The Fed is curbing short selling in financial stocks - has this ever been done before?
Is it the right thing to do?
Answers
1782 points
ChaosNantuko answered 4 months ago …
A stocks price has very little to do with how the actual company is run, so i really don't see what they have to accomplish by doing this. All this does - in my mind - is distort the price of these stocks. I also see this as a negative signal for the entire industry, because if the Fed believes these companies have a long way to fall still, it hints that there may be a lot more bad news in the future. At any rate, as long as they're still optionable, we can still play the downside.
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2547 points
Oldman answered 4 months ago …
The Fed is preventing "Naked shorting" by large institutional and hedge/private equity...They may finally enforce the rule that a short-seller must borrow the stock! This is something that should have been enforced all along!
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Philip answered 4 months ago …
The uptick rule was implemented as a result of the crash of 1929.
In July of 2007 it was rescinded.
This facilitated making a run at a company by selling unlimited numbers of shares of their stock.
When this is accompanied by the same sellers spreading rumors about the viability of the company they are shorting, it is called market manipulation.
The Fed eliminated naked shorts on 19 stocks effective 21 - 29 July with a possible extension of 30 days. The SEC is investigating charges of market manipulation.
All the short open interest on those 19 stocks had to be covered and the rumor mill went quiet for now. For those 19 stocks this was Christmas in July and now we have a rally (for the moment).
393 points
jester112358 answered 4 months ago …
Seems like a silly rule since institutional market makers own huge of amounts of shares of all these stocks which they can lend as they see fit. If these companies weren't reporting record losses the prices would never go down. Most are technically insolvent (more bad debt than real equity). So, this temporary short covering rally says nothing about the long term fate of most of the 19 companies subject to the new protection. They were selectively protected since they are the major currency traders/market makers (as was bear sterns). Bankrupcy would mean major problems in the currency trading markets which are much larger than the bond and equity markets. If a significant market maker in a stock, bond, or currency goes bankrupt then there is no market and panic would result as people are now holding untradeable pieces of paper. This is the whole rational of the huge FED bailout effort.
In the meantime, the market makers and hedge funds can still create synthetic shorts on all these companies by naked selling of deep in the money calls or buying puts. When these options are exercised they still have the same effect on the stock price as the traditional approach of borrowing stock, selling at the market and then rebuying to return the loaned stock.
104 points
MALNICK answered 4 months ago …
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