August 18, 2009
SEC Once Again After Shorts
The new SEC proposal aims at slowing down short selling, again. The proposal would force short sellers to limit sales to prices higher than the current best price offered by buyers (best bid price) of the stock. Since stock is traded in multiple markets, to meet the rule short sellers must wait until the best bid price in mutliple markets is exhausted by sellers before they can find a buyer. This may take time, and in the markets unknown time delay is a serious additional risk to the trade. The SEC is considering the rule as universal or as contingent on "circuit breakers," a percentage drop in the value of a stock. This stuff is bad. By building in a bias in favor of long positions, which is already too strong in the market anyway, the SEC encourages a boom and bust market -- the bias attaches (and people know trade on the bias as well as the fundamentals of a stock) until it reaches unsustainable heights and fails, very quickly when confidentence in the bias falls.
August 18, 2009 | Permalink
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