The SEC … said in a statement early Friday morning it is halting short selling on 799 financial stocks. The ban, which is effective immediately, is set to last for 10 days, but could be extended for up to 30 days.
Optimism is the opium of the people!
And the UK now has lifted its shorting ban, in response to which traders took the Royal Bank of Scotland down, based on its holdings of American MBSs and what seems like a now-questionable merger with Dutch bank ABN-AMRO:
"Stephen Hester, the chief executive of the Royal Bank of Scotland, criticised the decision to lift the ban on the short-selling of banking shares yesterday as he saw his own bank's price collapse by more than 66 per cent to only 11.6p."
The Royal Bank of Scotland was worth BP75 billion(!) recently - but froze in the credit crisis this fall and received BP32 billion in bailout money from the UK government. After the shorting run today, the bank is now worth just BP4.5 billion: more than BP100 billion in value destroyed.
It appears the UK ban on shorting did as little good as the American, and prolonged the death of the Royal Bank of Scotland in the most expensive manner possible. If short sellers had been allowed to give their bad news about their estimates of the worthlessness of the bank's American holdings earlier, at least the UK government would have been able to nationalize it sooner, reducing the length of the crisis, perhaps rescuing some jobs, and possibly saving that BP32 billion in bailout funds.
Just to follow up, an academic paper on the history of this ban have come out, and what it says should be no surprise - it was a bad idea that made the market worse - more volatile, less liquid:
"Stocks subject to the ban suffered a severe degradation in market quality, as measured by spreads, price impacts, and intraday volatility."
What I found interesting personally - that for a week after the ban, there was less shorting than usual. So the ban harmed the informational quality of the market for a time even after it had ended!
The authors say in sum:
"the temporary shorting ban is over, yet the stresses on the financial system do not seem to have abated. It may be too soon to judge, but we suspect that after some time has passed, future observers will look back at this shorting ban with the same kind of wonder that economists reserve for Nixonian price controls and other similar government interventions. Those future observers will probably ask: did they really think that would do any good?"
The confusion comes from the fact that I was talking about making a special-case change to the rules of the marketplace (banning short selling due to emotional panic), and you replied that a single person (or group of individuals) can't be trusted to outperform the market. How else do you imagine the rules change would be made, Aron?
Here's the SEC's direct word on why they did the short sell ban.
And here's Christopher Cox's wikipedia page: one can say at least that he seems to have the necessary domain competence for the job.
So, is the SEC's press release propaganda? How would you, Robin Hanson, deconstruct their explanation for the short sell ban?
The confusion comes from the fact that I was talking about making a special-case change to the rules of the marketplace (banning short selling due to emotional panic), and you replied that a single person (or group of individuals) can't be trusted to outperform the market. Not exactly a conversation on the same page to start with.
But we can do better than it, because 'it' is not fixed in stone but is a human construction that we have evolved over time. I cannot properly understand the confusion of ideas that would be responsible for such a statement.
The ironic thing is if there was a way to short house prices directly, there would not have been as extreme a housing bubble and these financial firms would not be in the trouble they are in.
The historical position was that if there were actually a fire in the theatre, that constitutes an absolute justification and defense against whatever negative consequences might arise from talking about it. If there was no fire, you could be held liable for any damage or harm that resulted from making the false statement.I found this particularly apt for describing shorting: If the stock was overvalued, no crime is done. If the stock was not overvalued, we've reduced someone else's utility. However, unlike the freedom to shout "fire!" whenever we want, this "criminal" shorting already punishes the shorter. Just because there ain't a law against it don't mean it doesn't carry penalties.
I don't see the connection to bank runs. If a shorter undervalues a stock, others should push back against his shorting. If everyone undervalues a stock, the stock price will drop for a time. But an under-valued share price doesn't cause a company to go bankrupt. The worst that happens is some other business snatches them up for a discount, or the board gets pissy for a while. A dropping share price indicates the market thinks that a company's fundamentals are unsound. Unless I'm grossly mistaken (and I often am!), a dropping share price does not cause a company's fundamentals to become unsound.
Plus, you aren't screaming fire to a bunch of ordinary people in a theater; you're screaming it to a bunch of firefighters (i.e., professional traders).
Its always seemed to me that SEC regs could be internalized by individual exchanges anyways.
Billswift, how do you feel if by shouting fire, you create a fire, and are therefore vindicated.
Besides the fact that they didn't actually ban short selling, (see my post on "Ban the Bear") counter party risk is a huge fear in the financial markets.
So the short sellers shout fire, sending the theater goers running in panic (clients, creditors, partners, etc). This particular theater is using torches for lighting (this is about as stupid as the investments banks have been) and the people in flight knock over the torches, starting a fire.
Its the same concept as a "run on the bank." The reason we created FDIC insurance was so there wasn't runs on the bank. Otherwise, everyone looks out for themselves and everyone loses as a result (if no one pulls out, 80% chance of survival, if everyone pulls out, 0% chance).
sounds like a prisoner's dilemma to me.
is it okay to shout fire in a crowded theatre?
Damn right, if there is a fire.
they're doing this in pakistan already. stocks are down 25% since
I think it's a brilliant move and should be taken further. It should be made illegal to sell securities for less than you bought them for.
There! The whole problem solved with the stroke of a pen!
Right? Or did I miss something? ( :>))
"The point is not that the system is perfect and ideal, but that we are unlikely to do better than it even in specific situations and ludicrously unlikely in the general case."
But we can do better than it, because 'it' is not fixed in stone but is a human construction that we have evolved over time. That in all scenarios, the same rules should apply, is not something to take for granted. Are trading curbs bad? Insider trading rules? Ownership disclosure regulations? FD disclosures? Margin limits?
Banning short selling looks asymmetric but the market is itself asymmetric. How many times has a company's stock performed in the reverse direction of AIG's, or some of the banks that have collapsed?
I heard this news last night, and thought, "Can that really be as stupid as it sounds?"
Now that the efficient markets are being hobbled, I wonder if there's some way to profit from this that isn't already being exploited. This morning might be a great day to be a financial professional.