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July 23, 2008


They are banning *naked* short selling. This is an already illegal practice.

They aren't banning short selling, or put buying, or call selling.

I've been hearing people speak about "rumors" as if they're some type of criminal activity. This worries me. In the 1970's the Indian government veered toward a more draconian socialism, with the imposition of "emergency" rule. The government began to enforce censorship on political news.

Most programs on the (then exclusively government-run) TV started to be interspersed with "public service" announcements telling people to be "good citizens", in various government-approved ways. One of the admonitions was not to spread "rumors". For instance, if a political opponent was arrested, the press may not be allowed to report it, but the news would filter through the grapevine. The government's anti-rumor campaign was a way to clamp down on this.

There are laws about slander and libel; but to expand these with some fuzzy concept of "rumor" is a dangerous step toward clamping down on free-speech.

Aron, if illegality were clear the SEC wouldn't have to issue a new order. And even if they are illegal they shouldn't be.

Software, we aren't as far from that happening here as many assume.

This specific policy is not going to have a big impact. Think of it like a restriction on the airline industry from overbooking their flights, in an environment where a passenger getting bumped on a flight is already an extremely rare event. I agree with Aron, that this is an additional regulation that will make it a little easier to enforce another existing regulation.

Ironically just as bills to limit oil speculation are moving forward (but apparently aren't expected actually to pass, it is still just for show), the preliminary report from the government task force set up to study the problem is out. Unsurprisingly it reports that speculators aren't actually to blame for recent high prices, it is supply and demand:


As someone who is invested in oil, I want to know who's going to go after the blankety-blank speculators who have been driving the prices down the past couple of weeks? I am out several thousand dollars! Maybe I should write to my congresswoman. Ban short selling of oil while you're at it!

If, as that quote implied to me, investors and customers react to bad news irrationally, or in personally rational but socially harmful ways, this makes more sense - at least if regulators genuinely know better.

or in personally rational but socially harmful ways

It's not the rightful function of government to prevent any and all "social harm". Even if people were capable of designing and implementing machines made of other people, that isn't what society is, and it's not what we should try to make it to be.

Robin writes: "The result of these sort of policies is sad and obvious: it will take longer for us to find out about bad news, and so we will interpret silence and apparent good news more skeptically."

Hm, are there any suggested practical approaches to reverse this tendency of ours to shoot ourselves in the foot? In a way I think it mustn't be that obvious to many people that these policies are bad, because then wouldn't there be more of an outcry against such policies?

Journalism codes typically discourage reporting on suicide - presumably bc this type of bad news typically spurs more of the same:


I haven't figured this one out, myself. Does anybody have any thoughts?

I agree that short selling allows new actors to play a part in the pricing process on a stock, so that it could increase the accuracy of the price compared to some objective target. But, when you short a stock, you borrow shares from a holder & sell them to a new buyer. So, if there are 100 million shares outstanding, and 20 million shares are sold short, that means that there are actually 120 million shares held in the market. If they are $10 per share, that means that $1.2 billion has been invested, ostensibly, in the company. But, only $1 billion is actually in use by the company. The other $200 million is being used by the short sellers to capitalize some other activity. It seems like this creates a perpetual undervaluation of the actual company, since the market must continue to attract $1.2 billion worth of investors in order to maintain a market capitalization of $1 billion.
Short selling is a hard business, and market wide, it's a fight against an ebbing tide, so maybe it's the short sellers as a group that end up paying in the end. But, even though I can't put my finger on it, it seems like short selling would have an depressive effect on the market even beyond its ability to "rationalize" prices.
It also seems like if there is something unfair, it is the fact that the lender of shares gets to pocket the fee from the short seller at the expense of the other shareholders, who don't receive the fee but still have to suffer the depressive effect of creating an artificial seller in the market. Maybe it would be a better system to have all short selling be naked, with all short sellers automatically paying a set interest rate to a central fund that is paid out as a dividend to all shareholders.

The distinction between naked short selling and short selling is real, but irrelevant in this context. You only need to look at the rhetoric against oil speculators to know that this isn't about exploiting market mechanisms, but about banning markets from falling and chilling the spread of information.

This isn't bureaucrats trying to fight financial wizardry, this is simple shoot-the-messenger politics. Bear Stearns was over-leveraged and heading for collapse. Lehman Brothers is also unsound. Overstock is crap too, incidentally. If it's not about the fundamentals, as some of the messenger-shooters claim, then name me one single company with good cash flow and a sound balance sheet that was made bankrupt by a shorting conspiracy.

Someone on another messageboard trotted out the old "Free speech doesn't give you the right to yell 'Fire' in a crowded theatre" cliché. My reply was (sans expletives) "Shouting 'Fire' is not just a right but a moral imperative when the theatre actually is on fire".

How about mandating equal amounts good and bad news? Massive fire in city but on the good side land prices down etc. This might seem silly (even in Romania http://www.eurotopics.net/en/presseschau/archiv/article/ARTICLE30606-A-quota-for-good-news ) but is it that different from having to get balance in debates on television?

We have nothing to fear but fear itself.

Surely the SEC is merely trying to trick its political masters into believing it is doing something, especially banning short selling. I trust the SEC to do this with minimal damage to the market. A month from now, I doubt that this will have any effect. (At least not a disproportionate effect on short selling; it has the effect of uniformly reminding traders that the SEC has power over them.)

The issue with newspapers and suicide seems to be self-censorship rather than banning, and we can't expect a newspaper to report every single thing anyone might find interesting. On that subject though, many writers of a somewhat white-nationalist bent complain that the media has an unofficial policy of suppressing reports of the race the perpetrators when they have stories on a violent assault. I don't read newspapers myself, so I don't know to what extent it's true, but I would be interested in what anyone with more insight into the internal workings of the media has to say.

TGGP, I think this may fall into a general economics of self-restraint which I would like to see more research into, interdisciplinary compilation of instances of, and synthesis into a coherent set of theories and body of knowledge. For example, one could argue Fox News loosened self-restraints regarding racial and other reporting (though not to the degree white nationalist sites might prefer) and a huge transfer of wealth resulted to the benefit of Fox Corporation. What exactly is going on here (Note: people shouldn't feel compelled to rush in to fill the status-vacuum with their preferred intuited explanation).

Think again please.

The people or businesses attacked have no chance to defend themselves. When confidence is critical, such as a marriage arrangement or in a banking business, an evil word may destroy years of confidence building effort. While I demonstrate that I am not a cleptomaniac, my chance at the job may have passed. While I demonstrate that I am not an alcoholic gambler, my fiancee may lose her patience with my troubles. While a bank demonstrates its solvency, it may be too late to stop the run. People needs protection against these type of attacks on reputation.

Being erev shabbes, it behooves to mention Chatam Sopher, a rabbi, who wrote a book forbidding badmouthing people or businesses.

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