I am adding a position in the Zero Beta Long/Short News Portfolio in the news item last week that came out about short selling from the SEC. It turns out the the old rule of only being able to sell stock short on a uptick has been repealed and now stock can be shorted on a downtick. This rule was put on the books after the stock market crash in 1929 in order to eliminate downward pressure on stocks. It has also put a bit of a put on the markets since as the market as if a selloff occurs, someone can not short until the stock ticks up - eliminating the chance for Armageddon type situations. This strikes me as odd in both the timing, nature, and relative lack of press. Isn't this some built in stabilization mechanism to combat mass panic - akin to the trading curbs put into place by the exchanges? Why then such great celebration?
"It's a historic day at the commission," Republican commissioner Paul Atkins said. "We are eliminating rule 10A-1 today because we have determined it is simply not needed."
I agree it is not needed and has prevented the end for quite some time, but I ask, why now? Well another item that they approved had to do with naked shorts - something that Overstock CEO Patrick Byrne probably found quasi solace in (now Patrick go focus on why your company was shorted to begin with).
"Separately, the SEC voted 5-0 to change certain trading rules to reduce the amount of "failure to deliver" in certain securities.
The agency eliminated a provision that protected certain short positions from requirements to deliver shares within 13 days of settlement."
When something like this comes along, I ask, "qui bono". On one hand owners of crappy companies who were not grandfathered in benefit a bit, I guess. Ordinary investors don't usually short stock, but hold it long, so now they have a huge downside risk. Hedge funds, who have been naked shorting for years, and are starting to get scrutinized for naked shorting, can now knock down stock prices with velocity without breaking the law. Also, companies like Goldman who run prop desks, can take advantage of any downturn that may cut into their Private Equity earnings, and short a downside hard. Either way, February 27th showed us what was probably an ETF (which are allowed to be shorted on a downtick already) selling off. Now we can see how individual stocks may behave.
Either way. I believe this law change is undervalued and am long this item until I see the headline, "Stock Market Crash...S&P Drops 20% in a Single Trading Session".
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