File this post under "update."
Two weeks ago, ("Don't Sell Yourself - Or the Bank - Short") we discussed the SEC's issuance of a temporary ban against short selling in approximately 800 stocks. The plan was designed to limit the downward pressure on the market, and to reduce volatility.
At the time, we were quite skeptical of the move.
Let's revisit things, two weeks in:
The SEC's short-selling ban was passed before the markets opened on Friday, September 19th. So, our baseline is the closing price on Thursday, September 18th.
Since that point, as of last night's close, the market, as measured by the S&P 500, is down 7.6%. In 10 trading days. Ouch.
How about the volatility of the market? Consider the following day-to-day changes in the S&P 500 Index:
9/19: Up 4.0%
9/22: Down 3.8%
9/23: Down 1.6%
9/24: Down 0.2%
9/25: Up 2.0%
9/26: Up 0.3%
9/29: Down 8.8%
9/30: Up 5.3%
10/1: Down 0.3%
10/2: Down 4.0%
In the past 10 trading days, we've had seven days where the market was up or down by more than 1.5%. For comparison purposes, note that the average daily move in the S&P 500, going back about 80 years, is approximately 0.3%.
I don't think that anyone is all too surprised by the negative price changes or the volatility we've witnessed in the past couple of weeks. After all, the news has been increasingly bearish, and the continually changing fortunes of the federal bailout package have caused a great "whipsaw" effect in the markets.
That's the point. One of the reasons we didn't like the idea of banning short sales as a method of stabilizing the market is that it simply doesn't work. People will react to the news - as they interpret it - and act accordingly. Even in the absence of short selling pressure, if no one wants to own stock, prices go down. When the outlook improves, however temporarily, people buy. Prices go up, even without the upward pressure caused by traders covering their short positions. This is the market at work.
We'll revisit this again somewhere down the line, but the early returns indicate that the SEC's temporary ban on short selling was a big waste of time.
Going forward, perhaps the SEC should focus its attention and energy on more important matters.
Like oversight.
And remaining relevant.
1 comment:
You may be right that the ban on short selling didn't really have an effect because even a dike can't stop a tsunami, but I wonder if, under normal circumstances the ban would not have stopped prices from dropping further. Prices drop as you say because people no longer want to hold the stock they own and others don't care to buy it. However, another component of price drops is the volume of supply when demand is steady. The more supply, the lower the price. Short selling increases the amount of real supply to the market, hence increasing price drops.
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