Regulators, Politicians - Do You Want to Prevent Unnecessary Market Crashes?

Reggie Middleton's picture

Hence,
we come to this Bloomberg story - SEC May Restrict Short Sales in
February to Curb Bets During Stock Plunges:

 

Jan. 23 (Bloomberg) -- Concern that short-sellers
accelerate stock declines may prompt the Securities and
Exchange Commission
to adopt a rule next month aimed at curbing
bearish bets when equities are plunging.


The regulation would require the trades be executed above
the best existing bid in the market when shares fall
10 percent in a day, said Brian
Hyndman
,
the senior vice
president in transaction services at Nasdaq OMX Group Inc. In
a short

sale, an investor borrows an asset and sells it,
hoping to profit from a decrease by repurchasing it later at
a lower price.


Forcing short sellers to wait for a stock to rise above
the best price bid may prevent them from flooding the market
with sell orders and causing losses to multiply. Some exchange
officials say the restrictions known as uptick rules don’t work,
citing studies that show they may be less effective during
panics that drive prices down and volatility up.

Well, the most glaring problem with this approach is that it attempts to
purposefully break market equilibrium. Regulators are not trying to
quell the market in times of extreme volatility, they are trying to
effectively control stock prices and guide them in a certain direction.
Note that there are no proposed rules to prevent the  climb of a stock!
Since there is no curb on the rapid climb of a stock's price, this idea
is highly imbalanced. Do you know what happens to imbalances in a market
that seeks to attain equilibrium? Usually the opposite of what caused
the imbalance as economic forces seek to right a fallen ship.

If one recalls what happened when the ill thought out short ban was
implemented in 2008, the convertible market choked due to an inability
to hedge and option prices soared! Shorts are a necessary component of
our marketplace. They facilitate:

So, hypothetically (of course) what happens when a company such as PPD
(see The
Flim
Flam Scam gets SEC'd - I'm not going to say I told you so, again!

and 

Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause
your wealth to Scram?
)  issues a statement that says we are an
admitted sham that has a economically unsustainable business model that
takes advantage of poor earners in their time of need all while
management sells virtually every single share they can get their hands
on into the corporate equity buyback program - virtually every single
share!. Oh, btw, we bought back 4% of our stock and have Y-O-Y 10%
increase in EPS because of it. Hooray!

The stock shoots up. The moral amongst us throw up. Fundamental
analysis, basic math and common sense go the way of alchemy and the
quest to turn lead into gold, and the crooks upper
management go Azimut shopping with those banging Italian chicks on the
bow...

  

I have a better idea. Let's implement the rules on the books instead of
making new ones. You know, the rules that were designed to force
corporate management to be more honest and forthcoming about their
company and it's assets? Instead of trying to stop short selling, you
can eliminate the reasons to short a stock, of course except for those
cases where the STOCK DESERVES to be SHORTED!

Let's walk through a couple of Reggie's best recommendations?

  1. Eliminate the commercial real estate practice of "Extend and
    Pretend". If a loan (or any asset) is underwater on the books, declare
    it so. Period! This will assist in making the companies less susceptible
    to speculation. Either they are in decent shape or they are not.
  2. Disincentivize the corporate purcahasing of shares to mask a fall
    in economic earnings. If companies want to truly return money to
    shareholders they should do just that. Return the money to shareholders.
    The term is called a CASH DIVIDEND!  CASH!
  3. Reverse ALL of the FASB games that have been implemented as of
    late, namely:
  4. FAS Statement
    No. 157
    and all related 

    Mark-to-market
    accounting fantasies

  5. FAS
    166
    and 167 implementation delays
    : Chances are that if its off
    balance sheet, its off kilter. This off balance sheet mess not only
    provides fodder for short seller speculation, it allowed the bulk of this
    asset securitization crisis
    (be sure to click the link to read up
    on it from beginning to present) to occur in the first place. If Lehman,
    Countrywide, Merrill, WaMu, etc. weren't able to hide so much from
    average investors, they may still be in business today... The off
    balance sheet mess is nothing but Enron, restated.

More on the topic...

  1. FASB
    Issues Statements 166 and 167 Pertaining to Securitizations ...

    Jun 12, 2009 ... 166, Accounting for Transfers of
    Financial Assets, and No. 167, Amendments to FASB Interpretation No.
    46(R), which change the way entities ...
    www.fasb.org/.../ContentServer?...FASBContent...FASB/FASBContent...
    -
    Cached
    - Similar
    -
  2. FDIC
    OKs Delay of FAS 166, 167 Effect on Capital « HousingWire

    Dec 16, 2009 ... FAS 166 and 167, which take effect in
    January, will require financial institutions to bring certain
    securitized assets onto balance sheets. ...
    www.housingwire.com/.../fdic-oks-delay-of-fas-166-167-effect-on-capital/
    -
    Cached
    -
  3. FDIC
    expects FAS 166 and 167 to increase bank capital requirements ...

    Aug 27, 2009 ... fdic-logo.jpg Federal Deposit Insurance
    Corporation (FDIC) directors agreed at their August 26th Board meeting
    that following implementation ...
    www.accountingweb.com/.../fdic-expects-fas-166-and-167-increase-bank-capital-requirements

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Kissy Ass's picture

Wow Reggie you are so smart, so great, such a voice of reason. You are #1. You are so worthy.

Your work is so great, you have so much hope and change to offer to the financial markets.

--Kissy

max2205's picture

New short selling rule: stocks down 10% will be supported by the PPT for one week.

ie short and you will be crushed immediately

Really who cares at this point. There are very few that my broker will allow me to short. I have to do a test short above the market just to see if I should even consider a short. Pair or just short. For over a year many cool pair trades are dead because the short side can't or willfully won't be filled by the powers that rule this f'cked up market.

RoastingBankers's picture

they can start with the usd

 

fking dipshits

 

 

lmfao

Anonymous's picture

Isnt it just painfully obvious, people???

OUR ENTIRE FINANCIAL SYSTEM IS ONE GIANT PONZI SCHEME!!

While the masses were being hypnotized by American Idol and Survivor over the last 8 years, our elected officials were being bought off by criminal corporate interests, gutting every shred of financial reform from within, looting the treasury and lining their own pockets at our expense...

Rather than to just admit what a completely PHUCKKKED state we are in---(Cant do that, or they won't get re-elected), they are doing NOTHING to actually fix anything, just using the printing press and their Enron accounting tricks to layer fraud upon the fraud, so they can continue the extend and pretend games.

This is a complete outrage, and each and every one of them WILL BE VOTED OUT ON THEIR ASSES IN THIS NEXT ELECTION!!

We are not buying your FAUX outrage---You will be judged on your actions alone!! Did you work for the people or Wall Street??

ATG's picture

No short sales allows inverse ETFs to extract

maximum cash from cows. Over and over again

at today's AIG hearing we heard the Treasury

Secretaries and their pawns complaining they

did not have regulatory authority (after they

abolished it.) The market is a con...

http://www.jubileeprosperity.com/

Anonymous's picture

Reggie, playing by the rules would be nice. As we all know, naked shorting is disgusting and disruptive.

Why not ban current shorting practice and replace it with an anti-LEAP product? Believing Longterm Equity Depreciation....BLED. Fitting acronym, no?

The usual games re this product would be in force; but at least it would be honest shenanigans, as opposed to vapour.

40muleteam borax

Anonymous's picture

We have to regulate counterfeiting stock, too, via naked short selling...big problem.

Budd Fox's picture

This "naked" short sell is a bunch of BS. There are rules that just needs to be made to be respected. Anybody selling without having arranged a borrow, at the end of the day has his Back office having to provide that borrowing..or failing delivery at the end of 3 days at  delivery period at DTC matching. If you respect the rule that, failed delivery without reasons is bought in at market opening next day....means the so called "naked" shortselling is a media invention, BS.

Moreover, if I am a HF or day trader...I just hit the bid and buy back at end of the day, so i do not have any mismatched delivery.

 

Banning short selling is just the brainchild of Lawyers and politicians and the result of stuffing regulators of lawyers and politician cronies...no serious market player will EVER entertain such an idiotic idea.

Anonymous's picture

The PROPER Short Sell rule is simple...

None

Short sales should be first come first served....

No locates required....

Electronically tagged....

Limited by # shares outstanding....

Large accounts are limited in size...
ie the BlackRocks

Doc Brown's picture

The short sale rule was devised for a reason applied to one and all. In regards

to markets rules a little pregnant doesn't fly. Your are either in or out. You vote,  no short sell rule, therefore, all the qualifiers to that vote are meaningless.