Short selling

Black_swans

Black Swans

Last night’s lifting of the short ban was an unwise and extremely preoccupying move. What were they —the Fed and the Treasury— thinking?

I’ve been about to write about short selling for awhile. In most cases, the disadvantages outweigh the benefits, it’s a situation akin to hyenas preying on the weaker members of the herd, mostly destroying the younger ones, which could’ve otherwise had a good chance to contribute to society’s well being.

Getting back on track, the first thought that comes to mind is of ‘black swans’, or those far into the tail events, which were enlivened by Taleb’s trades —waiting and bleeding for long periods of time, for those rare moments that would make his trades go north.

But, it’s something else, that I recall struck me the most from Taleb’s statements, the fact that maybe most great traders were not such good traders, but, a reflection of the probabilities involved —where a few had a minute chance of striking gold.

Buffet would fit the bill — he seems to have lost his Midas touch since his $6 billion bet against the USD, and he’s losing on his GS $5 billion purchase too.

Could it also be that Paulson was also a fluke and is also losing his touch, or his marbles?

I know the benefits of short selling are hard to digest. Shorts are quick to denounce deceptions from troubled company execs —it’s good to have these watchdogs shortening the leash on this misbehavior.

But, they also speed the demise of companies in trouble, and, we don’t need this right now —markets need a respite to calm themselves.

And I repeat, it was an unforgivable mistake to lift the ban on short selling.

Isn’t it obvious that the markets are in a fear-stricken justified free-fall, and not the moment to add the weight of a short rock on the market’s neck?

My 12 year old understands that frail creatures have to be treated with care, why doesn’t Paulson get it?

Update Oct 10: The major exchanges have what I think is an excellent proposal.

From this article:

The New York Stock Exchange and Nasdaq Stock Market may
file their proposal with the Securities and Exchange Commission
as soon as today, said three people who have seen a draft of the
rule. Under the plan, a stock that ends trading with a loss of
at least 20 percent would be protected from short sellers for
the following three days, the people said.

(…)

“This makes a lot more sense,” than prohibiting bets that
a stock will fall, said James Angel, a finance professor at
Georgetown University in Washington who studies short-selling.
“By doing something on a stock-by-stock basis that only kicks
in during times of market turmoil you allow short-selling to do
what it does under normal circumstances, but you prevent it from
exhausting liquidity.”