Thursday 16 September 2010

EU shoot the Short messenger

Can't say I disagree with the move to regulate Derivatives. The need for an organised and central market system is important a a key rule of making a market operate well is to have it regulated (with as little bureaucracy as necessary, of course).

However, Michel Barnier's moves for EU regulation today also focus on short-selling and various move sot make this more open (good) and harder to do (bad). As usual the old canard is trotted out about Short selling hurting the banks and causing the financial crisis.

As we know, the Banks managed to blow themselves up all by themselves, with just a little help from Greenspan and other incompetent central government types around the world (Exhibit A - Gordon Brown).

In fact if anything, shorting helps buy providing buyers to a market that otherwise is starved of buyers and leaves sellers watching a collapsing share price rather than a falling one.

But no, in Europe the ire is blamed upon Banks and the City for all their woes, not the issues within Countries (which can be summed up thus, Spain, too much building, Greeks paying no taxes and Ireland letting its banks go nuts on real estate - all caused by membership of the Euro).

Blaming shorting bond and stocks for the Greek situation is just plain silly. If you have not yet read this vanity fair article I suggest you do - it is incredible.

The focus on shorting is pure FUD to distract from teh real underlying problems. Sadly, as nicely as the markets are ticking along now, Greece is going to blow up sooner or later and nothing can really be done about it.


Steven_L said...

There's nothing big and clever about short selling CU.

Last night, feeling all big and clever I set an order to short Hargreaves Lansdown stock this morning.

I'm £80 poorer as we speak and it could get worse yet. What's wrong with these 'markets' can't they see how ridiculously overvalued it is? Even the directors have started flogging their holdings!

CityUnslicker said...

I have lost on all three short position I took out this year (well broke even on the wheat one) too.

No reason to ban it though is it?!

Bill Quango MP said...

Did you do cotton as well CU?

Nick Drew said...

can't support major interference with OTC markets, CU (though I know the proposals have a number of qualifications)

OTC dealing is one of the great glories of the City - we aren't as hide-bound to exchanges as elsewhere, and (at its best) it allows the really creative bespoke origination deals to be done

nothing wrong with an increase in the amount of clearing for OTC deals, though - which can often suit both parties

but bilateral deals, unconstrained by the limitations of exchange-traded instruments, are how innovation and efficiency are driven

(needless to say, freedom to go short is part of this)

James Higham said...

Can't say I disagree with the move to regulate Derivatives.

Yes but why only now?

Anonymous said...

Naked shorting should be banned, but normal shorting shouldn't as it aids price discovery. I don't think I'd short anything much at the moment though, the Fed seems to be buying the market through London these days.

Mark Wadsworth said...

Anon, can you enlighten us as the economic differences between:

1. Simply selling a share you own.
2. 'Normal' shorting.
3. Contracts for difference.
4. Selling a future.
5. Writing a call and buying a put option.
6. Not buying a share you otherwise would have bought.
7. Taking a spreadbet that a share will fall.
8. Plus a few I forgot.

Because ultimately there aren't any, it all comes to the same thing in the end.

CityUnslicker said...

Mark - Bravo.