The Financial Services Authority last night clamped down on short-selling in financial stocks, following on from a similar move by the US Securities and Exchange Commission on Wednesday. While there will be many who say this an affront to civilised and open markets, it is in fact a vitally necessary and overdue measure.
Those who argue for unrestricted short-selling ignore the fact that the system is loaded in favour of the bears. If an individual invests £1,000, or an institution £1m, in the shares of a troubled company because they think in the long term it will recover, they have deployed their capital, and all they can do is wait. There is no more to invest; their resources are finite.
If a short-seller comes on the scene, his resources are in effect infinite because he first borrows the shares he then sells. Given that the revenue from the sale is more than the borrowing cost of the shares, he has no net capital constraint and can continue indefinitely - so much so that in one celebrated case a few years ago, one person shorted 250% of a company's equity, though he did get into trouble for it.
See full Article.
Posts
