Markets Should Rally On Naked Short Selling Restrictions

With the markets continuously going down, one wonders when it will come to an end. Well, the end could be near with a powerful rally around the corner. The SEC is implementing restrictions on naked short selling of all stocks, not just Fannie Mae and Freddit Mac.

Previously, there was no disincentive for broker-dealers to reject naked short selling trades. With fines and penalties looming, naked short selling should come to a halt and allow for an orderly market to take place. The excessive selling should be reversed allowing stocks to trade on fundamentals. Hopefully this will curtail the daily watch on which companies are next to declare bankruptcy as liquidity dries up and taxpayers get left holding the bag.

Do you think that this measure will help spark a rally? Your thoughts are more than welcome.

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2 Responses

  1. Changing rules in the middle of a game is equivalent to cheating, so I think. And why not go all the way and prohibit leverage? And stop private investors from accessing the markets? Force them to go through “well” managed funds only?

    Anyways, these measures won’t change the rotten fundamentals of the economy. Short selling will stop. What needs to be covered will be. I doubt that it would just trigger a rally. A rally gets going on certain hopes. Those who short sell are the same ones involved in a rally. If the rules change, they may just go elsewhere (forex, etc.)

  2. Hi John,

    Thanks for your reply. Naked short selling has been a prohibited practice. It is unfortunate that regulators have not penalized broker-dealers for not enforcing it as they will do now. The practice is showing how short sellers are moving from one firm to the next and in a matter of days taking what was a solvent firm and bringing it to bankruptcy.

    Margin requirements were increased after the 1929 crash as individual investors were able to put 5% down which magnified gains and losses by twenty-fold. Unfortunately, greed hits individuals and companies and this time it was financial corporations that leveraged their balance sheets to excessive amounts.

    Sure the economy has stalled but the downward spiral that we are witnessing in the markets has gone beyond the rotten fundamentals of the economy.

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