As always when the stock market is running bad there is this discussion among authorities to forbid short-selling* of stocks. This time is no different as I could read yesterday that several authorities are talking about banning short-selling of stocks.
So, it must be good for the market if we forbid short-selling right? No, wrong.
- There is no evidence whatsoever that it will be better for the financial markets. Show me proof and I will surrender!
- Why keep up prices if market participants want them lower? Prices will always end up where they belong sooner or later. The sooner a stock shows its real value, the better for an effective stock market.
- Restricting the market makes the market less liquid and effective, which leads to lower prices. Not really what the authorities had in mind I guess.
- There are ways to get around this ban by using futures and options. So as usual, the ones that lose are the average Joes who do not have access to those instruments while the sharks prosper as usual. Or maybe we should forbid those instruments too? Why not forbid the whole stock market to avoid turbulence?
The most important point though, is why there is only talk about trying to lower the downward swings. If the market have not gone so high to begin with it would not have gone so deep now. Why ban short-selling? If we instead had ban people from over-investing and buying on the margin we might not have gotten these swings.
Check out the chart below for how the market did the last time we did when banning short-selling in 2008.
Edit: 28th of September. Adding a video from Bloomberg below.
*For those who do not know what short-selling is, it is when you are speculating in a falling price and sell something you do not have. So instead of owning 100 shares of XYZ, you are owing 100 of XYZ, meaning you have a total of minus 100 shares of that stock in your account and thus prosper when the stock is going down and you later buy it back cheaper.