Monday, October 11, 2010

Short Sighted Regulations

NOTE: This is part one of a two part post. I have an errand to run and will post the second part tonight or tomorrow.

Short selling was the creation of centralized exchanges for the expressed purpose of regulating stock prices. Short selling regulations allow traders to sell stock that they do not own. Proponents of short selling claim that short selling improves the liquidity of a stock. If a stock is in short supply, a short seller simply creates phantom shares of stock with the promise of buying it back later.

This justification is a joke. Historical data shows that short interest tends to increase during a liquidity crisis. Short selling increases during economic dips effectively decreasing liquidity when liquidity is needed most.

Even worse, not all shares get repurchased. If a stock goes bust, then the short seller never repurchases and keeps the loot from the sale tax free.

Short sellers claim that their actions can prevent pump and dumps. Just like everyone else, short sellers want to buy high and sell low. So, when short sellers find a pump and dump scheme, they join in on the pumping while they are selling stock, and enjoy the downward slide.

The only difference between the short seller who pumps and dumps and the CEO who pumps and dumps is that the short seller loves to rub it in.

Short selling is an inherently negative and inherently anti-market activity. The regulations that allow short selling are a direct assault on property rights.

Stock ownership is a mechanism for shared ownership. The people who want to share ownership will issue and distribute stock.

The short selling regulations say that, for this group to sell their stock on a public exchange, they must allow anyone in the market to start selling phantom shares of the equity on the market. The sale of phantom shares competes with the sale of real shares.

The short sellers claim that they are performing a public service, but the selling of phantom shares in equities ends working exactly the same as a large tax against the most productive elements of an economy.

Each year hedge funds, market makers and market manipulators reap billions of dollars in short selling regulations each year. As such, they spew forth with inane justification for the regulations.

Claims by these groups systematically prove false. As short selling has the same effect as a tax on the most productive elements of our society, I believe that the regulations allow the short-sighted allowing short selling be removed and the destructive process of short selling be eliminated.

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