashing.

Remember that short sales are only bets, essentially, that the stock will drop..

In my personal opinion, there should be NO publicly traded companies, except for utilities.

... how does that make sense?

I personally think utilities should be nationalized entities because they run regional monopolies..

if corporations had no stock, there would be no corporations.

reply to post by sir_chancealot

In my personal opinion, there should be NO publicly traded companies, except for utilities.

OK, you have the right to your opinion, but I like a free market. Where do you propose to replace the stock market that companies would be able to raise money by selling shares of themselves in a regulated ( in theory) market?

reply to post by redled


I work in the securities industry and am against short selling. i think it should be illegal for every stock and any other security.

We are supposedly a free market system where supply and demand sets the price of any particular security. By allowing people to sell things that they do not own, supply is artificially increased which of course drives down the price.

Also we are set up to be an investor economy. Shorting a security is basically anti-investing. It is not in our economic interest to allow such wealth destroying tactics instead we need to motivate folks to invest in such a way as to stimulate the economy.

At the very least we need to raise taxes on short transactions profits to 50% or so. That would discourage the activity greatly.

reply to post by disgustedbyhumanity

am against short selling. i think it should be illegal for every stock and any other security.

DBH say it ain't so. You make alot of sense otherwise. It's not like they are selling something they don't own and simply pocketing the money. They must (unless the stock goes to 0 ) cover at some point by buying the stock at the market price whether it is above or below the price that they sold the borrowed shares at.

Are you also against long puts, short calls, and inverse etfs?

reply to post by jefwane


I am all in favor of puts calls spreads, etc. Inverse ETf's if they do it with futures and not shorting the stock.

It is my point of view that if you think a stock is overvalued, don't buy it or if you own it, sell it. Or bet against it in the options market. The merits of a company are eventually reflected in it's stock price. Short sellers only speed that process up and quite often make it impossible for the company to recover. A lack of shorting of financials has not led to artifically pumped up prices or prevented precipitous drops. Seems that stocks do indeed correct without having short sellers intervene.

And as for the market maker exemption, that is a lark. I can see some need for temporary, close out at end of day, shorting in order to balance intraday trading of the underlying stock, but I do not think that options market makers should be able to short(or long for that matter) to offset the risk of the trades they enter. Again match buyers and sellers so that true supply and demand. ban shorting and plenty of liquidity would enter the options markets.

Bottomline is that short selling brings nothing to the economy. Any gains spent by the victors is offset by the losers.

No, Short selling is brilliant in it's effect. The ban was pure stupidity and a kneejerk reaction.

Without shorting when the economy tanked today, about 1.1 Trillion dollars evaporated, simply disappeared from the economy, forever lost.

With shorting and in a perfect model every dollar of loss would simply have changed hands. Zero economic loss. We would have weathered the storm without significant damage, under the new management of those with the best foresight for our current situation.

The suspension of short selling may in the final analysis be the worst possible action to have taken. This is what happens when Idiots get their hands on systems they do not comprehend.

Here is a simple anlaogy. You have some hormone imbalance in your body and there is a refrigerator with every known hormone therapy available.

Do you want George Bush to pick one out for you and shoot you up with it?
I think I would rather wait to see if I die a natural death first, thank you.

If you wanted to more "perfect" our financial system you would build in a perfectly balanced short / long balance. There would be pools of short / long stock always in harmony, no one could buy a long without someone buying a short. The real value in the market always being maintained, even if the real value of the stocks tank.


[edit on 30-9-2008 by Cyberbian]