Should shorting be suspended/banned?

cordelia said:

Look herein lies the problem...NOT ALL SHORT SELLING IS ABOUT SELLING SHARES THAT DON'T EXIST....PLEASE FOR THE LOVE OF GOD WILL SOMEONE EXPLAIN THIS!!!!!!!AND I AM NOT RELIGIOUS BTW

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Yeah. I think I understand that.

It is just that is the part of shorting that disgusts me. I think it creates an unfair advantage for people using that method and has no ongoing benefit to the market and it's participants

Thanks.

The ASX banning short selling but then allowing only market makers to short sell is ridiculous. Talk about an unlevel playing field. (Not that it is anyway but that is blatant).

Also how about trumpeting some rule changes to market participants - i.e. normally a change like this would go through a review process and be flagged to market participants at least several weeks in advance. Not knee jerk reactions deciding to change the rules on a Friday afternoon for the next Monday. How is that fair to the people that do have legitimate open short positions or are trading on the basis of one set of rules.

And why does Australia have to follow America's stupidity every step of the blinking way in this universe?

ASIC is a joke. So is the self regulated ASX.

Some have asked what's the situation about shorting CFD's?

This was released on IG Markets Website

Short Selling FAQs

What is the new policy?
On 18 September 2008 the FSA decided to prohibit the creating or increasing of a short position in a total of 29 UK quoted banks, general insurance and life assurance companies.

What are the specific shares that I cannot sell short?
A full list of affected stocks can be found here.

How long will these restrictions last?
The regulation ceases to have effect on 16 January 2009.

What if I already have an existing short position in one of the affected stocks?
You can keep your position open but you cannot increase your short position any further. Under certain circumstances when borrowing restrictions arise, as detailed in our Customer Agreement, this may not be the case and your position may have to close prematurely.

Could I mistakenly open a new short position in one of the affected stocks?
We have adjusted our systems to impose restrictions on the affected stocks; but, it remains your own responsibility to make sure you do not breach the FSA's requirements.

Will I have any difficulties closing long positions on any of the affected stocks?
No, selling to close an open position is not short selling and is completely unaffected by these changes.

Can I go short on any other stock?
Yes, there are no new restrictions on any other stocks. The only stocks affected are those named in the above attachment.

What if I already hold an existing short position in a stock not included in the list?
These are unaffected. You can keep your position open until it expires or you choose to close it.

Will I have any difficulties closing other long positions on non-affected stocks?
No, there are no issues closing existing long positions.

Are other markets outside of the UK going to be affected?
Yes, the US regulator announced similar measures on Friday 19 September 2008. We will update our current rules in line with regulatory changes as any new restrictions are applied. This will affect the availability of certain stocks to be sold short, as in the UK. Similar announcements have been made regarding the Irish and Swiss exhanges and there may be more announcements to follow.

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chops_a_must said:

Christ.

The derision levelled at Nioka is about his comment about hedging to Delta, which is absolutely essential for all markets. Got it?

Without delta hedging, there is no market.

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This is an equally deluded comment. If you do not believe the market can exist without delta hedging you are as 'moronic' as you claim nioka to be. Yes - removing the ability to hedge changes the dynamics of the market - but no - it will not destroy liquidity and cause the market to dry up.


I for one find your personal insults to nioka and others very disrespectul - maybe you need to get rid of the god complex and learn some basic manners. Its quite possible to debate a point without resorting to that level.

http://business.theage.com.au/business/asic-bans-all-shortselling-20080921-4l1f.html

ASIC bans all short-selling

* Eric Johnston
* September 22, 2008

THE Australian Securities and Investments Commission has dramatically widened its crackdown on short-selling, banning the practice across the entire sharemarket for at least a month as a "circuit breaker" to restore confidence.

But the stance has stunned local investors, who warned that market turmoil was likely to follow, given the ban could effectively shut down options and derivatives trading.

The Australian position goes further than US and British regulators, which last week detailed measures to ban short-selling on financial stocks only as part of efforts to prevent wild swings on global bank shares.

Australian and other European regulators followed with their own bans on short-selling on financial stocks, helping to spur the international rally in shares, including a 3.3% surge on Wall Street on Friday.

But last night ASIC widened its ban to include all shares, fearing that restrictions on short-selling on other exchanges would intensify risks on the Australian market.

Short-selling ”” the practice by hedge funds and other speculators selling shares they don't own in the hope of buying them back later at a lower price to create a profit ”” has been blamed for creating excessively volatile market conditions and undermining the price of bank and other financial equities.

ASIC chairman Tony D'Aloisio said the speed at which global capital travelled and the relatively small size and the structure of the Australian market meant that it was necessary to extend the prohibition to all shares.

"To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short-sell plays," Mr D'Aloisio said.

It is believed ASIC had also been concerned about the blurred nature of local financial shares such as Babcock & Brown, which would not have been covered by a direct ban on financial stocks.

Mr D'Aloisio said a circuit breaker was needed to boost confidence.

ASIC said it would reassess in 30 days whether to permit short-selling for non-financial shares. But the ban on financial shares would remain until limits imposed by other international regulators were removed.

Tom Elliott, a hedge fund manager with MM&E Capital, warned: "A lot of firms have positions they need to hedge. If they can't hedge them they will have to dump them into the market."

Treasurer Wayne Swan last night backed the ban, describing the measures by ASIC as an appropriate response to global financial market turbulence. "They will help protect investors as well as the integrity of our financial markets," he said.

Securities and Derivatives Industry Association head of policy Doug Clarke said the market was likely to treat the ban with caution.

"It's an extraordinary move," he said. "The speed in which it came through ”” especially on the back of Friday night's exemptions ”” is a surprise."

cuttlefish said:

If you do not believe the market can exist without delta hedging you are as 'moronic' as you claim nioka to be. Yes - removing the ability to hedge changes the dynamics of the market - but no - it will not destroy liquidity and cause the market to dry up.

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All Market makers run on some sort of Delta hedge. Remove that and you will find your options very very expensive. As well as a lot thinner as it removes many strategies that the average punter can use to be part of the options market.

Same with the Futures. If you remove one side of arb trades there is nothing to stop Mr HedgeFund throwing a couple of thousand contracts around to do as he please. Our Futs and options markets are already the thinnest in the world. Remains to be seen what will happen, but my guess is it will not help them.

Yikes. I really feel for anyone caught with their once-legit Friday Night shorts down...

Given that covered shorting WAS totally legal under the previous ASX rules, it totally sucks that anyone making trades under that system should wake up today and find they can no longer "cover" what they may have shorted legitametely on Friday. They could stand to lose a bucket-load IF the share prices of the stock they had shorted subsequently goes way north over the next 30 or so days.

I'm also a bit hazy on another aspect. How long are shorters allowed to hold a short position without closing for cover - as in - if ASIC decides to extend the ban for, say, another 3-6 months? Will existing shorters be totally "caught short" and forced to cough up regardless of their potentially massive losses?

Hmmmm.

Ideally, the ASX, ASIC should have given at least 7 days notice before dumping this onto the heads of legit shorters. I can understand why many are feeling just a tad mortified! Fortunately for moi, I am not holding any shorts atm.

The other thing to note is that banning shorts will not stop the mind games you see every day with the market depth screens. You know what I mean. Just before open you see a massive increase in SELL or BUY orders .... does this mean the share is going to go up or down at open, during the day or what? Often, as an observer only, you can see those large BUY or SELL orders get manipulated as bit players get spooked and DO buy or sell, presumably based on the "pressure" being applied by the queues of significantly increased BUY or SELL orders.

I'll be honest and say I got caught with that trick a few times when starting out in the share market. Once I realised that what I was looking at in the depth of trade screens was essentially a BIG POKER GAME playing out in real time, I became a bit more savvy and less likely to "follow the herd" on what appeared to be sudden significant changes in sentiment for a share - which would just as quickly "mysteriously" evaporate during the day leaving you holding the can as it were, while someone who had the balls to show big "bets" on the BUY/SELL depth screens sat back laughing all the way to the next day's trading while the "little fish" fried themselves!

So, I don't think banning shorts will stop the big poker game, eh? Otherwise, the WHOLE ONLINE SYSTEM of share trading would have to be unplugged.

Bsck to paper scrip maybe? Post and snail mail trading only? No wires either (too fast - might be too volatile)?

I think I'll go take a couple of Panadol on behalf of all those once-legit shorters (now quasi-illegal ratbags) and settle in for the mornings trading, purely as an OBSERVER.


Chiz?



aj

PS: Another thought just sprung to mind - I wonder how all this will now be incorporated into exisitng trading law? Would I be right in expecting some BIG lawsuits to come out of this...ie to test the "legality" of the no shorts bombshell??

Jeff they are not stopping you closing your short trades just stopping you putting new ones on.

Trembling Hand said:

Jeff they are not stopping you closing your short trades just stopping you putting new ones on.

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Ah! Thanks for clearing that up.... still, it might likely result in shorters being "forced" to close (today, this week??) at a significant loss? Or can they risk holding their shorts for as long as it takes this mess to be sorted out (ie after a slew of lengthy court cases?)

For what it's worth, I believe short selling should be removed from the market.
Downward moves would be from those selling shares/ taking profits.

If they want to trade the down moves, then people can use options or cfd's.

Greg71 said:

For what it's worth, I believe short selling should be removed from the market.
Downward moves would be from those selling shares/ taking profits.

If they want to trade the down moves, then people can use options or cfd's.

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Bloodieeee heeellll!!

Without shorting there is no derivatives market!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Tell me shoud we also remove shorting in the oil market??

Bucket shops are still taking shorts.

FWIW I believe markets should be left alone to sort it out for themselves but I can see the appeal of blaming a bogeyman for all the markets' ills.
However be careful what you wish for. I believe Asic's action today will be the genesis of a massive stockmarket crash within the next few weeks.

Have a nice day

ice

Greg71 said:

If they want to trade the down moves, then people can use options or cfd's.

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Well, they could be gone now. Perhaps they should guarantee that stocks prices should only ever rise by at least 10% p.a. and ban all selling of any sort to prevent them from producing a negative return. Free capitalism for all!

This is crazy! And I bet a lot of those mainstream punter (like retirees or soon to be) will start celebrating.

I agree with ice, this sort of action will have serious implication over the coming weeks.

chops_a_must said:

No, it's just when people comment on things they know nothing about, which makes them morons.

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Chops - Lets drop the personal attacks and stick to discussing the topic at hand. These kind of remarks only serve to turn a reasonable discussion into a mudslinging match. Not constructive.

Trembling Hand said:

All Market makers run on some sort of Delta hedge. Remove that and you will find your options very very expensive. As well as a lot thinner as it removes many strategies that the average punter can use to be part of the options market.

Same with the Futures. If you remove one side of arb trades there is nothing to stop Mr HedgeFund throwing a couple of thousand contracts around to do as he please. Our Futs and options markets are already the thinnest in the world. Remains to be seen what will happen, but my guess is it will not help them.

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Cheers TH - yes I do understand the delta hedging and that options MM's need to use it - and unless there's something wrong with my options depth screen I'm certainly not seeing much in the way of spreads being provided around the bank stocks options at the moment. It will interesting for me (who doesn't understand the extent of the impact) to see whether the volatility increase that has occurred today as a result of this change settles down or not and how the options market liquidity behaves.

But my point is that the market can actually exist without derivatives - just in a different form - i.e. less liquidity, and possibly more volatility.

(I also wasn't offering an opinion on whether the ban is a good move or a bad move - just countering chops point that the markets can't exist without short selling).

I certainly think the way the ban has been implemented - as an overnight thing - is highly irresponsible to anyone with open large trades - be they individuals, MM's or hedge funds - and that if they are going to implement a ban like this they should have gone through a communication and preparation process.

As somebody who received the annual statement from my superannuation fund informing me of massive lossses and charging me a hefty fee for performing this service for me, I feel that I have an interest in this debate.

I will let Adele Ferguson (www.theaustralian.com.au) in todays paper put my side of the case.

Under Superannuation legislation, the SIS Act, funds need to exercise the "degree of care skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide"

It is the use of super funds' stock for short selling that has caused so much debate, and should give us pause to consider the amount of money Australia's super funds have lost this year and how much the practice of stock lending has inadvertantly worked against the return of super funds

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She also says;

Most Australians have no idea that the $1 trillion superannuation industry warehouses its funds with "custodian" companies, which often offer a discount for the service if the fund allows the stock to be lent to third parties, usually hedge funds, which then proceed to destroy the value of the underlying securities that the investor owns.

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I don't think very many super fund contributors voted in this poll.

My guess is that the effect will be less volume if this isn't resolved in some way. Less volume is always bad. At some point it tips over the ledge and you end up with a non-function market.

Thinking about it with a level(er) head the ASX had no option but to ban shorts once the US & UK did.

Imagine if the Aussie stocks where the only financials in the western Bourses that you could short.

That said it has been a complete balls up as far as implementation and they should of got control of the naked shorts a long long time ago. Now the silly punters believe that the cause of the worlds ills are short sellers!! the post above me is a perfect example

the latest vid from Don:

http://au.youtube.com/watch?v=P7A10FGieYA

I think that genuine investors (or mug punters as Trembling Hand considers them) are entitled to feel annoyed when their retirement investments are gutted by the actions of predatory short sellers. Naturally the predators think otherwise.