Short Selling Bans Keep Markets Buoyant in the Short-Term

Spain And Italy Stocks Surging, Bonds Not So Much (Again) | ZeroHedge.

That the Italian and Spanish markets are rising is not a surprise. Short-selling bans appear to help markets rise in the short-term. This makes sense from a technical standpoint. Markets need buyers and sellers to function correctly. Over a long time horizon, buying and selling match up perfectly; however, market dislocations occur all the time over the course of a few seconds, minutes or hours. During these dislocations, investors will take on risk in the hopes of profiting from them.

If there is too much selling, a buyer may step in using credit to  purchase securities to sell them at a profit when conditions return to equilibrium. Too much buying will bring out investors selling on credit, that is borrowing shares to sell short. In the first case, buyers borrow money to speculate thereby supporting the market. In the second case, sellers borrow stock to speculate thereby supporting the market.

What short-selling bans do is take out the second case, stock-borrowing, but leave the first case, money borrowing, intact. The effect is more buyers on average as one method of selling is now prohibited. Rather than releasing selling pressure slowly, these bans allow it to build up so that frequent small dips aggregate into one big correction.

Anyway, does anyone know how I can invest in that new Jon Corzine hedge fund?

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s