Shorting is a lot harder than it looks and there is no middle ground, according to the head of the world’s largest short-selling hedge fund.
James Chanos, founder of Kynikos Associates, speaking to a gathering of hedge fund managers yesterday at a Securities Industry and Financial Markets Association conference, said, “we’re either the omnipotent evil genius manipulating everything, or we’re the village idiots simply handing out dollar bills to everybody on the path to prosperity.”
Neither assumption is entirely accurate, he added, noting that most large firms engaged in short selling actually oppose the now-defunct Uptick Rule, which requires that every short sale be entered at a price higher than the price of the previous trade to prevent short-sellers from adding to the downward momentum when the price of a security is already experiencing sharp declines. The Securities and Exchange Commission eliminated the rule on last year.
According to Chanos, the financial press and bloggers are contributing to heightened market anxiety by spreading rumors on specific firms.
“We live in a time in which the financial press has a compressed time frame and everyone is looking for a scoop,” he said.
In light of the Bear Stearns meltdown and bailout, Chanos said recent rumors spread by a television network about a certain brokerage firm’s stock price taking a nose-dive was just an attempt by the network to make the news as opposed to reporting it.
“I run the world’s largest short-selling firm and we have a trading desk in New York second to none, and we hear everything. But we didn’t hear anything about that day’s rumor about the firm’s stock taking a nosedive. They’re taking obscure blogs where someone is saying something with no responsibility or evidence whatsoever and reporting it as news, which does nothing more than inflame other traders.”
Chanos is urging regulators to crack down and throw the book at traders trading on information they know to be false.