Can The Market Heal Itself?

The knee jerk reaction to crisis is for people to seek help from the Federal Government.

I was just asking myself if the market could heal itself.

In previous posts I noted that self-interested companies would not allow their stock to be shorted.

In regards to shorting, the problem could be resolved by structuring the market so that the voices of the company's could be heard.

My first thought was to create a petition to be passed among shareholders and CEOs. The petition would give the big exchanges (NASDAQ, NYSE and AMEX) the ultimatum: "Stop the practice of shorting or we will pull our company from your exchange."

As shorting increases the float of a stock, thus reducing the value of stock, the self-interested stock holders and CEOs would be tempted to sign the ultimatum. Fearing a customer revolt that could dramatically reduce the size of their exchange, the stock exchanges have a big incentive to clean up their act.

Unfortunately, even if the exchanges wanted to clean up their act, they may be prevented from acting by a weird Fannie Mae, quasi government company called the DTCC.

The problem with this idea is that companies would have no place to go to exchange their stock.

So, for the ultimatum to work, one would need to create a new exchange. The new exchange would be structured as a buyer's coop. The exchange and trading procedures would be designed by the member companies. The exchange could do real time clearing of transactions. The exchange would then be in a position to structure the use of shorts and other derivatives so that they are more favorable to the companies.

The NYSE and NASDAQ are exchanges that were structured around the desires of the brokerage firms. The new exchange could be structured around the desires of businesses and end investors.

The threat of a new exchange appearing on the market might be enough to transform the market. On further thought, I think the market might benefit more from the appearance of different exchanged honed to different needs.

A market dominated by just a few big companies has a hard time making corrections, while one with a large number of small companies is quick to react.

** I assert that that the new thinking about shorts have created a market climate where companies are tempted to pull out of the market. I thought I should point out in the last few years, the IPO market has slowed to a crawl while a growing number of firms have gone private or have sought the protection of a private equity firm. The "no shirt ultimatum" would turn a trickle into a deluge.