One of the fascinating aspects of the financial meltdown was the admiration and praise for short-sellers – at least by those in the know of how the market works. Shorts were the hardy few that saw the train heading our way, the story goes.
Sure, they made a bundle off the declining financial woes of millions. But, we were told, they helped bring the problems of such formerly illustrious names as Lehman, Bear, AIG, to the forefront.
As one letter-writer to the WSJ framed it, we may even have had it worse if not for the likes of Paulson, late of Goldman/SEC fame, giving those all-important market signals.
I don’t hate shorts. And yes, I suppose they reveal market intelligence, warning us when all is not well. (However, I don’t see why just selling a stock and/or not buying it, leading to a lower price, cannot provide us with an accurate picture of a company’s relative health in view of the market. And I don’t see anything wrong with the uptick rule.)
But think about what happened last Thursday at that point in the market when it was down almost 1,000 points. What if it would have stayed there, or worse, by the end of the day? Why, we would have been told that the shorts were telling us again where the market was – should be – going.
However, the values of some stocks became absurdly cheap in a matter of minutes. Turns out it wasn’t so much sellers doing their thing as it was a combination of prop trading, software programming and, possibly, the fat-finger factor. It may be that an errant trade for billions, instead of millions, launched the market into a tailspin.
The losses that day were enough to cry about.
Regardless of where the market “should” be going, the possibility that the fat-finger factor, wherein the wrong key was pressed for a trade, or an automated software execution might have been interpreted as another example of tenacious short-sellers revealing the ugly truth about all those companies and their prospects was worth at least a smile.
