Will They Ever Learn?

Once again, regulators consider a bad idea that refuses to die:

Europe Considers Ban on Short Selling

BRUSSELS — A European market regulator is considering recommending a temporary ban on negative bets against stocks across the Continent in an effort to stop the tailspin in the markets.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

In such deals, a trader sells borrowed shares in hopes that they will decline in value before he has to buy them back to close out his loan. The difference in price is his profit, or loss. Critics say short-selling encourages speculation and pushes stock prices down, sometimes feeding on itself in a panicked market, while advocates say it keeps the market honest and maintains liquidity.

“We are discussing with national authorities and together we will decide whether we need coordinated action,” Victoria Powell, a spokeswoman for the authority, said Thursday. She declined to comment on the timing of any decision or its possible scope.

Short-selling is crucial to an orderly market. It’s difficult to over-state how important this is. Shorting is what gives a trader his power. It’s an energy field created by all tradeable securities. It surrounds us, penetrates us, and binds the markets together.

Short-selling is most important right now because it helps the market uncover the weakest firms. I find it interesting that regulators continue to blame short-sellers. The fact is that regulators overwhelmingly failed in finding problem spots in the economy and that’s exactly what the shorts did.

Posted by on August 11th, 2011 at 10:37 am


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