Ban on short selling and the sociology of algos (reply to Daniel)
September 25, 2008
Daniel’s comment to my earlier post calls for another post…
About the ‘regimes of worth’ point: yes. This is the general idea I was aiming for, although you express it here in a more eloquent way. I would not, however, use the word ‘inconsistent’ here, but instead refer to the fundamental incompatibility of the different orders of worth. Also, we should not assume that the different regimes of value exist separately. Of course, Boltanski et al are more sophisticated than that and refer to the continuous cross-fertilisation (my expression) of the regimes, but this should be stressed. The SEC, the markets and an assortment of experts (economists, accountants, OR people and many others) were affected by each other all the time. This does not necessarily mean that the incompatibility is lessened now, but it is important to note that the representatives of the different regimes of truth, if you may, go through a dynamic of change.
About SSF and short selling: Hong’s point that short selling is another way to express a view about the market is correct, of course, the same way that leveraged derivatives, for example, allow market participants to take positions in the market without committing capital upfront. The important point, as you say, is that short selling may be ‘expressing’ the same market view as selling a stock, but the informational and technological impacts that the different tools/practices have on other actors and the market would be different.
I do not know what are the exact routes through which such effects ‘flow’, but the little I have some knowledge about shows that the ban on short selling may backfire in some unexpected ways. For example, a popular type of trading algorithm uses matrices of historical correlations between stocks. The basic operation of the algorithm is that it buys one stock, while shorting its ‘counterpart’, another stock that’s expected to go down during the expected horizon given to the position. We need to stress that this is not a hedging position but the algorithm’s ‘value maintenance’ background process. So, when the SEC banned short selling, such matrices are, in effect, shut. Of course, buying and selling the different pairs of stocks would amount to a similar effect of value maintenance, but at a much higher level of capital dedication. Even more importantly, from the SEC’s perspective, is the fact forcing algorithms to replace short selling with actual buying/selling may introduce potential ‘volatility time bombs’ to the market, when many algorithms will be buying or selling the same stocks.