PDA

View Full Version : Short Selling



Frelodr
9th December 2008, 11:20
Can someone explain how this can be legal. I've read what Short Selling is and found this:

SEC rules allow investors to sell short only on an uptick or a zero-plus tick. In other words, you cannot sell a stock short if it is already going down. This rule is in effect to prevent traders known as "pool operators" from driving down a stock price through heavy short selling, then buying the shares for a large profit.

Well according to this chart, at this site: http://www.resourceinvestor.com/pebble.asp?relid=48522

What these banks have done is completely illegal. To me it shows they are breaking the laws. Maybe for those looking for something for lawsuits, ---> maybe this can help.

I'am new to this, so I could be way off. Can someone explain if I'am wrong.
Thank you, Lodr

cfole
9th December 2008, 11:26
frelodr, be carefull not to mix securities with commodities. Also note that during the financial crisis, Goldman Sachs was allowed to continue their shorting activity whereas ALL others were prohibited from doing so.

Right now, the list of compliance to the law seems like a shorter list than infractions of the law. The problem remains those in power are either corrupted by the magnitude of the situation or ambivalent to it. Either way, it is financial anarchy in my mind. Shall we talk of 8K's and 10Q's?

main1event
9th December 2008, 14:18
There is nothing wrong with shorting. All you are doing is hedging that something will go down in price and making the difference. In a true short sale there are shares available to do this. Lets say a company issues 10 million shares and 5 million are owned by insiders and institutions, the rest is the float. So theoretically 5 million should be able to be traded.

The real problem is naked shorting where its possible to short more than actually exists. Almost like what happens on the futures markets with comex.

The uptick rule is foolish, and not the cause of anything. If you can buy with up an uptick why should you not be able to short with a downtick.

Fear mongers worry about shorts, the system needs to be revamped for sure but shorting is a critical part of the market the ying and yang.

Frelodr
9th December 2008, 14:48
I guess what I'm saying is: --> According to what I see on that chart is that those banks increased (substantially) their shorting while silver was going down. According to that SEC law that is illegal. So shouldn't someone like GATA or Morgan jump on something like this and hold these banks feet to the FIRE? Lodr

cfole
9th December 2008, 15:17
I guess what I'm saying is: --> According to what I see on that chart is that those banks increased (substantially) their shorting while silver was going down. According to that SEC law that is illegal. So shouldn't someone like GATA or Morgan jump on something like this and hold these banks feet to the FIRE? Lodr

frelodr:

The SEC law you quote has nothing to do with Comex. Two different entities responsible for two entirely different markets. I hate to say it but you're mixing your apples with your oranges.

mainevent1:

I hope you did not take my post as negative on shorting. Shorting has been my single most used strategy the last two years. I was not comfortable with the decision surrounding Goldman Sachs, however.

Frelodr
9th December 2008, 15:32
Thank you, thats why I asked. So as long as everyone is allowed to do this I don't have a prob. It's just when the (Good ol Boys), have different rules, thats when it gets under the collar. Thank you again, Lodr

nuslvrkwen
9th December 2008, 18:57
Thanks everyone for clarity on short selling. You can short sell commodities and securities. Banks like JPMorgan & HSBC shorted commodities with silver shorting. THEY don't actually HAVE commodities. So why do they get to short trade them? Then with the securities; they traded fractional fees and rates between them ON TOP of shorting the commodities.

I believe the system really does need revamping. Until that time we are going to be way out in debt; unable to pay off the bailouts - because all that's going wrong with these trades is at a factor of 10 or 100 or 1000.

Frelodr
9th December 2008, 21:49
Thanks everyone for clarity on short selling. You can short sell commodities and securities. Banks like JPMorgan & HSBC shorted commodities with silver shorting. THEY don't actually HAVE commodities. So why do they get to short trade them?

This is something I found ---> Here's how short selling works. Assume you want to sell short 100 shares of a company because you believe sales are slowing and its earnings will drop. Your broker will borrow the shares from someone who owns them with the promise that you will return them later. You immediately sell the borrowed shares at the current market price. When the price of the shares drops (you hope), you "cover your short position" by buying back the shares, and your broker returns them to the lender. Your profit is the difference between the price at which you sold the stock and your cost to buy it back, minus commissions and expenses for borrowing the stock. But if you're wrong, and the price of the shares increase, your potential losses are unlimited. The company's shares may go up and up, but at some point you have to replace the 100 shares you sold. In that case, your losses can mount without limit until you cover your short position.

At This Site: http://www.investorguide.com/igu-article-827-stock-strategies-short-selling.html

This just seems wrong that they can use someone elses shares. To me it's kinda like borrowing my car without asking me, with a promise to return it or buy me another one. My car is still used without my permission!
Lodr

ascentient
9th December 2008, 23:02
Not quite true Lodr. The car is borrowed with the willing permission of the owner. When stocks are shorted they are generally borrowed from banks or other institutions who are happy to receive the interest commission. If they want to hedge their risk, they can use the interest to buy options to protect their position.

Short selling is a legitimate and useful tool for the equities market to help it correct from excessive prices in a shorter time frame than it otherwise would. Removing short selling keeps valuations higher than the market would dictate thus creating a greater overestimation of market value and creating larger crises. That's part of the reason the market drop we have seen in the stock market took so long to play out - by protracting the drop through the ban on shorting financial stocks, financial companies were overvalued for the September period. They fell a lot more once the ban was lifted (and they are still overvalued).

Short selling in futures markets is a different story. Unlike equity prices which are nothing more than a net present valuation of all dividends the company will ever make into perpetuity plus the current assets on hand measured in CURRENCY, futures are meant to represent a discounted value of a commodity at a single point in the future (also in currency).

When a stock is discounted, you are only ever discounting it's cash returns based on dividends and liquidation. These are all dollar amounts. So they can ALWAYS be replaced with dollars or whatever measure the equity is valued in. This is guaranteed as part of the contract when shorting equities.

When a commodity is discounted, you are measuring the discounted value of the commodity from a point in the future (albeit with some contango to measure the carrying costs not paid). In theory, spot price and the futures price should differ only so much as to respect carrying costs which are a premium (or shortfall) to represent the expected risk of being able to replace that commodity in the future.

Shorting of commodities is not an issue except that, unlike equities, the purchaser of a commodity has bought a right to claim a tangible asset in physical form. If they waive that right in lieu of fiat currency that should be their choice. However, the purpose of the market is to ensure smooth delivery of physical assets to manufacturers or distributors at the most optimal time based on market expectations.

Shorting a commodity that you don't have by borrowing the asset (much like an equity short position) or covered shorting is perfectly acceptable (and useful). Shorting naked adds risk into a market as there is always the chance that NO amount of money can create a commodity out of thin air. That is backwardation and if it enters a commodity market and is sustained indefinitely it indicates one thing: an expected difficulty to procure a commodity at ANY price. This SHOULD be due to the PHYSICAL scarcity of the resource. In the case of PM's that means that they cannot be aquired without theft as the owner will not accept anything in exchange for them and there is no way to physically aquire it (including all known or expected mining aquisitions).

In the case of agricultural products backwardation could only last indefinitely if there becomes environmental challenges so severe that they cannot physically be grown - then they get substituted by the market for the next best alternative.

Sorry for rambling so much, but I think that all the topics we are discussing recently - backwardation, contango, shorting and COMEX are so strongly intertwined I wanted to make a bit of a distinction on the nuances between them.

Bottom line - covered shorting of anything is fine, naked shorting of equities is fine but adds unnecessary risk to the system (provided there is a large enough margin requirement to repurchase the equity), naked shorting of commodities is inexcusable - there is NO way, save for THEFT to ever guarantee coverage of the position.