Comments on: “Eat My Shorts” – Short Selling in Australia

By: A Meaningful Life "Blog Archive": The Short Selling Ban - Regulator Legal Liability?

Fri, 26 Sep 2008 22:38:32 +0000

[...] Update: Just read Sean’s Stubborn Mule blog which has has a good post on short selling. [...]

By: stubbornmule

stubbornmule — Thu, 25 Sep 2008 21:55:31 +0000

@Mark: Your point is well taken: my reference to Sharia law was too brief to capture their approach correctly.

As I understand the restrictions you describe, and I am certainly no expert on Sharia law, if a lender advances 70% of the purchase price of a house then they assume 70% of the risk, benefiting is the house price rises and losing if it falls. I would argue in this case that effectively this is a joint purchase despite being labelled a loan. In a way it is the opposite of a repo which is structured as a sale but is effectively a (collateralised) loan. It is interesting to note that the Sharia restrictions would prevent the excess of leverage in mortgage markets and elsewhere that are at the root of the current financial crisis!

In any event, I’ve edited the post to be (a little) less simplistic.

By: Mark L

Mark L — Thu, 25 Sep 2008 20:51:53 +0000

As usual, a very concise and clear explanation Sean. However, I have
to object to the statement that “this is exactly the position that proponents
of Sharia law would adopt”. While for separate reasons that are too intricate
to explain here, Sharia law would proscribe most forms of short-selling,
there is nothing in Sharia against borrowing money to buy a home, nor against
lending for such a purpose. The feature of lending which is proscribed under
Sharia is the charging of fixed interest on such loans (or at least, excessive
fixed interest, depending on whose interpretation of Sharia law you take).
If the lender accepts no interest, or makes an arrangement under which
she shares the risk of principal and interest being repaid, then it is all legal
under Sharia law.

By: AJ

AJ — Thu, 25 Sep 2008 06:30:26 +0000

Whatever one’s thoughts on the ethics or othrwise of short selling, the law of unintended consequences (very fashionable right now!) is going full throttle. Liquidity is lower, brokerage fees are lower due to this lower velocity of trading, transaction costs are higher…..the finance industry is a hair’s bredth away from significant job losses, to the point where I’ll have to go learn a trade! There is a danger now that there is nobody to buy into a sharp equity sell-off (ie. short coverers). Buy and holders won’t be dominant enough in aggregate to hold off an unsuccessful US bailout. We could be turning very ugly here.

By: stubbornmule

stubbornmule — Thu, 25 Sep 2008 04:37:15 +0000

@killinc: There is an exemption on covered short-selling for approved options market-makers, so the options market does still exist. I imagine it is limping badly though, as I expect that they are finding it harder to borrow stock that it would have been a week ago.

By: killinc

killinc — Thu, 25 Sep 2008 04:20:35 +0000

Yes options might still be legal but does the options market still exist? How are they being priced in markets where proper hedging cannot take place? As real options?

By: Kwoff.com

Kwoff.com — Wed, 24 Sep 2008 23:57:17 +0000

“Eat My Shorts” – Short Selling in Australia | A Stubborn Mule\’s Perspective…

A look at the recently ban on short-selling in Australia….