The horse has bolted and regulators now want to jam the door close.
I have expressed the view many times that regulators may seek to control established markets practices – I am talking here only of legal practices – but the markets will head were they want to. It is only a matter of time. I am not saying this is not the low but rather that the market will need to confirm this is the low. It cannot be imposed.
Shorting has a legitimate role to play and whilst it brings shaky stocks to their knees in an extremely savage way it does avoid death by a thousand cuts. Bad businesses should not be propped up. We have seen numerous examples in the last few months.
I am not going to peddle my views on the role of free enterprise and perfect competition although I do believe for all its sins it has served well and is the foundation to the economic world we see today.
Shorting – as part of the perfect competition we witness in the market today – plays many useful functions. Shorting allows legitimate hedging by the likes of superannuation funds and individual investors who may be bearish on the markets but don’t want to realise large gains on long term holdings. The fact more do not take advantage of this facility is not the fault of shorting.
Shorting brings market liquidity and yes even in the likes of BHP and the other majors. Without liquidity we would not have perfect competition and for our market liquidity is more critical than it is for most global bourses because of our size.
My concern with the current bans on shorting is that this could create a ‘bubble ‘of a different kind and potentially more savage than the market meltdown we have or are witnessing.
Shorting has become the ‘whipping boy’ for other issues – such as interbank credit fears, key economies slipping in to recession and fear of fear gripping sentiment worldwide.
In fact I would go so far to say that by far the majority of the fall in global equity markets has been the result of investors exiting the market and NOT shorting.
Equities make up only a portion of financial markets and savage plays in say foreign exchange or commodities could wreak havoc that I don’t even want to contemplate.
Enjoy the ride