The market and public sentiment are stacked against those who take short positions in the stock market. The reason for this, of course, is that most market participants, such as mutual funds and retail investors, buy and hold stocks for the intermediate or long term. Some of these investors hedge their long positions by implementing any number of shorting strategies. There is also a sizable segment of market participants, who short the market or individual stocks outright, believing that prices will decline. This group finds itself at a distinct disadvantage. There are no built-in protections for them as there are for those who take long positions. There is no sympathy for them when their short trades work against them.
If the market goes down precipitously, losers can turn to congress and even the media who lend a sympathetic ear. Our congressional representatives want to know what can be done to stop the hemorrhaging because a large percentage of their constituents hold long positions in their 401k, IRA, or individual investment accounts. Indeed, most congressional representatives and public officials hold long positions themselves. Conversely, there is no such sympathy for shorts. Nobody goes to bat for shorts. Shorts are regarded in some circles as traitors or predators. Some even denounce shorts as unpatriotic for effectively shorting America when they short the market. They are the Rodney Dangerfields of the marketplace. They get no respect.
They also get no justice. The SEC has implemented multiple rules that favor investors and traders who take long positions and is considering adopting additional measures in the future to protect them even more. For example, the SEC has banned naked shorting. Since 1987, the SEC has implemented circuit breakers to restrict program trading on an exchange for a specified period of time when the market moves up or down by a large number of points during a trading day. Predictably, circuit breakers have tripped much more frequently during market declines than market rallies. The SEC is considering whether to reinstate the uptick rule that prevents short selling of a security, except on an uptick. These types of rules skew the playing field in favor of the bulls. The SEC has taken sides. Longs are good. Shorts are bad.
Federal Reserve Chairman, Ben Bernanke, unabashedly states that creating a wealth effect is one of the principle objectives of quantitative easing. Bernanke claimed earlier this month in a Washington Post op-ed that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending”. This means the Fed wants the stock market to rise and is directly intervening with taxpayer money to make that happen. The Fed has weighed in heavily on the side of the bulls and rigged the market as a result. Screw any bears that are foolish enough to bet against the house. When the Fed puts its money squarely on the side of the longs and has the firepower of the printing press at its disposal, it is time for shorts to abandon the field to the longs or risk getting steamrolled. The market may crater in the future but it will not be because the Fed did not try its level best to prop it up. This is market plunge protection in its most unadulterated form and gives lie to the concept of a fair market.
Unregulated high frequency trading gives traders at investment banks and hedge funds free rein to rip-off investors 24/7, as long as high frequency traders keep the market from plummeting. See investmentwatchblog.com/the-wave/. Ask traders who have taken short positions in the market since March 2009 how well those shorts worked out for them. They were crushed and would be either lying or psychic, if they say otherwise. One reputable market technician after another has called repeatedly for either a market crash or a significant market pullback and has been consistently wrong. See investmentwatchblog.com/the-bane-of-technical-market-analysis/.
The government should act immediately and decisively against high frequency traders who have cornered our market and manipulate it to their advantage every day of the week. See investmentwatchblog.com/the-market-is-cornered/. It is high time to drive market manipulators out of the market and into prison where they belong. Who gave high frequency traders the right to rip-off investors with impunity? They are swindlers who deserve no quarter, but go tell that to the SEC. The wise guys know that the SEC will not lift a finger to protect investors, particularly those who traffic in short positions, from the depredations of high frequency traders, unless there is a deafening public outcry for them to act. Bernie Madoff knew that and so should short traders. See investmentwatchblog.com/high-frequency-trading-a-trilogy-of-angst/.
A market tilted in favor of the bulls makes a mockery of the bedrock principle of a fair marketplace, which dictates that market forces and market forces alone decide whether stock prices go up or down. The market cannot be the cornerstone of our capitalist system if the government favors one side of a trade over another. The government should keep its heavy thumb off the scale of greed and fear that drives the market.
There are no advocates or ombudsmen for those who trade on the short side of the market. If shorts are tired of getting the short end of the stick, they need to organize and campaign for a fair market. Perhaps, a huge class action suit against the Federal Reserve and the SEC would be a good place to start. It should not be that difficult to convince a just and open-minded jury that it is unfair for the government to take sides and tilt the playing field toward longs at the expense of shorts. Short positions should be safeguarded with as much vigor as long positions.
After all, shorts are people too. They should be treated the same way longs are treated. It would be unfair to have it any other way, no matter which way one thinks the market or an individual stock is heading. If shorting in the market is so repulsive, it should be treated like cigarette smoking. A public disclaimer should advise short traders that their trades could be hazardous to their financial health since market regulations and public opinion are stacked against them.