via Aleph Dog: Government Policy Created Too Hastily:
“I have been no fan of naked short selling; I have long argued that the brokers must locate shares before a short sale can be done. Anything less than that is fraud. But I do not support eliminating shorting, even though I almost never do it. What would be the effects of eliminating shorting?
- No more merger arbitrage funds.
- No more statistical arbitrage funds.
- Wait, no more arbitrage?
- 130/30 funds go away.
- Other quant funds go away.
- Barbarian hedge funds that do real research go away.
- Put option implied volatility goes way up. (A lot depends on whether specialists/market-makers can still short…)
- Because of put-call parity, call implied volatility goes up as well.
- Players move to credit default swaps, oh wait, might those get banned as well?
- Those relying on securities lending income lose out.
Eliminating shorting is stupid. Enforcing getting a locate is smart.”