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Short Sale Rule Passes After 3-2 Party-Line Vote, Shorting Anything To Be Illegal Shortly
By the thinnest of margins, the SEC just voted 3-2 to institute the short-selling rule which will put curbs on shorting individual securities that fall over 10% in any one day. Dow Jones points out that even market decisions are now split according to party lines: "Republican Commissioners Kathleen Casey and Troy Paredes said Wednesday they would vote against the proposal. Democratic Commissioners Luis Aguilar and Elisse Walter signaled their support for it, along with SEC Chairman Mary Schapiro, who was appointed last year by President Barack Obama." Paredes was further quotes as saying that the rule is "rooted in conjecture and too speculative." Not surprisingly, Aguilar and Walter, both likely reading from the party lines said that this would "help bolster market confidence."
At this point we are too lazy to pull the S&P chart of what happened in 2008 when shorting in select stocks was proclaimed verboten for a certain amount of time. We fail to see, however, how eliminating this critical piece of market testing will do anything but further increase speculation that the entire market is now a sham, propped up by various regulations and money printing practices.
At least the SEC can now go back to doing what it does best, which is not enforcing the law against blatantly obvious instances of insider trading and market manipulation.
Oh, and good work SEC, you got Goldman Sachs pissed.
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Well then, looks like Long Nero, Short Constantine.
Market should have tanked on that news just to say "Stop fucking with the market, assholes!"
Except for the fact that the only way banks can continue to make money is from day trading and attempts to squeeze short sellers. They got drunk on trading profits in the spring and summer and they believe that they can keep repeating the formula. Surely they could tank the markets at will and make profits being short however that hurts sentiment and banks assets leaving them only one option.
Agreed the markets should have collapsed since it is evident that "All is not well" in marketsville. Regardless shorts are done covering in my opinion. When the daily fundamentals decay daily and the markets rally manipulation is the only option. As pointed out by TD big banks have been gunning futures after markets yet when the markets are open stocks are down since November. Magic does not exist..only excellent magicians with a wide collection of tricks.
This is but another trick. Regardless of how it appears the pigeon indeed did not cease to exist..it is just out of sight.
Hedgies industry will take a hit. I guess theres no need to hedge anything if the direction of asset prices only goes in one direction.
If the market weren't being manipulated by quants and bots you'd have a point.
Can you say "No bid"? I knew you could.
How does this impact inverse ETFs?
Most (leveraged) inverse ETFs don't actually short the stocks in whatever index they follow. They use derivatives. Of course, that means counter party risk.
ETFs use swaps which represent some counterparty's representation to replicate peformance of an agreed formula. Sometimes on the "Bucket Shop" model I suspect.
Well, I'd say that is both right and wrong.
They typically do short the stock in amounts up to at most what the corresponding long fund is holding long, and use swaps for the balance.
This helps keep the costs down, since the short/long positions in the cash market (i.e. the real shares rather than the derivatives) are cheaper than the swaps.
So, not only will some of the underlying components of the leveraged ETFs (long and short) be in circuit break mode distorting their trading, but the inverse (short) leveraged ETFs on days when the market is moving up will themselves be subject to the circuit breaker.
So, a pair like DRN (3x long real estate) and DRV (3x short real estate) will trade in a bizarre way, where on big moves up in the real estate stocks, DRV will not be shortable at the bid, with no corresponding restriction on going long DRN. That in turn will mean that you could see DRV be overvalued and people who want to gain exposure to real estate piling into long positions in DRN, as opposed to being split between long DRN and short DRV.
Therefore, I would expect to see bigger tracking errors on the leveraged ETFs (both long and short).
It's been a while since I actually read one of the inverse ETF prospectuses so I'm probably wrong. In fact, it's been nearly 2 years based upon my written notes. Time to download the latest and review. Thanks.
I just looked at 2 random portfolio composition files for inverse ETFs (one Direxion, one ProShares), and both were today 100% cash, swaps and futures contracts.
I have definately seen outright short positions in portfolio composition files - but on my sample size of 2 today, it appears that your blanket statement wasn't far off the mark.
Regardless of the composition (short stock or a swap), the effect will be the same. The couterparty that would normally write the swap is going to be subject to the same short sale restrictions, and therefore unable to create their hedged position in the same way, hence likely driving up the cost of the swap and distorting the ETF pricing.
I agree with your conclusion. No matter what boat you're in, the waves will be rocking the boat, often in unexpected or unseen ways.
Why would one want to short an inverse ETF??? Just buy the long version. I can see some components within the inverse ETF being distored but overall, only on the most of extreme days.
For the market overall, it now means that a long, very slow decline is baked in the cake, since there is less incentive for shorts to take a position (and then have the ability to cover said short position, thereby putting in a bottom to a decline). A long slow grind downward with fake rallies (i.e. manipulation) over the next two years, IMHO.
> Why would one want to short an inverse ETF???
1) Because it is over-valued
2) As a hedge against going long the under-valued corresponding long product.
ETFs have tracking errors, and it is sometimes cheaper to go short the inverse ETF than to go long the long ETF.
This will become a more pronounced issue once the circuit breaker short sale rule goes into effect.
I've set up a fake account to test the idea that the ultra ETF's always underperform - I'm shorting both the 3x China bull/bear funds and the 3x energy bull/bear funds all in equal amounts. Theoretically they will all decay over time so I think it should end up positive in the amount of the tracking errors. Only been a week but so far so good. I'm curious how it will look after 3 months or so.
There are a few practical issues that make this not work well:
1) You have to factor in the costs to borrow the shares, which is not zero if you are holding the positions overnight.
2) You have to compare it against the risk free rate of return (granted, thanks to Bernanke, this approaches zero).
3) You have the risk (which is substantial for some of these ETFs) of your broker buying you back in because of fails to deliver. This I think is the real killer, and will not show up in a "fake account".
4) If you are in a trending market you will need to frequently adjust the sizes of the positions or you will get your head handed to you.
5) If you place a position large enough to make any money you won't be able to sleep nights.
Best strategy is to short all leveraged ETFs - but the only parties in a position to do so safely are the ETF sponsors themselves.
You would short the inverse ETF instead of going long because the inverse ETF has negative compounding going against it. (Think FAZ/FAS)
BOTH are substantially down from their issue prices (if you consider their reverse splits).
In other words, shorting the inverse makes more money than going long the 3X because the inverse compounds daily.
It's hard to explain, but shorting the inverse fund is the better way to go long, just like shorting the FAS is better than going long FAZ.
After multiple reverse splits and significant tracking
errors due to adverse compounding,
Direxxion reduced the leverage in leveraged
ETFs and changed the reset from daily to monthly.
Their prospectuses allow them to use swaps and
derivatives including options rather than underlying stocks,
with attendant counterparty and time wasting risks...
http://www.direxionfunds.com/pdfs/PR_DF_093009.pdf
http://www.jubileeprosperity.com/
No exemption for ETFs (unlike the original uptick rule which did not apply to ETFs).
How it effects trading in ETFs remains to be seen. Clearly this will distort the order book for ETF components that have triggered the circuit breaker making fair value computations harder... but it should be entertaining to see the results of trading on the long/short ETF pairs, where I expect the inability to short will materially screw up pricing, especially on the leveraged ETFs like ProShares and Direxion (it is a common occurence for a 3x leveraged Direxion ETF to move more than 10%).
This isn't that big of deal, and may even be a good thing (I admit to being an optimist). All they did was to re-institute the uptick rule *if a stock declines more than 10%*.
"Under the rule, a price test would be triggered for a security any day in which its price declines by 10% or more from the prior day's closing price. For falling stocks, the rule will allow short selling only if the price of the security is above the current national best bid.
The restriction would apply to short sale orders in that security for the remainder of the day as well as the following day."
http://online.wsj.com/article/SB1000142405274870424000457508534413967404...
Of course, this does nothing to stop the practice of a hedge fund using two accounts to coordinate an uptick to sell into (A la Jimmy Creamer).
Still, Durden #4's point is well taken, this is basically another "feel good" waste of time by the SEC.
cannot wait to hear the first jackoff on CNBC (in about 3-4 months) ask : 'would the mkt be moving lower like this if the gov't hadn't taken actions to curb short-selling'
I fully expect any day now a bill to be proposed by noted tax-cheat (and head of the tax-writing House Ways and Means committee) Chuckles Rangel that outlaws the reporting, or even existence, of a negative close on Wall Street.
That too would like pass on a "party-line" vote.
Cripes - I'm not a big believer in the Bank of Serta (for either FRNs or PMs), but that honestly looks to be the only marginally safe place left on earth to place ones hard-earned sheckles these days. No?
I belong to the bank of Tempurpedic, myself.
So, you have to cut into a more expensive "BANK", but you invested for the better sleep support, right? You won't be complaining as much as "perfect sleeper" Serta customer,who chose the cheaper "BANK" to put his nest egg in. I don't have any data or insight to offer about the shelf life of nest eggs in either of those Banks. I doubt they will mature in a positive way.
HHays.
Markets always go up, just like housing!
You have to love when the brilliant CEO's of the largest financial institutions who have been heralded as soothsayers and titans of power make borderline retardation statements such as: " We failed to realize home prices would not rise forever"
and gold!!! (bitchez!)
(duplicate deleted)
That's the ticket. Fiddle f* around with the insignificant whilst the Sociopath's wholesale thievery of the public continues.
Quick men, a diversion!
Agree. Wanna boost market confidence? Restore the rule of law, start prosecuting fraud, stop the K-Street / Wall Street / Congressional circle-jerk. Wanna put my capital back to work? Show me a capital market that's not a shell game or a Ponzi.
But...but...markets are bad! My CongressCritter Mike Honda says so.
More expensive fiddling with the market. Awesome.
Is there an exemption if the company releases devastatingly bad news and should be down 50%? Probably not. The SEC never thinks beyond step one.
Market makers are not exempt but are still required to meet their market making obligations. Say bye-bye to liquidity and I feel sorry for anyone who is actually long the stock that takes a >10% dive and wants to sell.
He who sells what isn't his'n
Must Deliver or Goes to Prison...
Only if he doesn't have administration approval.
Interesting how there are no curbs on a 10% increase intraday. Bubbles good. Price discovery bad.
As long as naked short selling is allowed, we really do need a rule such as this.
I wonder how long it will take to get all of the HFT algorithms updated to accommodate the new rule.
I would like to outlaw stupidity. We can afford to lose the government bureaucrats, congress, etc. who would be in jail, but can we afford to house them all?
Outlawing stupidity, yeah, essentially that's what they're trying to do. "If it were something bad, it wouldnt' be legal, therefore I can [and probably should] invest in this shady vehicle." So you support that by closing door after door, just so that nobody can say you missed one. Feeling safer now?
Um, will I still be allowed to sell?
With most of the recent gains - from Fed-driven liquidity - behind us, and the economic indicators turning down once again, it would seem that these are desperate measures to attempt to keep the markets propped-up, just before the next wave of selling begins. The gov't cannot prevent the credit cycle from contracting. Mark-to-market repealed you say? The laws of economics will be obeyed. This is the last straw in the destruction of anything resembling free markets. Now just bread and circuses... IMHO.
More important is the defacto re-implementation of the uptick rule.
Any short sale must be initiated above the highest national bid.
dabullify
So what happens to positions like SDS?
that's cool. I don't short stocks that are down 10% on the day anyways. It would also be great if they would reinstate some sort of the uptick rule, preferably in a way where my broker handles the uptick during the execution. That way I'm not immediately underwater from hitting the bid. SUCKAAAASSS. SEC = Suck Enormous Cock.
We're gonna see some changes in put premiums after this useless piece of bureaucracy is implemented.
SEC = Serious Enemy of Commoners
This is great news----the main driver of this ponzi scheme, criminal market has been the criminal banks squeezing short sellers who know how to read a balance sheet and income statement. If short sellers would just get out of the way and stop shorting this fiat ponzi scheme, the criminals at JPM and GS (and by extension the FED) would no longer have that pool of money with which to criminally inflate the market.
Everyone just needs to pull their cash out of everything --- the United States market is a criminal scam and the SEC is nothing more than the "Fox watching the hen house"----the people that run the SEC are in on the take and should be behind bars---until that time, if you don't participate in their criminal scam, they cannot continue to win.
I'm assuming the long-buying rule that prohibits buying any security up over 10% in a day is soon to follow?
Nah, Goldman still needs idiots to dump shares to after they run them up.
This rule will help market makers manage inventory as prices are dropped during market panics. Moral of the story be short before the 10% drop. I'm guessing option market makers will be exempt from the rule. Ultimately all selling will be prohibited as in bank/market holiday. Moral of the story part 2, this market is for traders only. If you are a long side "investor", good luck.
Great. Another half-baked untested SEC rule to make the markets more un-free.
I suppose now that the Little Guy is out of the picture - we can go ahead and crash since this supposed rule will probably have no effect on dark pools since nobody knows what goes on with them anyway. I atually went to the SEC web site to post a comment in opposition. Naturally it did not make the list - I guess they only post your comments if they agree with the majority.
yawn everything goes up Little Guy likes that its like the Little Lump in his pants
This is an interesting chart from Kevin Depew on Miyanville. It shows what happened to Pakistan's Karachi 100 (KSE100), that back in June of 2008 when they banned banned short selling.
https://admin.minyanville.com/assets/FCK_Aug2007/File/kse100.gif
All roads lead to hell, at this point.
Looks like they figured out how to game it after that short stepstair.
So, when a stock is dropping hard, you just place your cover order at -9.98%, and reverse it in anticpation of shortcovering? Makes sense. But if they're gonna protect the downside, then they damn well oughta protect the upside. Put the same kind of constraints on stocks +10%, and stop these ridiculous squeezes on POS cos.
Maybe they don't want anyone to make money when they crash the market.
Next to be outlawed...put options?
I think the SEC committee just telegraphed their future market expectations! Here it comes.
Interesting.....one side wants to prevent/delay the inevitable (yet again). The other wants to keep an efficient market and allow NECESSARY corrections to take place.
Hey Feds...can we just get the pain over with already?!?!
This move will put insider information at a premium!
After all, if YOU know that stock is gonna dive uncontrollably tomorrow, and this measure will accentuate that move, then you can make the maximum profit by shorting it in advance!
All bets must be made FOR Big Brother. All in opposition will face treason charges.
We are looking for liquidity to disappear...
http://www.jubileeprosperity.com/
Will be watching what inverse and leveraged inverse ETF's do in response to this change.
No problem is to bad, that the government can't make worse...
Let's see what if I owned a bunch of stock. Really want to hold onto my gains but don't want to sell. I might short the stock periodically. Cheap insurance right?? Oops not allowed..oh well I guess best I call my broker then and sell outright.
They are probably going to try to do the same thing in the FOREX market so when the USD falls more than 10%, no one can short the USD and therefore the currency gets to live a little while longer.
They banned buying a stock after it has risen > 10% in a day, too, right? LOL
If you are going to short after a stock drops 10% in one day you are an idiot. The rule is bs. Banning all sales, when it comes, will, obviously, be a more significant situation.
This rule will never work. Look at China shanghai composite. Shorting stock is not even allowed. How much did it decline in 2008. More than most countries!!!
the fed is manipulating this market for their own gain and the good of insiders trading in DC.
screw them all! thunder and lightening is coming to take all the turds down.
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