EconInvestor

By Monday, the Securities and Exchange Commission (SEC) will probably modify its ban on short-selling stocks ( SEC bans short selling in hundreds of financial stocks ) to allow options market makers to engage in short selling. ( SEC Considers Revising Shorting Ban in Options Market ) However, the fact that it didn’t consider the effects on the options market ( Options Clearing Corporation Statement Regarding SEC Short Sale Ban) shows how little thought went into the ban.

The ban is a bad idea from two perspectives: short-term and long-term.  For now I’ll assume that the SEC will revise the ban in the options market and won’t go into that issue. 

From a short-term perspective, what happens to those already holding short positions?  It appears that the government just forced them to buy in order to close out their position.  How much of Friday’s run-up was due to shorts closing out?  Why should they be forced to take a loss?  Shorts were engaged in legitimate trading.  The government just changed the rules in midstream.

Rven if the shorts are allowed to hold their positions, the ban on new shorts will put enough short-term pressure to force a close-out at a loss.

Another related short-term issue is the effects on hedge funds. Some of these funds may have to close out their positions at a loss. This could drive down their prices. This could cause a run on the fund or cause problems with their collateral or capitialization.

One long-term issue is that it now increases uncertainty and volatility into the market.  Now traders have to worry about what unexpected action the government might make.

Another long-term issue is that it encourages the idea that the government can step in at the spur of the moment and change the rules of the game.  Another way to make money is to have the government issue a new trading rule in your favor. Already some companies are trying to get on the list of banned from being short sold ( Companies try to scramble aboard SEC short selling lifeboat).

Along these lines, why is  AHD - ATLAS PIPELNE HLDINGS and  NSH - NuStar GP Holdings on the list?  Two oil pipeline companies on a list to help financial companies in distress?  This seems like some insider connection at work.

My next post will go more into this ban.