Well, At Least SEC Improved On Its Latest Naked Short-selling Crackdown

Well, the SEC re-instituted its naked short-selling ban. The prior ban was a joke, not because I am against it, but because it limited it to select financial stocks. The new ban is for all stocks.

Short selling is fine and helps markets but I am against naked short selling. Selling more shares than are available impacts firms that depend on capital markets for funding. Typically financial institutions, penny stocks, resource companies, and tech/biotech start-ups are hurt by naked short-selling. This ban should have been instituted many years, or decades, ago. Patrick Byrne of Overstock (OSTK) has been harping for years about how naked short selling was hurting his company. Who knows if naked short selling is the reason for Overstock's struggles but if it wasn't widespread, it wouldn't even be in a discussion.

The cynic in me says that this change is going to have little impact. SEC doesn't have the resources to enforce it. But if someone is ever caught, they will pay a price now.

Comments

  1. AnonymousSeptember 18, 2008 at 1:11 AM

    There's always unintended consequences. Making shorting more difficult will reduce the longs' ability to hedge. This has the possiblity of accelerating the selling.

    ReplyDelete
  2. Sivaram VSeptember 18, 2008 at 10:40 AM

    Limiting naked shorting will increase the cost of shorting slightly.

    As for someone trying to hedge by shorting, well, they should go and borrow a share that actually exists.

    ReplyDelete
  3. UnknownSeptember 18, 2008 at 1:29 PM

    "Who knows if naked short selling is the reason for Overstock's struggles but if it wasn't widespread, it wouldn't even be in a discussion."

    Oh come on, message board pumpers always complain about "naked shorts" if the stock goes down for any reason. leh and aig were not on the reg sho list

    ReplyDelete
  4. AnonymousSeptember 18, 2008 at 2:41 PM

    As far as I can tell Overstock hasn't made a penny of profit, ever...

    Shortsellers are definitely not their problem.

    ReplyDelete
  5. Sivaram VSeptember 19, 2008 at 11:13 AM

    ContrarianDutch,

    You are correct in saying that Overstock never made any money but that doesn't mean much. Start-ups often don't make money for a while. Amazon didn't make money for something like 4 years. The key point is that these companies depend on the capital markets for funding so naked shorting hurts them. But like I said, I'm not saying Overstock's problems are all due to naked shorts or if even any of them are. But that's the argument of their CEO.

    ReplyDelete
  6. AnonymousSeptember 19, 2008 at 1:55 PM

    But I definitely see the argument in shorting the stock of a company that has never made any profits, does not seem likely to make any in the foreseeable future and is only kept afloat by the unwavering belief of it's devotees. They have been in business for nearly ten years and are hardly a completely fresh startup.

    What is the plan here? Keep issuing new stock again and again forever? Looks like a posterchild for "companies that deserve to be heavily shorted".

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Charlie Munger: Stock market as a pari-mutuel betting system

The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market . Everybody goes there and bets and the odds change based o­n what's bet. That's what happens in the stock market. —Charlie Munger, "Art of Stock Picking" Although I don't share the same views on politics, I am probably closer to Charlie Munger than Warren Buffett when it comes to how we view the world. Warren Buffett is almost singly focused on business and investing, and is not very opinionated, indeed possibly not knowledgeable, in other areas. In contrast, I am closer to Charlie Munger in the sense that I have diverse interests—you can probably tell by the articles I link to or write about—and have an opinion on almost anything. There is one big difference though: I am not into the field of psychology quite like Munger. So it may be surprising to see me rarely
✖ READ MORE >>>