Here's the latest from our Highly-Placed Professional
'Whatever your politics, you know that climate change is a bad thing. You feel a bit distressed when you hear about sea levels rising and snow melting on the ice caps, and you shudder at the thought of all that land-fill seeping out tons of methane. You know that someone, somewhere has to make a stand.
Well it's the same with the latest government bill to ban 'abusive short selling'. So what if Labour is in the last death throes of a once loved, but now pretty much redundant government ? The point is that someone has to make a stand, and I for one am pleased they are going to try to restrict the totally over-the-top abuses which marked the lows of the credit crunch. Perfectly good businesses don't deserve to be put on a short seller block for no other reason than to line another hedgie or banker's pocket.
And I, for one, simply don't buy the argument that all is fair in love, war and trading. There were many instances during the financial crisis where rumours flew about that caused company stock prices to fall, and we all knew unscrupulous short sellers were behind the mayhem. And the upshot was simply to push the global financial system ever closer to the edge of the abyss.
Short sellers with an obvious vested interest in continuing such practises will always argue that they are simply helping the markets perform efficiently, but these words ring hollow to many of us who see the unfettered use of almost unlimited leverage in this way as unpatriotic and somewhat immoral. The whole point about markets is that they be allowed time to do their work. Vicious short selling, often exacerbated by blatant rumour mongering, doesn't give any company enough time to get its house in order and often damns it to an early, precocious fate.
The sort of restrictions being proposed by the CESR (Europe's securities regulators) would oblige short sellers of more than 0.1 % of a company's stock to report such trades to their national regulator, and if they went over 0.5 % then disclosure would become public. Now for hedge funds and investment banks, who pride themselves on putting their money where their mouth is, why would such disclosure be a problem ? (And, after all, there are already disclosure rules in place for when investors take large positions in companies).
As is often the case with headline government policy, there is not that much detail in Labour's plans to limit short selling. However, I applaud the fact that this contentious area of investment practise is being looked at a lot more carefully. My feeling is that a whole lot more panic, confusion, and ultimately wealth destruction, was caused by 'abusive short selling' at the height of the crisis, and that the biggest loser was, as usual, the man in the street (who lost out with his investments and in his pension). This simply cannot be right. Put short sellers squarely in the public eye, and I'm convinced you won't get the same destructive forces being put to work'.
1. 'People profit from positive rumors on companies by buying the stocks. So, what's wrong with profiting from negative rumors by shorting them ? As a trading strategy, shorting is as valid as going long. Anyway, a lot of times shorts are actually hedges, so where do you draw the line between hedging and shorting ? And at what point does shorting become 'abusive' ? Since the dawn of gambling, lots of people have been burnt by buying something based on rumors, so let them burn themselves shorting too. remember, shorting is not a one way bet. As for the shares in companies that are being shorted, that should create buying opportunities - if you really have confidence in those companies, that is. Put your money where your mouth is. If you think a stock is undervalued, go buy it'.
2. The rules are inconsistent at the moment - shorting is highly secretive and that is why it is destructive and open to abuse. Make the rules consistent and transparent, and those people following proper investment and hedging strategies can continue to do so - and those who engage in the more shady activities must come clean'.