SEC: Don’t Mess with Market Mechanics

With the SEC banning naked short-selling of brokerages, Fannie Mae and Freddie Mac, financials have just been given the green-light to continue blaming someone else for their predicament. Banning naked short-selling may seem tempting as it would create short-term stability in the markets and keep Fannie Mae and Freddie Mac from requiring bail-outs. However short-sellers didn’t create the underlying problems in these companies and likewise, banning short-selling won’t make these problems disappear.

Its the first step down a treacherous road as the SEC will soon “draft rules to the same issues across the entire market”. As abhorrent as hoping a company fails may be, the primary reason for the existence of financial markets is to optimize the allocation of capital and short-selling is a crucial part of that. Without short-selling, you’re just encouraging the creation of asset bubbles and making it a lot more difficult a correction to occur. Imaginary creation of wealth can never last and the lack of short-selling will just make the subsequent crash a lot worst.

Short-selling is banned in China, one of the underlying reasons behind the >400% run-up in stock prices, and now the staggering >50% stock market crash. In the long run, banning short selling will only mask the many problems faced by the financial industry. And with the SEC’s track record of dealing with problems, maybe that’s all they want to achieve.

EDIT 16-07-08: Whether it be correlation or just causation, financials have had a huge bounce today, the day after the SEC banned naked short-selling of brokerages.

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Life in Equity Research

I’ve been working as an Associate in Equity Research for almost three months and I’m loving every minute of it. The hours are great for a job in high-finance, 12 hours a day, Monday to Friday and the very occasional Saturday. And surprisingly, its never really been that bad. It really does help that not only do I enjoy what I’m doing, but I’ve also been given a huge amount of responsibility so I know what I’m doing is really worthwhile.

Three simple but important things I should keep in mind for any future jobs:

1. Whenever you ask any questions, prepare for it as if you’re going for an interview. That means exploring all avenues and making sure you know the topic inside out. You don’t want to come out sounding like an idiot.

2. Work late hours but more importantly, especially for myself, wake up early. I don’t mind working late, but I do have trouble waking up in the morning so I’ve got to try sleeping earlier and starting work earlier. It’ll be less applicable for investment banking but its always good to get as much sleep as possible. You’ll never know when you need it.

3. Double-check work. It doesn’t matter how confident you are that everything is correct. There is ALWAYS SOMETHING WRONG. It always pays to double-check work. Especially since you do a lot of work when you’re half-asleep. You don’t want spelling, formatting or formula errors in anything you do because you want a record of doing quality work.

And lastly, something that I’ll try to keep in my job next summer. Keep a log book of everything you have learned, and mistakes you have made. Nobody can remember everything (perfect example here) and you don’t want to be making the same mistakes all over again.

So sadly, theres just one more month of this and I’ll be back in school, and there will be regular updates again…