By investors, we don’t mean average folk. By this we mean short sellers who borrow money to bet on a particular stock dropping. These aptly-named villains of the stock market are tampering with the natural ebb and flow of market activity, and many experts agree they should be stopped. So, is it time for Wall Street to pull the rug out from underneath these investors? Many say yes.
It begins with cutting out the motive, means and opportunity for these short sellers so that their lifelines bleed out. With so many rumors inundating the markets due to these short sellers, it’s time for the powers that be to take action. There are many opinions out there on how to go about this. Some suggest blocking short sellers from brokerage sales altogether. A report in the Wall Street Journal outlines a research report from a brokerage analyst at Fox-Pitt Kelton Cochran Caronia Walker who says that an emergency prohibition of short-selling in brokerage shares is crucial. This analyst was speaking specifically to Lehman Brothers Holdings, but the theory can be widely applied.
The Rumor Mill
The thought is that damaging rumors set off by short sellers can really do some harm to companies like Lehman Brothers, Merrill Lynch and Morgan Stanley, because these are historic firms built on a foundation of trust and confidence. The same report recommends a short-term ban on this type of activity until the current crisis is over, at which time short-sellers can be free to do their thing yet again.
Stock borrowing can be tracked, recorded and monitored. A more balanced free market may ensue if short-sellers were no longer allowed to operate in the brokerage sector. The goal should be, many experts say, to retain and encourage a true balance in the market without trading based solely on the fundamentals of a given firm.
Limits and rules used to be in place regarding short selling, as evidenced in the uptick rule banning short selling during times when a stock was plummeting; however, that rule is no longer enforced. Many people say more effort should be put into enforcing already-existing laws that tackle the issue of rumor-spreading, such as the illegal practice of talking down a stock while making a profit on its downward spiral.
High-frequency traders make money by keeping an eye on large institutional investors and try to predict how they will approach their investment making, says Time. They may use a highly sophisticated computer program to determine if a particular fund is trying to buy up a large position in a stock, then getting ahead of those trades before selling at a profit seconds later. There are many who believe that these high-frequency traders are only around to rob wealth from the stock market with no intentions to add real value to it.