SEC’s curbs on short selling a waste of time

The rule puts in a so-called circuit breaker for stock prices, restricting short-selling of a stock that has dropped 10 percent or more for the rest of a trading session and the next one. The new curbs take effect in about 60 days but stock exchanges have six months after that to implement them. Full story.

The above rule will only serve to delay the inevitable and could actually worsen the situation. For example, let’s say a former high flyer disappoints the street with its earnings report. Normally, the stock is bid up in anticipation of blow out earnings, but now the earnings come in lower than expected, so say the stock drops 20% in one day, but short sellers are now cut out of the game.  Like a dam, the pressure will build up and a day later when the short sellers can jump in, it might cause the stock to drop more than 10% and so forth.  This effect could go for a longer period of time than if normal market forces were allowed to play out.  When one is forbidden from doing something the desire to the opposite increases twice fold; the more one is prevented from doing something the more one wants to do it.  Thus this rule is just a silly piece of legislation that will not really achieve much in the long run. In the short run, it might provide the illusion that it has the effect of stabilizing the markets.