Short Sellers: Quit Whining and Follow The Rules
by: Tom Brown posted on: August 27, 2008 Font Size: PrintEmail Doug Kassâs ode to the market-efficiency-enhancing benefits of short selling in the FT last week would be more convincing if the list of short-selling all-stars he includes had some actual investors on it. But it doesnât. Jim Grant is a journalist, not a money manager. Nouriel Roubini is a finance professor. Soâs Robert Shiller. Yes, Jim Chanos had a hand in bringing Enron to light, but given the work Fortuneâs Bethany MacLean and others did on the company at the same time, Enron would have blown up on schedule even if he hadnât shorted a single share. So on Kassâs evidence (and despite his assertion) the shorts havenât done a whole lot to improve the marketâs ability to find a clearing price.
I have no problem with shorting stocks; the fund I manage is short a number of them. But please, donât tell me, as Kass says, shorts âprovide an anchor of objectivity in an investment world populated by those more interested in rewards than in uncovering systemic risks.â Bull! Short sellers are no more objective or disinterested than longs are, and want to profit from their positions like everyone else. And, yes, they can be devious. By the nature of short-selling, as Marty Whitman points out, shorts are highly motivated to do whatever it takes, including lie and distort, to get their short positions to crack sooner rather than later. Public-spirited guardians of the truth these people are not. I donât understand why they insist on preening.
And I donât understand, either, their sanctimony every time the SEC announces it plans to simply enforce its rules regarding short sales. Those rules arenât too restrictive, after all. You donât even need to wait for an uptick anymore. All the agency wants now is for short sellers to actually deliver the securities they have sold. Simple, right? When I buy a stock, I deliver the cash Iâve committed on settlement day. Why shouldnât short sellers be required to do the same thing?
Yet itâs all gotten people unhinged. To people like Doug Kass, the SECâs move means the agency âseems to be implicitly blaming the shortsâ for the walloping the financials have take over the past year and a half. Wrong. Given the magnitude of the credit crunch and banksâ attendant writedowns, itâs clear the stocks would have cratered whether anyone had shorted them ahead of time or not. For his part, Bob Lang says the SECâs proposed restrictions âsmack of regulation and government controlâ and âis a complete farce and runs in the face of pure capitalism.â Jim Chanos complains about âoverly burdensome and unnecessary regulatory provisions.â
Calm down, girls. Hereâs a reminder: the trading of equities in the U.S. is governed by a set rules and regulations designed to ensure the markets here are fair, open, and transparent. Youâre not allowed to trade on inside information, for instance. You canât trade for your own account ahead of your clientsâ. Depending on what type of investor you are, you might even face restrictions on what types of securities you can own, and in what size.
These rules are well-known. And, oddly, I never hear a peep of protest from the investors who are required to follow them. It seems to be only the short sellers who find rules a burden.
Hereâs one more rule. If you short a stock, you have to deliver the shares at settlement. If you didnât have to do thatâif you could sell as much stock as youâd like without having to deliver anythingâindividual equities might become subject to manipulation, and market would lose some efficiency and rational-pricing pizzazz. And in fact, thereâs evidence that just that sort of manipulation goes on. Take a look, for instance, at the âthreshold securitiesâ list the exchanges publish daily. Itâs a list of stocks for which sellers failed to deliver 10,000 shares or more over the prior five trading days. Companies will get on that list and stay on for weeks. Zions Bancorp., to pick one name I know well, that escaped the bulk of the credit crunch, and whose fundamentals are improving steadily, has been on the list for nearly a month. Thatâs not the sign of random clerical oversight; more likely, itâs evidence speculators have targeted the stock and are attempting to manipulate its price via relentless selling.
Now the SEC proposes to more judiciously enforce Reg SHOâthat is, insist that short sellers actually deliver shares at settlement--and the hyperbole machine goes into overdrive. Youâd think from the howls that free enterprise as we know it is being threatened.
No, itâs not. The government just wants short sellers to play by the rules, the way everybody else has to. If shorts could just get over this crazy idea they have of themselves as noble, disinterested truth-seekers, they might realize that, and adapt. In the meantime, a lot of us would appreciate it if they could just tone down the whining.
Tom Brown is head of Bankstocks.com.
Seeking Alpha
by: Tom Brown posted on: August 27, 2008 Font Size: PrintEmail Doug Kassâs ode to the market-efficiency-enhancing benefits of short selling in the FT last week would be more convincing if the list of short-selling all-stars he includes had some actual investors on it. But it doesnât. Jim Grant is a journalist, not a money manager. Nouriel Roubini is a finance professor. Soâs Robert Shiller. Yes, Jim Chanos had a hand in bringing Enron to light, but given the work Fortuneâs Bethany MacLean and others did on the company at the same time, Enron would have blown up on schedule even if he hadnât shorted a single share. So on Kassâs evidence (and despite his assertion) the shorts havenât done a whole lot to improve the marketâs ability to find a clearing price.
I have no problem with shorting stocks; the fund I manage is short a number of them. But please, donât tell me, as Kass says, shorts âprovide an anchor of objectivity in an investment world populated by those more interested in rewards than in uncovering systemic risks.â Bull! Short sellers are no more objective or disinterested than longs are, and want to profit from their positions like everyone else. And, yes, they can be devious. By the nature of short-selling, as Marty Whitman points out, shorts are highly motivated to do whatever it takes, including lie and distort, to get their short positions to crack sooner rather than later. Public-spirited guardians of the truth these people are not. I donât understand why they insist on preening.
And I donât understand, either, their sanctimony every time the SEC announces it plans to simply enforce its rules regarding short sales. Those rules arenât too restrictive, after all. You donât even need to wait for an uptick anymore. All the agency wants now is for short sellers to actually deliver the securities they have sold. Simple, right? When I buy a stock, I deliver the cash Iâve committed on settlement day. Why shouldnât short sellers be required to do the same thing?
Yet itâs all gotten people unhinged. To people like Doug Kass, the SECâs move means the agency âseems to be implicitly blaming the shortsâ for the walloping the financials have take over the past year and a half. Wrong. Given the magnitude of the credit crunch and banksâ attendant writedowns, itâs clear the stocks would have cratered whether anyone had shorted them ahead of time or not. For his part, Bob Lang says the SECâs proposed restrictions âsmack of regulation and government controlâ and âis a complete farce and runs in the face of pure capitalism.â Jim Chanos complains about âoverly burdensome and unnecessary regulatory provisions.â
Calm down, girls. Hereâs a reminder: the trading of equities in the U.S. is governed by a set rules and regulations designed to ensure the markets here are fair, open, and transparent. Youâre not allowed to trade on inside information, for instance. You canât trade for your own account ahead of your clientsâ. Depending on what type of investor you are, you might even face restrictions on what types of securities you can own, and in what size.
These rules are well-known. And, oddly, I never hear a peep of protest from the investors who are required to follow them. It seems to be only the short sellers who find rules a burden.
Hereâs one more rule. If you short a stock, you have to deliver the shares at settlement. If you didnât have to do thatâif you could sell as much stock as youâd like without having to deliver anythingâindividual equities might become subject to manipulation, and market would lose some efficiency and rational-pricing pizzazz. And in fact, thereâs evidence that just that sort of manipulation goes on. Take a look, for instance, at the âthreshold securitiesâ list the exchanges publish daily. Itâs a list of stocks for which sellers failed to deliver 10,000 shares or more over the prior five trading days. Companies will get on that list and stay on for weeks. Zions Bancorp., to pick one name I know well, that escaped the bulk of the credit crunch, and whose fundamentals are improving steadily, has been on the list for nearly a month. Thatâs not the sign of random clerical oversight; more likely, itâs evidence speculators have targeted the stock and are attempting to manipulate its price via relentless selling.
Now the SEC proposes to more judiciously enforce Reg SHOâthat is, insist that short sellers actually deliver shares at settlement--and the hyperbole machine goes into overdrive. Youâd think from the howls that free enterprise as we know it is being threatened.
No, itâs not. The government just wants short sellers to play by the rules, the way everybody else has to. If shorts could just get over this crazy idea they have of themselves as noble, disinterested truth-seekers, they might realize that, and adapt. In the meantime, a lot of us would appreciate it if they could just tone down the whining.
Tom Brown is head of Bankstocks.com.
Seeking Alpha