SEC Issues Temporary Ban Against Selling Shorts

19Sep08

The Securities and Exchange Commission on Friday launched an aggressive assault against short-sellers, saying it would temporarily prevent investors from making bets on stock declines in an attempt to stem some of the worst stock-market slides in years

That’s right, folks. There’snow a ban on shorts, with sandals, beach umbrellas, thongs, and t-tops to follow.   Get to the beaches fast, before we’re all forced to wear those long woolen things from the 20s and earlier!

Erm.. ok that’s not really what it means.  Ian Welsh from firedoglake.com had a very interesting article on this temporary ban of short selling.

Over the pond, in yonder Britannia, they decided to ban just not all naked shorts on financials, but all shorts on financials period. The SEC is trying to decide if it should follow suit, or if it should go all in and ban all short selling, period.

This smells of panic driven decision making. Regulators are in a cold sweat, and they haven’t thought this through. Short selling, ironically, provides market support. If you sell a stock you don’t have, that means you are now on the hook for it. As the price declines, you have to buy. You become built in support. One of the ironies of short selling is that it makes steep and precipitous declines less likely. Huge amounts of short “interest” on a stock means that it also has huge amounts of built in support on the way down.

Go read the whole thing, if you’re just that masochistic and into knowing just how paniced we are.

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