From: sehari@iastate.edu (Babak Sehari)
Subject: Re: Should we limit the shorts life time.
Originator: sehari@marge.ecss.iastate.edu
Organization: Iowa State University of Science and Technology, Ames, Iowa.
Date: Mon, 27 Jul 1992 20:54:18 GMT

---

There has been a few argument on this issue, since last time that I checked
this newsgroup.  So, here we go:


From: greg@gregm.Berkeley.EDU (Greg Moritz)
>Most of the news *I* hear (or at least the news I notice) regarding 
>'shorts' is that the market for [... ] is *up* due to shorts covering 
>their postitions.  

Short covering is reverse of shorting a stock.  They are not the same thing.

From: jwales@copper.ucs.indiana.edu (jimmy donal wales)

>Babak Sehari seems to be seriously confused about the nature of
>price movements in the stock market.  Further, he is using a rather
>vague measure of the 'good' or 'bad' involved with short selling.

Jimmy! Go back and check your books.

>Suffice to say: it is relatively easy to see that _any_ restriction
>on the flow of information to market (i.e. short sale restrictions) 
>will involve some very serious consequences (costs) for market efficiency
>relative to some information set.

I wonder how?

>It always amazes me that while your average clueless citizen knows
>that he or she would be foolish to discuss the technical details of
>(say) theoretical chemistry as if he knows it all.... that same citizen
>has no qualms whatsoever about spouting forth on complex issues of
>market efficiency.
>
>--Jimbo

You should listen to yourself, and have some "qualms whatsoever..." -:)
So, practice what you preach.

From: jmo@courant.princeton.edu (Mike Orszag)

>Mr. Babak Sehari writes on short sales:

>> So, It seems that say B and C have left their car with a friend for safe
>> keeping, however, the friend has rented the car. Now, because of wear
>> and tear, high mileage on one hand, and the fact that the car is reduced
>> the need for cars in the market place on the other hand, the price of the
>> car is lower.

>The argument is that there is moral hazard in loaning your stock to a broker
>as the broker may loan out the stock again for a short sale. 

My argument is that not only there is moral hazards, but also there is some
serious economic consequences, which might reduce your assets values.  If
the brokers are permitted to loan your securities for shorting purposes.



From: jld@cbnewsc.cb.att.com (J. L. David)

>In article <sehari.712013741@vincent1.iastate.edu>, sehari@iastate.edu (Babak Sehari) writes:
>> ---
>> 
>>   One of the reasons that stock market crashes is the frenzy of shorting
>> by big investors. 

>Prove it. ...

I already did prove with the example in my last posting.  Also, if it wasn't
so, SEC would not not restrict the shorts on the down tick.


>> The funny thing is these "Market Terrorists" do not have to cover their shorts.

>Not true.  If the supply of borrowed stocks dries up (and it has happened)
>you can have your position closed against your will.  Short sellers are
>not "Market Terrorists," simply people with a different opinion.

A shorted stock might be shorted again by some one else.  See Person A borrows
the stock from Broker B .  B sells the stock to C, which deposit it with his 
broker D. Person E borrows the stock from broker D and cycle could continue
indefenetly.

>>I was wondering would be a good Idea to tell people "you can not sell things
>>that you do not own, or buy a put option, or write a call option". At least,

>No, it isn't a good idea if for no other reason that it would impede liquidity.

Shorts does not increase the liquidity, they just drive the prices down.
They increase the supply, with little change in demand.

From: @bnr.ca (Brent Buckner)

>There is an argument that shorting decreases the likelihood of a
>stock market crash or mitigates its impact.
>
>First, the process of shorting can prevent share prices from rising
>to heights that will not be supported.

Market that is the owners of the security and the buyers of the security
should decide what is the right value not someone who does not own the
security.

>Second, closing short positions requires purchasing stock.  This
>can mitigate a crashing price.

However, since there is no guide line on when such thing should happen,
the market could be manipulated.


>You are proposing disallowing people from borrowing stock and selling
>it.  Would you also consider disallowing people from borrowing money
>and selling it (selling money consists of using it to purchase)?
>Note that these represent the same activity.  Your analysis of the
>supply of stock increasing due to shorting is exactly the analysis
>of the money supply increasing due to borrowing.

When you loan money, you have to pay it back in a given time, but when you
loan stock you could hold on to it almost indefenetly.

From: keith@iscp.Bellcore.COM (Keith Hawkins)


>Here's my two cents worth on the can of worms
>Babak Sehari opened. 
>
>(That's not a slam on Babak. It really generated
>some interesting dialogue.  And lots of it!!)

>My general view on shorting is that it is just as
>perfectly legit, fair, etc. as going long.

>Should someone be restricted from going long
>by $1 million?  NO.  So why should someone
>be restricted from going short the same amount?

When you buy $1M stock you are investing on that company, but when
you are selling the company short, you are decreasing it's value, it's
potential for attracting capital, and the investors invested on that company.
 
>When you buy long, you are betting, and I repeat
>BETTING,  the stock, commodity, whatever, will
>rise in price.

You could put it that way, too. However, what you really are doing is you are
investing on the company, that is you bought a part of company.

>When you go short, the gamble is for a 
>decline in price.  Nothing more.

There are other instruments for "gamble", which could be useful for
insurance purposes, such as puts and calls.

                               With highest regards,
                                    Babak   Sehari.





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