To the Mats

So this cosmic news yesterday from the SEC that begat a rally that had already happened? Turns out not so cosmic, limited to a few stocks. And not Effective Immediately.

My friend Greg is on the case here (and incidentally stands to have a windfall of search hits for his great Naked Shorts site). Apparently now you can’t short without personally having drinks with Stock Loan. Other new rules require Dedicated Shorts  to file tax returns, possess a drivers license in order to operate a vehicle, and get a passport prior to international travel.

Look, I know it’s the principal that counts, and the fact that they are "on the case" to protect us all against the Evil Shorts Who Hate America.

But it’s one of those "careful what you wish for" moments in my humble opinion.

What would happen if you put severe roadblocks up to shorting stock? It would transfer into derivatives. Bearish bets would still exist, they would just go places like Put options. And it would cause a lift in put premiums. Which of course would add to option volatility. Which would ultimately spill over into stock and market volatility.

Ever see an options board in a difficult to borrow security? Yes, many.

Ever see one with low volatility? I have not.

Not saying that allowing shorts free reign to do whatever they want makes any sense either. Just that there’s a balance somewhere, and going too far the other way may produce the exact consequences they seek to avoid.

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