Friday, September 19, 2008 0 comments ++[ CLICK TO COMMENT ]++

Consequence Of The Short-selling Ban On Financials

UPDATE: ProShares says that no new shares will be created but existing ones can be liquidated. One of the advantages of ETFs is supposed to be their inherent arbitrage which keeps their share prices close to the net asset value but that is going to be out of whack now that arbitrageurs can't create new shares of the ETF.

Here is a consequence of the financials short-selling ban. The Ultrashort Financials ProShares (SKF) isn't trading:



I have no position in it but just pointing out some results. I suspect that the derivatives market--such as those writing options--will also see less liquidity (since writers often hedge their derivatives position by taking long or short positions in the underlying stock.)

This isn't a big deal (except for those bears who need to get their money out) but it's something that may happen to other stocks. I never would have thought this possible a few weeks ago but it is quite possible for the stock market to shut down. I'm not expecting it to happen in America or Canada but things are nowhere near normal.

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