Stop feeding the bears cry the Zookeepers!!!
When regulators ban short selling do they have a legal liability to the mum’s and dad’s, fund managers and traders who lose money from this almost instant change in regulated markets? I’d love to see what some of the big legal firms think on this.
(Update: Just read Sean’s Stubborn Mule blog which has has a good post on short selling.)
It is in effect the banning of an instrument used to hedge, used to remove risk. A reasonable person could argue they wouldn’t expect a regulator to do this surely?
I’m not saying this out of anger as I haven’t had shorts in the market for a long time. We closed all our trading book positions back in April. However I am angry that free trade and capitalism is at risk here of being hurt by short-term decision making by people in a panic to cover themselves in their regulatory roles. The same people who actively encourage openness in markets, hedging to create stability and improved liquidity.
In addition you could argue that a reasonable person expects regulators to announce major reforms well ahead of time so that organisations can adjust their business models and risks. Imagine if a government made sweeping company tax changes today and implemented them tomorrow. Why are rules around the trading of equity via stock and futures markets any different?
Mum’s, dad’s, traders, and fund managers all engage in short selling. Many trade CFD’s to achieve the shorting effect. The larger players borrow the stocks they are going to sell short.
These market participants were busily operating in the market on the premise that short selling is a part of market operations and provides liquidity to markets. In many cases shorting is a hedge against illiquid assets they own and can’t sell because liquidity has dried up.
Below is my Macquarie Bank Prime Trading Platform account rules received as a result of the change. It highlights how little I can now do when I do go back into the market. I can only buy companies. That doesn’t feel liquid to me and it feels very inflationary. Neither is good for markets.
Share Positions
Opening New Positions
- Short Prohibited
- Long As Usual
Closing Existing Positions
- Short As Usual
- Long As Usual
CFD Positions
Opening New Positions
- Short Prohibited
- Long Prohibited
Closing Existing Positions
- Short As Usual
- Long Phone Trades Only
Photo: Wili Hybrid
Marc: thanks for the link! As I understand it, the exemption that allows options market makers to short sell for hedging purposes does not apply to CFD brokers. This means that if a client wants to close out a long CFD position and the broker has it hedged with other CFDs rather than stock, the broker may be unable to close out the risk. Hence “phone trades only”. If you were stuck with a long CFD position that you couldn’t close out, I can’t imagine you’d be too keen on using CFDs again in the future. I can’t help thinking that this does not bode too well for the future of the CFD market.
Comment by Sean Carmody — September 26, 2008 @ 10:04 pm
We closed all our CFD positions back in April. We were up 27% since Jan1 for the year on our model trading and we decided with the recession/depression risk our capital would be better in the business. For me this is all about a step backwards in market development, that’s the crux of my worry.
Heh we are due for a Laksa!
Comment by Marc — September 26, 2008 @ 10:30 pm