The Dogma Of Short Sale Bans; Keep The Faith

Short sale bans are to politicians what bloodletting was to 11th century barbers.

I have been toying with the idea of covering all my UCO short; which is sad, given that I haven’t even had to face a bounce yet. That 25% gain is tantalizing, like a forbidden piece of fruit.

But two things are holding me back. The first is that I would be very, very long if I wasn’t holding that short. The second is an addendum to the first; now is not a time I want to be very long.

We have three countries in Europe banning short sales, chasing that proverbial monster down the rabbit hole.

Unfortunately, they will likely find, like every other country during every other major correction has before them; that short sellers are not what is driving the selling.

You do not drop almost 20% because people decided to short stocks. There is so much risk involved with the action, the sheer volume required along with the size of the gonads on all the individuals involved would have to be enormous.

Name to me one instance where banning short sales has resulted in improved market action. I dare you, name even one.

This concerns me because the presence of short sellers can act as a dual function for the market. A short seller is not just someone who takes a negative view of a security and tries to force it down.

Short sellers also indirectly act as broker dealers.

Their activity removes a great deal of stress off of institutional brokers, since it’s the short seller’s money that is at risk. Ban short selling and you simultaneously increase the amount of working capital that traditional brokers need to function.

Plus, short sellers offer a venue for people who do not necessarily want to sell their stock to earn additional revenue stream on their assets, during a time of distress. Banning short sales effectively removes the ability of those individuals to loan their assets, making traditional sales the only remaining option, should these people feel like they require income.

Also, more practically, banning short sales is a tell by these countries that they think they are in serious trouble. You do not banish market activity unless you are mortally threatened by it; so this maneuver has managed to both increase the amount of risk to active market participants while letting the whole world know that France, Spain and Italy think themselves royally fucked.

Brilliant confidence building choices there, on display.

So I stay in my short, for the indefinite future. I would like to cover for more than 20% gains, but only if I think I can do so without risking my neck, should Europe fall.

If you enjoy the content at iBankCoin, please follow us on Twitter