Critique4

Posted: October 17th, 2013

Critique4

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Critique4

Introduction:

The authors’ focus is on the price pressures exercised on individual stocks in the markets. The declines in the prices are usually driven by the presence of high demands for non-short volume of liquidity. Short sellers, during episodes or periods of decline in prices of stocks, are usually active in this period resulting in exacerbation of the prices in the markets hence further decline in stock prices. Short sale and their relative intraday prices usually drive prices in unprecedented directions leading to increased uncertainty in terms of the share prices in the financial markets. These high levels of uncertainties have attracted the widespread calls for restrictions in short selling practices, in the financial markets. Hence, the article seeks to provide evidence of the role of short selling in the major intraday price pressures.

Body:

Criticism of the practices of short selling is based on the presence of abuses of the practice to maximize benefits such as profits accrued from trade. Long selling and short selling have different effects on the prices of stock in a given market. During large price reversals, short selling is usually slightly lower than long selling. Hence, long selling is the main driver of reduction in prices because of its downward effect, thus resulting in the prerebound decline of prices. This is based on the notion that large investors who have weak capital conditions because of liquidity crises (Jones, & Lamont, 2002).

Abusive practices on intraday practices are the primary focus of the article. This is because the practice puts excessive pressure on the prices of shares. Short selling is usually attributable to arbitrage opportunities and the hedging demand. The article also focuses on issues such as temporary intraday price pressures, which involves acts of short selling. Predatory tactics in the markets have a role to play in price reversals as well as the decline in prices of stocks in the market (Jones, & Lamont, 2002).

Literature supports that the act of effects of short selling are usually positive in terms of the prices of stock in a market. The effects usually include the increased price efficiencies of stock, price discoveries and better liquidity in the market. Price pressures as a result of manipulation by the short sellers are usually limited to few occurrences in cases such as arbitrage and various corporate announcements. Short selling is essentially an investment practice. Hence, the periodic welfare costs of unrestricted short selling in a market are inadequate to negate the advantages, which are, accrued from short selling (Kot, 2007).

Hence, this is a vital ideal as it supports the need to oppose the calls for additional restrictions in the short selling and intraday activities in the financial markets. This is because short selling is a fundamental aspect, which ensures that the market is unpredictable and not limited to predictability. This is because short selling is a habitual exercise actualized by investors in the presence of market downturns (Shkilko, Van Ness, & Van Ness, 2012).

Conclusion:

Restrictions in short selling are an infringement of the liberties exercisable by investors in the market. This is because it limits the investors to respond to negative or market downturns to save their funds from deprecating value of stock in the market. Other avenues could be adopted such as ensuring the provision of an equal and conducive environment for trade of stock. Intraday and short selling are vital investment practices as they are assumed by the sellers in a market to respond to the downturn in a market. This is because the response of short sellers usually results in the ability of the stock prices to rebound after complete short sale (Diether, Lee, & Werner, 2009). Hence, it is a driver of reversal of share value in that it provides avenues for price reversals and subsequent increases in the price of the share value. Hence, short sale is a necessary investment practice in the market to ensure healthy growth of stock prices.

Reference

Diether, K., Lee, K.H. & Werner, I. (2009). “Short-Sale Strategies and Return Predictability,” Review of Financial Studies, 22, Pp. 575-607.

Shkilko, A., Van Ness, B. & Van Ness, R. (2012). “Short Selling and Intraday Price

Pressures” Financial Management, Pp. 345-370.

Jones, C. & Lamont, O. (2002). “Short-Sale Constraints and Stock Returns,” Journal of Financial Economic, 66, Pp. 207-239.

Kot, H.W. (2007). “What Determines the Level of Short-Selling Activity?” Financial Management, 36, Pp.123-141.