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Tuesday, September 30, 2008

The Short Squeeze

In a bit of irony, the banning of shorting is causing pension funds, mutual funds, and other institutions that have large stock holdings are losing money due to the ban.
These companies are given a small fee for lending out stocks to be used for shorting, and with short restrictions, these companies are not receiving this income.

Further, as previously blogged, without shorting allowed, markets will move with greater volatility. And market volatility hardly is a confidence builder. This can be easily seen by reviewing China's stock market slide (click).

Without shorting, expect more volatility and a steeper decline. Remember, institutions can short, and the super rich can still short through "dark pools", so really we are talking shorting for people lower than billionaires.
UPDATE: 10/5/08 China is to allow shorting

(image source)

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