I am no fan of falling securities prices (especially the stock of my company); however banning short selling will not stop market forces from reaching a new equilibrium valuation. If the goal is to protect against run-away algorithms or short-term order imbalances then a sensible policy response is to introduce market circuit breakers which halt trading in a class of securities or single instrument in the event pre-established boundary limits are reached.
As for Twitter the case is even stronger. Attempting to ban communications facilities just because they are new and potentially "scary" to neophytes is a similarly blunderbuss approach. Should we ban wireline telephony because it can be used to order an assassination? In the 19th Century a group of English textile workers who came to be know as the Luddites sought to ban the introduction of new wide frame textile looms because they threatened the old artisanal ways of weaving. Perhaps the world would be a more bucolic and leisure-filed place had they prevailed but we would also not have benefitted from 200 years of scientific advances in areas such as vaccines and transportation.
I do not mean to suggest that no regulatory limits on either technology or financial markets are ever appropriate. Sensible capital requirements disclosure rules and circuit breakers are well-established ways in which to channel capital markets and rules which ban texting while driving and wireless telephony over military frequencies are also in the public interest. However had Louis XIV outlawed the guillotine I doubt the French Revolution would have been any less bloody [Frederic points out below I should have cited Louis XVI instead].
There are enough real policy challenges to be tackled let’s not invent fanciful new ones.
Tom In research for my new book (I’ll send you a copy) I found many examples of new technologies causing change that made incumbents uncomfortable and so they try to regulate the technology (even though the behaviors they fear are already regulated). The first serious discussion of a legal right to privacy in the US came with the invention of the Kodak camera in the 1890s which led for example to Teddy Roosevelt briefly banning “kodakers” in Washington parks. The Gutenberg press brought its would-be regulators. Today the internet with its applications such as Twitter is the greatest cause of disruption — and with it fear and a will to hold off the change — since I’d argue Gutenberg.
I don’t detect a Luddite link here. Who last used Twitter to weave or thresh? It’s a pity that so many people are so distracted by their online communications. Focussing on activities which are genuinely productive while reducing Twitters and simplifying trading might not be such a retrogade step. The traders still trade with the money of the people and therefore the mechanisms by which they trade should be easily explained to the people.
Bonjour Thomas Interesting points you raised especially your last sentence. I didn’t know about the Luddites. Human being is usually reluctant to change or evolution and it’s a kind of reflex of self-protection to ban (or cut heads) with the aim to keep control over thoughts people culture or economy. As for the guillotine Louis XIV died in 1715 so he never saw any. I am sure you wanted to say Louis XVI instead. The guillotine adopted in 1789 killed over 16000 people during the French Revolution (Louis XVI included as we know). Uprisings quite often lead to savagery (as we can still see in some parts of the world) however I want to think that if that “tool” had been outlawed there would have been less blood. The good thing is that whatever the methods of controls by governments if a revolution has to happen it will happen. All in all we have to move with the times wisely. Fr̩d̩ric.
Tom I agree with your final statement. The collection of Continental European officials (in common with most political officials) do not seem to understand the difference between short selling where a stock is borrowed and sold with the risk being taken by the seller as he or she has to return the stock to the original lender at the borrowed price and NAKED short selling (where no underlying stock is provided). In the US (I’m not sure of the UK situation) when records have been checked there have been vast numbers of open naked positions (this depsite the fact that stock is supposed to be provided within three days of the sale!) some of which have been open for YEARS. Resolve that rather than trying to manipulate or ban a price discovery mechanism (although I’m sure the politicians would rather only have a stock market that ever goes up). With regard to HFT the exchanges seem bent on providing ever more capacity to allow for ever larger numbers of quotes despite the fact that the vast majority never actually trade. What would stop the mini flashes or mini crashes (and reduce overall volatility in its tracks to the benefit of INVESTORS!) would be as Themis Trading in the US for example have advocated 1) mandate that quotes have to remain valid for at least say 1 second 2) cancel rebates for cancelled trades (this would stop ‘sniffing’ by the algorithms) and 3) fine companies if the ratio of the number of quotes to actual trades exceeds certain levels. One of the reasons for last May’s flash crash was the HFTs hitting the metaphorical STOP button which exacerbated the price cascade (Nanex did some great work on this). Circuit breakers are fine as far as they go but almost all rules and regulations from the SEC and others seem to be designed to stop something once it’s occurred rather than stopping it happening in the first place. DavidC
Many thanks to Frederick for correcting my (obviously) weak recollection of French monarchy; and to Jeff for sharing examples of his latest research. Jeff deserves huge credit for championing the adoption of new technologies to broaden the public debate before it became obvious and popular.
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