October 10, 2008 09:52 am
Borrowed from GS BB (Zorro11) Could not have said it better myself. Question is WHY???
In July 2007 the SEC abandoned the longstanding “short on an uptick” rule. Under that rule every short sale had to occur at a higher price than the last trade. Only those who truly believed a company was overvalued would consider a short position. A high volume of short sales would only serve to drive up share price.
Not any longer. Starting in August 2007, just one month after the uptick rule was abandoned; the market experienced its first serious crash. The SEC refused to reconsider the folly of their decision. Essentially, there are now potentially two sellers for every single buyer; the original holder of shares, and a short seller. If shorts create enough downward momentum, they can force real shareholders into a sale they never would have considered otherwise.
The argument that two sellers add liquidity to the market is absurd. It isn’t greedy bankers that crashed the economy; it was the fools at the SEC.
Short selling was banned recently, and the market recovered. Today, the SEC lifted the ban on shorts, and the market immediately plummeted. They don’t need to ban shorts. They need to reinstate the “short on an uptick” rule that was on the books from 1934 to 2007.
Unrestricted shorting will not only destroy companies, it will also destroy the entire global financial fabric each of us depend on.