Thursday, May 7, 2009

Short Selling Curbs Won't Create a Bull Market

Curbing or ending short selling will not turn a bear market into a bull market. Calls by short-sighted and market ignorant politicians to ban short selling, bring back the uptick rule or introduce 'cooling off periods' when the markets are dumping are very bad knee-jerk reactions.
Americans (in particular) have a deep-seated need to hear only good news. Bad news is to be avoided at all costs. Witness the stock market of late. The news reports say that banks need more capital or they are in danger of collapse, like Bear Stearns and Lehman Brothers did, remember? And what happens? The stock market rallies. CNBC trumpets the end of the bear market. The nation breathes a sigh of relief and goes after those scoundrels that caused this mess - the short sellers.
Studies have already proven that the outright banning of short selling throttled liquidity. And exchanges, ECNs, brokers and investment banks need liquidity in order to get their fees. The uptick rule didn't work before. That leaves the cooling off period. I wrote about this in Financial News in October last year. The consensus from designers of trading algorithms was that an algorithm can smell a time-out coming a mile off. Which means panic buying or selling will INCREASE during times of volatility. Making volatility GREATER. And the short selling could dump prices even faster and further than would have happened before. You can't beat the algos. My advice is to leave short selling alone, and let the market recover of its own volition.

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