Loading ...The Problem, The Solution and Why It Probably Won’t Happen
Investing has changed dramatically over the decades. Generations ago the SEC, NYSE etc. had strict, often onerous rules to protect individual investors. Many were the result of abuses during the 1920’s before the Great stock market crash of 1929. Over the past century and particularly in the last twenty years or so, the pendulum has swung to the other extreme. Actions that would have gotten you fined or even imprisoned have gone un-punished and it seems like we are in the wild west days of anything goes when it comes to stock trading. In one sense, if you are a free market guy, and I lean that way, you can take the attitude that adults should be free to take risks and live with the consequences. However, when it comes to these meme stocks most players are going to end up bagholders and are going to get burned badly. Yes, people are making a lot of money, good for them. They don’t really understand the difference between investing in companies vs. speculating on pieces of paper. The only reason stocks like GME, AMC and numerous others are defying gravity, not to mention any connection to fundamentals and reality, is because of engineered short squeezes. Given the way the rules are currently, it makes perfect sense to take advantage of this flaw. I propose the rules should be changed. They probaably won’t be because brokerages prime broker services generate a lot of revenue. Short selling should be made illegal. There is no reason anyone, hedge funds or individuals, need to sell stock that they don’t own. Just make it illegal and prevent anyone from borrowing shares to sell. Those hedge funds and individuals who want to bet that a company is overvalued can still buy puts. Hedge funds usually use leverage anyway and they have the financial ability to purchase enough puts to benefit and for various timeframes to make up for not being able to actually short the stock. If you remove short selling you eliminate short squeezes. Stocks that have minimal value will not go to ridiculous levels based solely on forcing others to buy at higher prices to cover what they don’t own. If you remove that aberation from the markets all investors will have to sharpen their ability to identify true value. Isn’t that what investing is supposed to be about? There is still plenty of room for informed speculation without having these questionable companies being pumped up to unsustainable levels only to come crashing down when reality sets in.
Sounds like you don’t lean too far to the free market side. Who cares if the shorts get squeezed? Who cares if the WSB crowd gets crushed when these meme stocks come back down to earth? Either you understand the risks you are taking when you buy or short any particular stock, or you don’t. And if you don’t, you will learn a valuable lesson the hard way.
As with Robinhood and other recent products (apps for teen ‘investors’), they are not designed to establish confidence in the rules of the game but rather to involve the maximum number of players to the game to be fleeced by HFT’s and the banking cartel. OK, caveat emptor as you say but I think it’s undeniable TPTB are scraping the bottom of the barrel at this point.
Thanks CM, what would be your thoughts on limiting short positions to be only allowed on the actual secondary market shares outstanding, IE ban the practice of re-borrowing and re-shorting (which is currently without limit). Secondarily, enforce bans on naked short selling (leverage with zero skin in the game – as I take it). You know, as I think about the PTB regarding this currency printing and stock pumping scheme – wouldn’t it be consistent for them to ban or at least seriously modify short selling just to keep markets inflated just a bit longer (a desperation move since it will surely upset the hedgies). It’s apparent to me at least that they are just buying time to execute their plan – but it’s extremely tenuous month over month now.
You are correct YYZ that the rules(or lack of them) are being abused, so your suggestions are a step in the right direction. If puts didn’t exist that would be as far as I would go. However, since they still provide the means and opportunity to both profit from over valued stocks, as well as contribute to balancing valuations, I would prefer to see a ban on short selling which would greatly reduce the abuses I have outlined in the pumping up of garbage companies.