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Short selling now under control????

redgtxdi

Diamond Member
Jun 23, 2004
5,458
7
81
So, the 10/8/08 short selling ban is over but now this new deal is supposedly going to take care of the short selling??

I'm not big on trading, but I get the gist......short selling = questionable ways to make quick money.


Are new policies going to take care of unscrupulous quick selling??

Does more need to be done?? (if so, what?)

And how in the heck did the SEC let this go on for so long??? (assuming they've now come to the decision that it was a bad thing after 120 years of trading)
 

Vic

Elite Member
Jun 12, 2001
48,671
9,807
136
Whatever Cramer told you, either do nothing or do exactly the opposite.
 

frostedflakes

Diamond Member
Mar 1, 2005
7,925
1
0
Yeah, in a healthy market I don't think short selling is a problem. With large financial institutions on the brink of collapse, though, it was very dangerous. IIRC short selling contributed a lot to Lehman's bankruptcy.
 

redgtxdi

Diamond Member
Jun 23, 2004
5,458
7
81
I think the idea tonight was that there was too much coordinated short selling by "large" parties.

Thus questionable influence in the market and.........bam, easy profit by said coordinated parties.


 

halik

Lifer
Oct 10, 2000
25,696
1
0
coordinated short selling with large amount of capital will move the spread
 

GroundMeat

Member
Mar 16, 2008
25
0
0
Shorts are fine. You can bet for (long) be unsure (not own) bet against (short). Plus short positions give vital information with regards to where people think the stock price is going. The pendulum always swings both ways, shorts just grease it to the down side.

Being leveraged 30:1 and your bubble bursts on the other hand is a recipe for disaster.

A story about leverage: http://www.bloggingstocks.com/...ll-sells-entire-stake/

He will probably build up his stake again but DAMN $2B+ going poof has got to hurt (he owned 6% of the co.).

Cramer is entertainment not advice.
 

Special K

Diamond Member
Jun 18, 2000
7,098
0
76
Can someone explain to me the rationale behind banning short selling? How could shorting directly contribute to the decline of a stock's value? Isn't shorting just a bet that the stock will go down in value? You borrow the stock, sell it, and then hope you can rebuy it later at a lower price when you have to return the stock you borrowed. If the stock has risen since you borrowed it, then you have to buy back at a loss.

How does that cause the stock to go down in value?
 

GroundMeat

Member
Mar 16, 2008
25
0
0
Just like buyers willing to pay more for an ownership stake in the co increases its stock price. Sellers willing to sell at lower and lower price drive a stock's price down. Shorts increase the amount of selling going on, thus drive prices just a little bit lower.

Whats going now is de-leveraging. Lets say you are a normal person and initiate an equity position of 50% (2:1 leverage), depending on your firm you will get a house call to cover said margin balance at around 35ish % equity (gotta cover ASAP). You get a fed funds call should it reach 25(3:1)% (ish) equity (cover today or get sold out). You have two choices either add cash to the account or sell out. If you add cash its dollar for dollar. If you sell out it's ~$3:$1 so you have to sell ~$3 worth of equity to cover $1 worth of margin. Now imagine a hedge fund / investment bank with 10/20/30/40:1 leverage, and it's loosing money, the markets are crappy, and clients are not sending money. You have to sell and you have to sell A LOT, and it's not just your hedge fund it's industry wide. Big boom which is what we have right now!
 

JS80

Lifer
Oct 24, 2005
26,260
4
81
Originally posted by: Special K
Can someone explain to me the rationale behind banning short selling? How could shorting directly contribute to the decline of a stock's value? Isn't shorting just a bet that the stock will go down in value? You borrow the stock, sell it, and then hope you can rebuy it later at a lower price when you have to return the stock you borrowed. If the stock has risen since you borrowed it, then you have to buy back at a loss.

How does that cause the stock to go down in value?
It's naked shorting and market manipulation that is the real threat.
 

Craig234

Lifer
May 1, 2006
38,548
345
126
IMO: The basic stock market activity is to buy and sell stock, period. If you think a stock will go up, you buyand hold it, and when you think it won't, you sell it.

This creates supply and demand pressures that determine the stock's market value.

Every other activity represents the financial industry's desire for additional ways to profit more, from the relatively simple (covered shorts) to the very complex (see physics Ph.D's).

Shorting does provide an additional way to profit from a stock. Instead of just watching stocks go down not owning them when you think they'll go down, you profit from it.

There is a price for this; your sell as part of the short creates additional 'supply' which under supply and demand lowers the price.

On a larger scale this can become a market manipulation under some circumstances. Wall Street will defend it passionately, since it is one more way to profit.

From the perspective of 'is it good for business/the nation' outside of the financial industry, I'm not sure the benefits of short selling are much at all, that it'd be bad if it didn't exist.

One basic idea about the financial industry is that if you take a chunk of cash, the more bites that get taken out as it goes through Wall Street processing, the better for Wall Street but the worse for society as financial transactions become more expensive. Financial activities are not island, those who don't want to play are affected. If you want to buy a home, the price you pay is higher when Wall Stree hands out the loans with looser credit requirements, as the demand for the houses and the ability to pay more goes up.

From there, of course, you get into more and more complex and risky transactions; one small step up is simply margin trading, where you can make more by risking more with the same amount of assets, that raises the stakes - and usually works, given the limitations on margin amounts, so that most people can usually repay (and sometimes they can't and you get into bankruptcy and such, an overhead society is willing to pay for the chance to make more money most of the time).

Of course, Wall Street does things big, and that's where you get into the complex situation in the middle of the crisis, the housing bubble and how people profited from it, the creation of derivative financial products based on the riskier mortgages, and the selling of them with ill-protected 'insurance' in credit default swapd and the financial pressures on the Wall Street firms to partake in the orgy lest they miss out on the profits, all the while with the risk of major crashes floating around.

I wonder if the two basic sides of the argument aren't the one saying 'screw Wall Street, let them make a reaonable profit but not play too many risky games', and the other the one that stands to profit from those games and wants to get to do all kinds of things. The huge size of the financial industry - which ultimately is 'overhead', not directly creating goods and services for our nation but only facilitating those activities and often more IMO leeching off of them - finace being larger than manufacturing suggests it's too big.

I think it might make sense to have a national commission to study what our financial industry should do for the good of the nation versus what activities are merely leeching and risky activities to create profit for the industry, and to suggest new government regulations for the industry. But I suspect that politically the money in supporting Wall Street far outweighs the money you get for reigning them in.
 

Nemesis 1

Lifer
Dec 30, 2006
11,366
2
0
Originally posted by: JS80
Originally posted by: Special K
Can someone explain to me the rationale behind banning short selling? How could shorting directly contribute to the decline of a stock's value? Isn't shorting just a bet that the stock will go down in value? You borrow the stock, sell it, and then hope you can rebuy it later at a lower price when you have to return the stock you borrowed. If the stock has risen since you borrowed it, then you have to buy back at a loss.

How does that cause the stock to go down in value?
It's naked shorting and market manipulation that is the real threat.
Bingo. Market manipulation has been going on by the big boys along time. This shake up all though bad. Short term. Could be great in long term. Some of the worse offenders are now insolvent. Hip Hip hurr AY. If shorting stocks is bad going Long must be good than right. According to pyhsics for ever action there is = opposit reaction. LOL . The big boys got stomped. But lets face it . The players are still rich . The money lost was ours. Not theirs . They still have theirs.

 

ultimatebob

Lifer
Jul 1, 2001
24,199
1,831
126
If Cramer was half as smart as he thinks that he is, he would have told you to sell all of your stocks BEFORE the market tanked. Instead, he told you to unload everything after the market dropped, insuring that you would have missed out on Monday's rebound. Way to add insult to injury there buddy.

So, yeah... Do what Vic said, and basically do the opposite of what that moron tells you do to.
 

StageLeft

No Lifer
Sep 29, 2000
70,150
2
0
He isn't against shorting, he said he made half his hedge's money on it. I think it combined with the credit derivatives (no idea what I'm talking about now) are what helped it.
BEFORE the market tanked. Instead, he told you to unload everything after the market dropped, insuring that you would have missed out on Monday's rebound. Way to add insult to injury there buddy.
Wrong. He said a before Monday's rebound to cash out. He also said before Monday's rebound to buy 25% on Monday, so in fact he timed this perfectly. No, he didn't tell everyone to cash out Oct/07, but from what I can tell if a person had followed his advice to the letter, they'd be ahead of the market right now.
 

brencat

Platinum Member
Feb 26, 2007
2,170
3
76
Cramer is the worst. I actually watched his show for the first 10 mins last night and got visibly irritated. The guy acts like he's running a game show -- mildly entertaining to some, and nausiating to most. And he's dead wrong 80% of the time too.

What he was railing on was naked short selling btw. Anyone who sells stock short is required to 'locate' (i.e. borrow) the stock first. Wall St. firms have stock loan depts to facilitate this. Traders who want to short make a quick 20 sec phone call to stock loan and check the borrow to make sure it's okay.

The problem comes about when either there isn't sufficient borrow in a name or the trader decides he's going to short it anyway without securing the borrow (naked short selling), knowing he's got 3 days before the trade settles and at least a short period of time afterward to rectify this situation before he gets bought in due to a failure to deliver said stock to the buyer. Most of the time, you can get away with it because the trader covers the position shortly thereafter. In addition, SEC requirements that you provide the 'source' of your stock locate are a joke -- all that was typically required for years is that you indicate your own firm's name on the trade execution screen (this has since been beefed up after the sh:t hit the fan -- about time).
 

jman19

Lifer
Nov 3, 2000
11,183
610
126
Originally posted by: JS80
Originally posted by: Special K
Can someone explain to me the rationale behind banning short selling? How could shorting directly contribute to the decline of a stock's value? Isn't shorting just a bet that the stock will go down in value? You borrow the stock, sell it, and then hope you can rebuy it later at a lower price when you have to return the stock you borrowed. If the stock has risen since you borrowed it, then you have to buy back at a loss.

How does that cause the stock to go down in value?
It's naked shorting and market manipulation that is the real threat.
Yeah, this. Naked shorting can cause an imbalance to what would normally be sold off.
 

351Cleveland

Golden Member
Apr 14, 2001
1,381
6
81
Short selling is evil. I am 100% against it. It requires that the stock tank... and betting that it will... and the act of short selling can sometimes lead to that stock price drop all on its own. There are very few events where that can be predicted OTHER than having insider information or other information that one should not have (like being the cause of a massive stock drop... a la 9/11).

Short selling = bad... at least that is my opinion.
 

seemingly random

Diamond Member
Oct 10, 2007
5,281
0
0
Originally posted by: 351Cleveland
Short selling is evil. I am 100% against it. It requires that the stock tank... and betting that it will... and the act of short selling can sometimes lead to that stock price drop all on its own. There are very few events where that can be predicted OTHER than having insider information or other information that one should not have (like being the cause of a massive stock drop... a la 9/11).

Short selling = bad... at least that is my opinion.
I used to think this way also. As it turns out, it's not unpatriotic. It helps eliminate excesses and occasional cancers in markets. As in medicine, the treatment is sometimes worse than the disease.

Shorting can be used as a tactic for subterfuge just like unmitigated optimism.
 

GroundMeat

Member
Mar 16, 2008
25
0
0
Shorting is evil? How about thinking that Enron is a crooked company and that they are cooking their books? That must be evil. What about thinking Oil at $140 a barrel when there is a possibility that there is going to be a slowdown in the US is damn crazy? Damn that must be a plan from the devil, etc. you get my point.

There are many events that can be predicted, for example the market is predicting that 1st and 2nd quarter of next year there's going to be a recession.

As SR said shorts help work the excesses in the market out faster, so we can get on with growing sooner.

Craig what you said makes absolutely no sense.
 

Special K

Diamond Member
Jun 18, 2000
7,098
0
76
Originally posted by: jman19
Originally posted by: JS80
Originally posted by: Special K
Can someone explain to me the rationale behind banning short selling? How could shorting directly contribute to the decline of a stock's value? Isn't shorting just a bet that the stock will go down in value? You borrow the stock, sell it, and then hope you can rebuy it later at a lower price when you have to return the stock you borrowed. If the stock has risen since you borrowed it, then you have to buy back at a loss.

How does that cause the stock to go down in value?
It's naked shorting and market manipulation that is the real threat.
Yeah, this. Naked shorting can cause an imbalance to what would normally be sold off.
Actually now that I think about it, couldn't regular shorting cause the stock to go down if lots of people are shorting at once? They borrow a share, and try to sell it. If lots of people are doing this to the same stock at the same time, the price should drop. Of course, what it does after that shouldn't be affected by the shorts, should it?

There could also be a large upswing when all of the short positions panic and rebuy to cover their shorts. Is that correct?
 

halik

Lifer
Oct 10, 2000
25,696
1
0
Originally posted by: 351Cleveland
Short selling is evil. I am 100% against it. It requires that the stock tank... and betting that it will... and the act of short selling can sometimes lead to that stock price drop all on its own. There are very few events where that can be predicted OTHER than having insider information or other information that one should not have (like being the cause of a massive stock drop... a la 9/11).

Short selling = bad... at least that is my opinion.
That's absolute rubbish. Short selling is a necessary tool to keep market at an equilibrium. Without being able to bet the the other way, the market would be a series of bubbles with profound busts.

Assuming that investors are mostly rational, shorting dispels most of the irrational exuberance out there.
 

First

Lifer
Jun 3, 2002
10,518
271
136
^ Exactly, short selling has its place and provides a framework for stability. Derivatives and CDS, I'm not so sure.
 

JS80

Lifer
Oct 24, 2005
26,260
4
81
Originally posted by: Evan
^ Exactly, short selling has its place and provides a framework for stability. Derivatives and CDS, I'm not so sure.
Derivatives are fine as long as there is a clearinghouse to service it. OTC CDS on the otherhand has huge risks.
 

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