Thursday, October 02, 2008

"No Short" List--only hurts small individual investors

The new ban on short selling financial stocks has not only broken the integrity of the financial markets, it really only impacts the small, individual investors. If you were a large hedge fund who wanted to short a financial stock, it can still be done by selling short a futures contract on the S&P 500, and simultaneously going long 499 stocks in the index--excluding the stock to be shorted. The net position is a synthetic short on the targeted stock.

Why does this hurt the small, individual investors relative to the big guys? Because the commissions on buying 499 stocks adds up relative to the gain from shorting one stock--if you are right. The bigger funds are likely going to be short more than one stock and they are making much large investments, so the transaction costs are a much lower fraction of the amount invested.

2 comments:

Magdalena said...

Hello Ray! :-) Best wishes from Poland! :-) I'm getting to know blogger, and I found you there, becouse of "The marriage of sense and soul". I will visit you. Baci :-)

Chetan said...

Hi Ray,

I read your blogs often. Today I saw your LinkedIn profile. I see you have double masters from MIT. I am curious to know as to how could you do both BS and MS simulatneously during the period 1990 – 1993.

Chetan