Here are a few comments on a recent article written by our Highly Placed Professional, who is supporting the UK government's attempts to rein in 'abusive' short-selling.
1. 'We've all heard the arguments about why short selling is fundamentally part of a normal market - but if anyone reflects on the period 2007 to 2009, what strikes you is the capacity of markets to overreact to ill founded gossip and rumour, which in many cases has done lasting damage to banks and corporates.
Clearly this flies against the concept of efficient markets, and in essence, if markets as a whole cannot be relied upon to act rationally, then some form of control over the worst abuses - like short selling backed up by a rumour mill - is required.
Market participants frequently behave for their own narrow interests, and efficient markets should not allow that to succeed'.
2. 'Oh dear. How unfortunate that your correspondent chose to open his piece using a global warming metaphor in the very week that the poor scientific practises of the Climate Research Unit was laid bare for all to see. Sadly, the article's relationship to facts about short selling is worse than the CRU's dodgy record. The lamentations about abusive short selling should be accompanied by real examples of such abuse - none in the article, certainly none on the FSA's website. I can think of many other causes of recent turmoil in the markets, but serious reviews (Turner, DeLarosiere, etc) barely touch upon hedge funds and short selling before getting on to meatier topics.
Short selling is not unfettered, and the ban in shorting financials generally made restricted stocks fall faster than non restricted, with more volatility, wider spreads and shallower markets became the norm. Short sellers may have profited from the banks' declines, but they were not the authors of the banks' misfortunes; short sellers did not decide where share prices should end up, the market did that. Short sellers were merely along for the ride'.
3. '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'.
4. 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'.
5. 'Having a pop at short sellers is a bit like betting on a sports event and then complaining that the bet itself influenced the outcome of the game'.