Monday, September 22, 2008

Short Sell Ban

Before you start reading this a confession. I am getting into dangerous territory here as this log is based on half baked knowledge. Someone please comment to put me right if I have got it all wrong.

As I understand, short selling is the primary weapon of the Bears. Borrow stock, sell in the hope that the stocks will fall for them to buy back and return to the borrower.

But banning short selling aren't the regulators taking the bears out of the market? Wouldn't that remove the balance that is brought in the market by bulls and bears? I mean the bulls want the prices to go up while bull want them to come down. This should theoretically give a fair price for a stock.

But with bears gone, the bulls will have a field day and the stock prices will always go up until reality catches up with the prices and then it would be a bigger disaster. No?

Oh well! What do I know?

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Praveen M said...

good thought...the fxstreet article (link follows) may help refine it further

Amitabh Mukherjee said...

Thank you for your comment and leading me to good information. I instinctively felt that the check and counter-check that is so important to attain equilibrium is taken away by this ban. However, did not think of the "liquidity" angle.

Governments should not interfere with markets unless there is a threat of bottom falling out. But more importantly there should be interference with the fundamental forces of the market.

Just to give an analogy, will broadcast of bad news be banned just because that drives down the market further?

My point exactly.

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