The Securities and Exchange Commission, SEC, needs to immediately get rid of “shorting” and “high frequency trading”.
Today in Part 1 I’ll go over why we need to get rid of stock shorting.
What is a short? Plain and simple, a short is a BET that a company’s stock price will go down.
Let’s take a look at how this works. A gambler (I refuse to call them an investor) sells a stock which he doesn’t own at market price. Let’s say $100 as an example. If the stock goes down, let’s say to $80 in this example, he buys the shares and then gives the stock shares to the person who bought them for $100. He makes $20 on the deal. Winner! Now the strange part in all this is that the short gambler never actually owns the shares that are traded. He just makes profit on the share price drop. How is it that he never owns the shares? A short is done in cooperation with a brokerage house that “loans” him the shares on the initial sale (the $100 sale in our example). The repurchase (at $80) which is done by the brokerage house is payback to cover the “loan”. Notice the the gambler never touches the shares. The brokerage firm (big Wall Street that Senator Sanders complains about) is supposed to have the shares which are in reality owned by their clients. Again in an oddity of shorts the real owners of the shares never know that their shares have been sold (“loaned” for the bet) and will be restocked at some later date. And in yet one more oddity, the shares sold may not exist at the brokerage firm when sold which is a naked short. In a naked short the brokerage firm “bets” that the short gambler will cover the bet with “real” shares before they get called to actually deliver the shares.
Is this lunacy? How is this investing? This is just GAMBLING!
Okay, you’ll hear from the SEC as well as the stock gamblers, that shorts allow for market liquidity and efficiency. Those are fancy terms that mean lots of ups and downs in share prices. Gamblers want market swings because that’s where they make their money. It’s not about “investing” money into well run companies. It’s about making money on churning money.
The SEC is two-faced on their position about shorts. They claim that in all their studies there is no relationship between shorts and market downturns. Strangely they have a rule in place that limits downward slides when short sales contribute to a down movement of 10% or more which seems to be their threshold of pain for “no relationship”. They also eliminated the “uptick” rule in 2007. The uptick rule was that you could only short after and upward price movement of a stock. What is significant about 2007? Golly there was this meltdown of the market right after that in 2008. The Great Recession as it’s been called.
Many analysts have concluded that shorts and margins were a couple of major factors that caused the Great Depression in 1929. Hmmm…
The SEC has the power to stop this insanity but won’t. And why not? Money talks. Follow the money. Shorts are a mechanism to hedge your bet on market downturns. (Did I say hedge? Hedge fund? Any connection?) Big traders, big brokerages, hedge funds all make money using shorts.
As I heard a stock broker at a large Wall Street firm once say, “If it wasn’t for the fact that we wear $3000 suits, we’d all be arrested as bookies”.