The Stock Market is not a Barometer W Out Short Sellers

What the stock market does today or any day  until short selling is restored, will tell us NOTHING.

The pundits are going on CNBC, Fox, Fox Business, Bloomberg, etc and trying to give us some historic reference and relevance of the big declines in the market yesterday.  They are comparing apples to oranges.

Without short sellers, we have no idea what shares are actually worth.

Short Sellers keep markets honest.

A market without honesty, what can that tell us ? Nothing.

19 thoughts on “The Stock Market is not a Barometer W Out Short Sellers

  1. Even with some of the short sellers back in the market, I don’t think we will ever be able to gauge the market again. (Pre-BailOut) I guess its back to the algorithms for hedge funds everywhere. The SEC has made it a little easier by requiring Form SH from all short-sellers. Now they can add this latent data to their calculations and get closer to a “real” barometer of the stock market.

    Comment by econ365 -

  2. Short sellers are equally important for any market as long term investors.

    Comment by automated trading software -

  3. i do agree with you and i think we are now near the market bottom

    Comment by farouk -

  4. Yes, it is hard to said if the short is still coming

    Comment by Stockpreacher -

  5. Should shorting be more tightly regulated, to prevent naked short selling?

    Should “fail to deliver” trades be severely punished?

    From MC>
    for all the talk about naked short selling, no one/institution has ever been identified as a bad guy in naked shorting. The CEO of Lehman Bros talked about it in his hearing, but in his emails that were revealed, he showed an obsession for going after shorts.
    Find me the naked shorts, and the proceedings against them. I cant.

    Comment by VR -

  6. I am hoping that short selling comes back as I have started CFD trading and short selling is the bread & butter

    Comment by Shaun Pounder -

  7. Thank you ..blog goog
    Sure you can buy a put, but Mark is talking about buying a large position of puts – the market maker won’t sell you all those puts, as he can’t short the stock to cover your position. He would be too highly exposed, therefore. I heard the short ban is lifted tomorrow.thanks

    Comment by EgeLeee -

  8. I definitely agree. The market may not be efficient 100% of the time, but short-selling allows the market to adjust when its over-valued. Short-selling allows the market to be “pseudo-efficient.”

    Comment by sred -

  9. Agreed.

    Comment by WL -

  10. Sure you can buy a put, but Mark is talking about buying a large position of puts – the market maker won’t sell you all those puts, as he can’t short the stock to cover your position. He would be too highly exposed, therefore. I heard the short ban is lifted tomorrow.

    Comment by Nash -

  11. I’m not sure I understand why short selling is needed. Why not axe short selling, you’d probably need to axe margin accounts as well but I don’t see that as a bad thing either. Under those conditions investors might actually look to invest in companies that make profits and pay dividends.

    Comment by DTB -

  12. But can’t a short by synthesized by buying a put and selling a call both with an ATM strike price?

    That would recreate the short, and then the market makers could trade as they pleased.

    I’m not a derivatives expert, so I recognize that there could be some problems with this (margins req’s might be higher on options markets, etc.) but it seems plausible enough as a short-term substitute for outright short sales and it might yield you the same information as naked short sellers would in a regular market.

    Comment by Eh -

  13. Buying a Put + Selling a call with an ATM strike would give you a synthetic short.

    I haven’t looked into how exactly derivative markets have been affected by this whole mess, but the strategy seems perfectly plausible to me.

    Comment by Eh -

  14. Once again, I agree with this assertion.

    Comment by the-cuban-responder -

  15. In the above I meant recreate shorts (not puts) using options strategies. It would be more expensive certainly, but it’s not like the strategy is impossible now or anything

    From MC> Rememeber, with options, the market maker puts on a short or long trade behind the option. They usually dont carry it naked unless its a small position

    Comment by Eh -

  16. But there are certainly ways to recreate puts using options strategies.

    Also, is there another effect where people are unable to fully hedge their positions without puts and thus they act more conservatively than they otherwise would. In other words, the market isn’t an accurate gauge of fair value, but it’s erring towards undershooting rather than overshooting (which I think is what you’re implying).

    Comment by Eh -

  17. Pingback: Tuesday Tidbits - September 30, 2008 | Michael Gracie

  18. I agree with you 100% on this. I don’t know what kind of a “free market” system we live in when the government can issue an edict banning transactions on a list of 800 specific companies.

    They said this is a “temporary” measure. Do we know what the means? 1 month? 1 year?

    Comment by MSC -

  19. No doubt that short sellers keep the market honest. However, naked shorts have to be done away with. Otherwise, the market is nothing but a big crap shoot.

    Comment by Fernando -

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