Skip to main content

Effects on Banning Short Selling

If the SEC temporarily bans short selling, it will actually INCREASE the cost to banks of raising new capital, and the market's floor might be removed.

- "The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling," writes the WSJ. "SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning."

- This move will affect hedge funds that use short positions to hedge investment risk during a rights issue or placing. If they're not able to provide liquidity during a rights issue, the costs to banks of raising new capital will increase. 

- Shorts provide a floor, buying (i.e. covering shorts) when there is no one left to buy. If you can't short, the only way to reduce your risk is to sell, which may exaggerate downside pressure in the event of a market sell-off. A simple illustration: Look at China's stock market, where no short selling is allowed. The Shanghai composite went from 6100+ to 1800 in the space of a few months...

Comments

Post a Comment

Popular posts from this blog

Financial Crisis Management

Back in the 80s, when the US government had to deal with a crisis where the Resolution Trust Corporation, which is a holding company formed and housed within the Treasury, to deal with distressed real estate that was funded by loans and savings, the strategy was deemed a sucess where it was later reused by the HK and Indonesian government during the asian financial crisis. This indeed managed to give immediate liquidity and confidence to the markets during such turbulent times. In addition, this came as a win-win situation for the governments, because as these distressed assets were bought in a 'fire-sale' price, which was significantly cheaper than its face value, the governments made profits from such transactions, where in today's case, the similar situation applies. The target of this plan for the purpose of restoring order in the banking system, so banks will remain confident to lend, as well as to free up funds for further lending and use when the economy grows.  Afte...
Post a Comment
Read more

Can Banks Be Trusted?

Today's events have indeed been a thrilling experience experience for the international markets. As I am writing this, the China Central Banks has just cut its key interest rate again by 27 basis points to spur growth, Lehman (est. 1844) has filed for Chapter 11 (Bankruptcy) , there are rounds of ECB having an emergency rate cut, UBS sneaking in to declare another $5B of writedowns, AIG seeking help from the Fed with a request of a $40B bridge loan after rejecting an offer by Flower to prevent themselves from joining the slaughterhouse where their CDs are currently gapping outwards, and it seems that the only few pieces of good news are probably that Merril had a merger with BOA, as well as a consortium of global banks have put together a $70B fund to facilitate liduidity and an orderly resolution between Lehman and their counterparties. ECB also joined in with $30B to curb liquidity woes as well.  In my opinion, it seems like an obvious trend that all Fed Governors are challenged ...
3 comments
Read more

Video: Lesson On Elliott Wave

Hi mates, Just received this in the morning. It is a short interlude of the Elliott Wave course. If you are a serious trader, and would like to have a roadmap to the markets, I would suggest you take a good look at this, this has worked for me. Enjoy... Watch this full $79 course, FREE. Click Here!
Post a Comment
Read more