From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Subject: Re: Should we limit the shorts life time.
Organization: Dept. of Computer Science, University of Ottawa
Date: Mon, 27 Jul 92 23:50:13 GMT

In article <sehari.712270458@marge.ecss.iastate.edu> sehari@iastate.edu (Babak Sehari) writes:
>---
>
>There has been a few argument on this issue, since last time that I checked
>this newsgroup.  So, here we go:
>>> 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 can't be CERTAIN of this, but I think that this situation comes in
as one of those under which the short position would have to be
covered.

In this situation, it is quite clear that once Broker B sells the
stock to C, there is NO stock to cover A's short position.  He is no
longer able to borrow a stock from B, because B no longer has the
stock.

If the short position did NOT have to be covered at this point, then
we're talking about something other than "short selling" - we're
talking about trading in some surrogate for stocks.

In short, this example that you give describes something that looks
like short selling, but isn't.

>From: @bnr.ca (Brent Buckner)
>>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.

Have you ever heard of "demand loans?"  These are loans that require
you to repay the principal "on demand."  I've seen this sort of clause
described in quite a few legal documents.  They do NOT require you to
pay it back in any kind of given time.

Not having negotiated any short sales of stock, I'm not certain of the
specific terms that people tend to agree on, but I STRONGLY suspect
that they include some form of "on demand" clause.  This would, of
course, cover the situation described above where the broker winds up
selling the shares that were sold short, i.e. - if the shares get
sold, the short-seller is required to cover the position.

I'm not certain of this, and I can't find any good references to short
selling in my 'ol Finance text, so I COULD be wrong on this.

But if there is an "on demand" clause, it mitigates your complaints
concerning the perpetuity of short positions.

>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.

You are ONLY investing in the company if you are making a purchase of
stock from a primary issue; i.e. - you respond to a prospectus, and
pay money in to the company's representative.  That how you invest
money in "part of the company."  If you don't do it this way, you are
not "truly" investing in the company.

When you buy stock on the stock market, which are fundamentally a
SECONDARY market, you are NOT putting money INTO the company.  You're
just buying out somebody else's investment in the company.  When you
make that purchase, the company does not receive ONE CENT towards
their activities (unless you're purchasing treasury shares, which are
just a substitute for a stock issue).

>>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.

But since the trading of such things provides even higher leverage
than even dealing with short sales, are these not a bigger problem
than short selling?

If short selling is a "great evil", then aren't put options even
worse?  Short selling at least requires that there is some stock
kicking around to back up the value of the sale.  Options require no
such backup (in theory - in practice, you probably WOULD have some
shares).

-- 
Christopher Browne
cbbrowne@csi.uottawa.ca
University of Ottawa
Master of System Science Program