From the TUC

Time for a wider debate on shorting

23 Sep 2008, by in Economics

The ban on short-selling in financial stocks brought in at the end of last week by the FSA and the SEC was greeted with some scepticism as well as relief, but it has been credited with helping to boost the stock market after its recent plunges.  The actions of the regulators have been mirrored by some of the world’s major pension funds, which have also moved to prevent their shares in various financial companies being lent out to short-sellers.

So far, however, there is little talk of wider action on short-selling, either by regulators or pension funds, and it seems clear that shorting is not going to exit the stock-trading stage quietly.  The Head of Public Relations at Watson Wyatt, while recognising the need for the ban as a short-term measure, added “…it will be good to see this decision reviewed as soon as possible to give back to skilled investment managers their full suite of tools with which to generate returns and control risk for institutional investors”.  Oh – so that’s what short-sellers are doing when they aren’t destroying major financial institutions?

While speculation on share prices is as old as the stock market, borrowing stock you don’t own to make a bet on its share price going down pits your interests as a shareholder directly against that of the company whose shares you have borrowed.  This makes a mockery of the corporate governance system in the UK, which requires directors to serve shareholder interests and makes company directors accountable to shareholders.  How can a board of directors serve shareholders who stand to gain from destroying their company’s share price?  And how can the responsibilities of share ownership be exercised by those who ultimately see themselves as traders rather than long-term owners?

Time for a rethink?

2 Responses to Time for a wider debate on shorting

  1. TomP
    Sep 30th 2008, 12:39 pm

    Worth having a further look at this.

    I had a very quick look at academic evidence on the impact of shorting and it seems pretty inconclusive. One of the sensible arguments in favour of letting it happen is that it can help prevent prices losing touch with reality, but the three papers I found on the subject all had different views.

    Also all that shorting means increased trading costs. Someone has to be picking up the tab.

  2. Nice TUC, nasty TUC | johninnit
    Oct 21st 2008, 11:56 pm

    […] of a coherent critique of the current financial crisis (gulp), but then his colleagues Adam and Janet very kindly go and plug up the gap a bit themselves, at least enough to keep me safe for opinions […]