<DrumBeat: September 19, 2008 The Oil Drum Of pipelines and the future>

422 comments on No Naked Short Selling => No Short Selling at All => No Future Energy?

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x on September 19, 2008 - 5:43am Permalink | Subthread | Parent | Comments top

It has been long standing Republican ideology that government is the problem. One should not be surprised that when such people are placed in positions to enforce the law they do not do it. The Bush administration only enforces laws that suit it. It ignores the Constitution using fear, flag waving and patriotic rhetoric to justify things that would have been unthinkable years ago.

I find it odd why NSS was not balanced with Naked Long Buying where one could buy stocks that don't exist. Maybe it would have made the fraud so obvious that even the government hating and rule of law despising Republican officials could not ignore it.

In any case I find the concept that things that are borrowed can be sold to be rather bizarre. If I rent a car and try to sell it, I would expect to be arrested. If I borrowed a friends tool and sold it, it would probably be the end of the friendship.

While short selling may make for market liquidity short term, I doubt that there is a long term benefit to it except to market makers and those specializing in it.

There are many markets that are liquid with out short selling. The labor market comes to mind. Clothing markets don't have short selling and yet no one runs around naked. Same thing goes for food items not trading on the commodity exchanges.

Short selling facilitates the market makers and the flipping of financial assets quickly. It helps to create fast market conditions where long term investment is held in contempt because no one is committed to their investments. If investments were less liquid like real estate, people would likely not be so flip about buying a particular stock or commodity.

Volume of trades would slow, much to market makers dismay, but financial decisions would hopefully become more sound since buyers would be committed for longer time periods due to illiquidity. There would still be ups and downs as in the current housing market, but I doubt the world would come to an end or that markets would cease to function.

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Elkad on September 19, 2008 - 8:48am Permalink | Subthread | Parent | Comments top

"In any case I find the concept that things that are borrowed can be sold to be rather bizarre. If I rent a car and try to sell it, I would expect to be arrested. If I borrowed a friends tool and sold it, it would probably be the end of the friendship."

Wrong analogy. Its not a car or a tool, its a cup of sugar. I borrow it from you, to pay back tomorrow (plus a small fee). I'm guessing sugar will be cheaper tomorrow than today, so I sell today, and buy it back tomorrow. After I pay you the fee on the loan, I pocket whatever difference is left. Of course if I guess wrong, I have to pay more than I sold it for (or at least enough that I can't cover the interest I'm paying you without losing money)

Naked short skips the borrowing part. I find a buyer who wants sugar. I offer to sell him some at slightly under current price, if he waits till tomorrow for delivery. Since I don't actually own any sugar, I take my contract to the bank, show them that he's gonna pay me this much tomorrow, get a loan, and then use that to buy sugar at the last minute. Again I'm gambling that sugar will have dropped enough to give the buyer the discount, pay the interest on the short-term loan, and still leave some profit for me.

Either way, since some sugar didn't get purchased today, the odds are good that the price will drop slightly tomorrow. If we all do this, we can artificially push the price down (and then yo-yo it back up as we all try to cover our shorts, leaving the last few guys hung out for a loss)

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Remig on September 19, 2008 - 10:09am Permalink | Subthread | Parent | Comments top

I would describe the benefit of short selling as follows: Two parties - A and B. A owns a stock at price C. B owns none. B implicitly acknowledges the validity of price C by not buying at that price and by not selling at that price. B can only sell by a short sale since B does not own the stock. If short sales are blocked then, when B no longer acknowledges the value of C, C does not directly adjust in response. The market in the stock becomes illiquid. A eventually loses confidence in price C and sells to run away from the uncertainty.

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Nate Hagens on September 19, 2008 - 10:45am Permalink | Subthread | Parent | Comments top

we can argue about the benefits of short selling until we are blue in the face. given a long time horizon I might agree that short selling doesnt add a huge amount to the market. but given a long time horizon, the market doesn't add happiness or well-being to the planet or it's denizens. the issue at hand is there are hundreds of funds with trillions of dollars at their disposal - changing the rules of this magnitude is like a big ocean wave hitting a river canoe - it will teeter - it will rock back and forth, and its a coin flip whether if will capsize.

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mididoctors on September 19, 2008 - 12:10pm Permalink | Subthread | Parent | Comments top

same here

basically a load of guys are just betting something is overvalued..

is it or isn't it?

are all those mortgages correctly valued or not?

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422 comments on No Naked Short Selling => No Short Selling at All => No Future Energy?

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