Friday, October 10, 2008

Ban on Short Selling in the US is lifted

Yup, the initial ban was to prevent the US stock market from dropping too fast.
To those who do not know the implications, let me explain.

Short selling refers to selling stocks you do not own, and hoping to buy back the stocks at a lower price. Hence it creates an impression that more people are selling away stocks than the actual number of people who do actually WANT to sell their stocks.

This problem is magnified when institution investors ( fund mangers and people with lots of $$) start to do this. Because to everyone else in the market, all they see is frantic selling of stocks. And due to herd mentality, they will get scare too and sell the stocks that they own. With more people doing this, the chain effect can be devastating. Finally the ones who profit are these people who short sold at first, and 'covered'( buy back) from the panicked stock owners.

However i feel that the ban was uncalled looks as though US wants to manipulate the market. Purposely changing the rules of stock trading, just to save their own market. There is theoretically nothing wrong with a bear market. Market goes in cycles! It is natural that it corrects itself. I don't see them banning the buying of stocks when the market go up. All this however is just from a logical perspective. The ban was mainly to save companies and people who have invested lost of $$ in the US companies. So i guess its 'right' to have the ban, sounds like I am contradicting myself..haha.

So, now with the ban lifted, i think drops could be more pronounced, but technical rebound will be bigger, cost shortist will definitely need to cover back, and generally they will cover back around the same time, leading to a rally. More on the trading mechanism of the stock market will be discussed in my future posts.


Edmund said...

haha actually short selling in my opinion is not somewhat of a natural process of the market. Logically speaking you don't sell what you don't have in the first place and thus it is actually just another mean for traders to make money out of it. However short selling actually causes many market crisis such as the great depression by simply magnifying the effect as you have stated. Thus its pretty much understandable why its banned to prevent another crisis where banks have stocks which are worth like $0.01. well thats just my 2 cents :D

Daniel said...

Its true that its not really a natural process, but if this is the case, they should not have implemented it in the first place. But now they can just ban short selling just because the market is bad..this is being unfair to the traders who make $$ from short selling. I guess their main motivation comes from helping out the vast majority