Saturday, 20 September 2008

Short Selling or Greedy Gambling?

Short selling or "shorting" is the practice of selling things the seller does not own, (often financial instruments), in the hope of repurchasing them later at a lower price. Often the sold item is 'borrowed' or 'rented' for the period of sale and re-purchase.
- from Wikipedia

Short selling has been restricted, for the moment (in the UK), to 'non-financial stocks, but the practice of short selling has been defended as contributing to 'market liquidity'.

In the US, there are also restrictions, also temporary, and a ban on 'naked short selling', which is the same practice, but without bothering to borrow to pay for the shares, or ensuring such shares will be available on the due day. Naked short selling has long been banned in certain 'key stocks'

It widely accepted that naked short selling is rife, and the practice is poorly policed.

It is pretty obvious that short selling is no more and no less than placing bets that a stock will fall - and it's equally obvious that market regulators are well aware of that, hence the past minor restrictions, and the current more powerful ones.

But it is not only gambling that a stock will fall - Short selling is making a bet while simultaneously influencing the outcome in the better's favour.

No wonder it is so rife; no wonder they make billions out of it.

And no wonder the regulators have failed to regulate it, or admit the obvious damage it is doing to more honest investors. As these gamblers got rich, their money didn't come from each other, or from thin air - it came from outflanking pension funds and other legitimate investors who really keep the market alive - not just 'liquid'.

Whenever a stock - or the whole market - is in decline, gamblers can accelerate that decline as they laugh all the way to the bank. Short selling should be banned; the gamblers should pay for their shares as everyone else has to, not sell before they even own them - and naked short selling should be prosecuted with heavy financial penalties.