It’s revealing how the presumed universal good of bolstering investor confidence can be claimed by both sides of an important issue such as short selling U.S. stocks.
Here are the quotes.
After duly noting the positives brought to the table by oft-despised short sellers (market liquidity and pricing efficiency), Securities and Exchange Commission Chairman Mary L. Schapiro today said, “We also are concerned that excessive downward price pressure on individual securitues, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets.”
After the SEC voted, three-two, to indeed restrict short selling of a stock for more than a full session when it falls 10% in a single day, well known short seller James S. Chanos said, “The unintended consequence of this rule will be an erosion of confidence at a critical time when the economic recovery is struggling to take hold amid unprecedented deleveraging worldwide.”
Chanos went on to say in a statement in his capacity as chairman of the hedge-fund advocacy group the Coalition of Private Investment Companies that “investor confidence will not be served in the long term” by the rule.
Investor confidence is the mom and apple pie of market-based debates, but its ability to be nearly universally applied tells us it’s a concept too abstract to carry much meaning.
The markets are places where people and institutions with very different motives, means and attitudes transact business. Their confidence is by definition a matter of their world view and their side of a trade.
They lose confidence in markets when they think those markets aren’t level playing fields. Many people think markets are unfair whenever they lose money, but that might not be the sort of confidence loss we want to shore up. It can only be done by trying to set the system to favor price increases over decreases, unleveling the market.
Another interesting aspect of today’s SEC vote is that it was three-two, but not much notice was paid to that split. In the days that William Donaldson led the SEC under President George W. Bush such split votes were seen by many as an anathema of rule-making.
Maybe that’s because Donaldson, a Republican, sometimes joined two Democrats to pass controversial rules. In this case Schapiro, an independent appointed by a Democratic president, joined the two Democrats. The two Republicans, argued in essence, that there was not enough empirical evidence that less regulated short selling was a problem.
Perhaps reflecting that split, this is a decision sure to please few. The advocates wanted more restrictions on short selling, while the other side wanted no change.