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To: wonk who wrote (24235)	10/28/1999 3:55:00 AM
From: marcos	Respond to of 26163

I know what you mean, there is a bias toward overevaluation, and margin certainly may contribute to it - the effects of margin are quite obvious as stocks pass through the 3.00 and 5.00 margin levels of various houses on the TSE, i've noticed that a lot, the newly-found or newly-lost marginability accelerates moves through the cutoff level. But basic to my perception of an exchange of share equity is that the shares actually exist, that a piece of a company is being traded. Just can't wrap my brain around the naked short idea ever being legitimised in the regs of an exchange. I wouldn't want to deal there, for sure. Margin is a contract for debt between a lender and a borrower. It is not an integral part of the basic function of the brokerage house, that of trading. It's just customary that houses lend to clients as well as provide a trading service, the debt is quite separate from the trade. One certainly affects the other, but they are two distinct services, related but distinct contracts. In both cases the house is lending - equity cash-equivalent to the long, and the long's shares to the shorter -g- As you point out, one way margin affects trading, and particularly short trading, is that margined shares are available for short borrows, one major reason why houses give margin. Nothing wrong with this imho, as the borrowed shares exist, a piece of a company is being traded. And yes, there is a risk to the shorter that the shares will be called, but i think he should just accept that as coming with the territory, and manage the risk as well as he can by being careful of what and from whom he borrows. Just part of shorter DD. Every trade carries risk. Yes, the risk of being called probably does contribute to overevaluation, but imho nothing warrants the legitimising of the selling of what does not exist. And the overevaluation doesn't last forever, anyway - they all find their intrinsic value eventually, though some do float high for what seems forever. Haven't read the SEC concept release, only scanned it a while ago, don't remember much of it. It was only the naked short comment of that judge i meant to criticise. I really doubt that naked shorting exists to any degree, even on the otc-bb among the infamous M&Ms ... but then i don't really know, either. It's just that if the practice was absolutely completely illegal, and such law was strictly enforced, then the pumpsters of all this non-reporting paper would lose one of their favourite and most effective tactics, that of promoting myths about large short positions while spinning rhetoric about what is, in fact, moral high ground. "But what would be fair, is that anyone who purchases an equity on margin, loses their right to call that share back, e.g., move it to a cash account or call the cert, as long as the share is lent." Hmmm ... i think there you would be interfering with the right of the buyer to the use and disposal of his property, wouldn't you? The margin arrangement is between long and house, while the short arrangement is between shorter and house ... the house sets the rules it deals by, so it would have the right to restrict the long, and the long could go elsewhere if he didn't like the house rules. But to make it a law or a SEC reg - i don't think so. And if the long makes the borrow directly to the shorter, then he has restricted himself already as part of the contract, the terms of that contract would apply.