Short Selling

It’s become popular with politicians in times of great market crisis and extreme volatility to stop short selling. This naturally is never supported in the market as it undermines liquidity and opportunities of making profits. Old Jobbers (Market Makers) will know that you make money in both Bear and Bull markets but it is always more skilful in Bear markets. The concept being anybody can buy in a rising market and sell for a profit but it takes more nerve and understanding to sell short trusting judgement on when the market has bottomed.

Stock lending/borrowing is key in covering short sales and Investing Institutions also make money by lending mountains of stock that would otherwise remain in the vaults gathering dust and earning nothing. So preventing short selling actually hits the investor.

So if short selling is deemed by Politicians as fundamentally wrong for the market and presumably for the investor, why it is allowed at all?

The answer is that markets and investors need the liquidity that short selling brings. Without releasing static assets in the vaults of the investing Institutions the market would stall, inhibiting volatility and the chance to make profits. Why would professional investors put their investment into the markets if they can get better returns elsewhere?

Profits must be allowed to be made and the risks must be allowed to be taken. Sure risks must be understood by all and measured closely but taking away all risks in the markets is not the answer.

I feel that the long term answer to short selling is to manage the risks being taken by individual market players. This could simply be done by insisting on a greater margin for Stock Lending. This alone would increase the profits for investors and mitigate a small part of the profit by short sellers however, it would not prevent short selling.

Short selling is a very important part of the market and has to be allowed unhindered by political interference. If the market agreed to increased margining and brought greater monitoring and control of stock borrowing, the politicians could be kept at bay.