Page 250 - THE MARKET WHISPERER

246 PART 8 - Shorts: Profit From Price Drops

In this daily chart, you can see a rare example of a large percentage

crash in Goldman Sachs (GS) stock, resulting from the publicized criminal

investigation into the company’s conduct based on the fear of investor
fraud during the 2008 financial crisis. In the Tradenet trading room, we
shorted at the start of the process, when the stock dropped to below
$174. Two days later, when we saw that the downtrend was continuing
and we wished to increase the quantity of shorts, we found that this was

not possible because all available shares had already been taken by other

shorters.

Regulatory limitations can occur, although very infrequently. In cases
such as the financial meltdown of 2008, shorts were prevented, based
on political considerations. Once every few years, usually during crises,
the public’s voice rises to a shout against shorters, and a moral argument

ensues concerning the contribution or harm shorters wield on market

stability. In some rare instances, shorts were prohibited on certain

financial stocks for several weeks. In actuality, the limitation was set only

towards the close of the crisis at points in time that no healthy shorter

would execute new shorts. So in actuality, the prohibition barely affected

traders. As traders, we have become accustomed to the resurfacing every
few years of the time-honored dispute between supporters and detractors
of shorting. Each side has its “justifiable reasons,” but in the final run,

history has proven that the voice of logic overcomes opposition.

How can you know that it is not possible to execute shorts in a certain
stock? When you press the SHORT button, the trading platform will display
a message, usually of one word: Unshortable. Some trading platforms

allow accessing this information even before you give the order.

SMART An alternative to shorts in cases where your broker does not
MONEY hold the particular stock is the PUT option. We will not learn
about the put option here, but it is not a complex process.

Is it possible that one broker will allow executing shorts in a certain
stock, and another will not allow it? Yes. In actuality, it is not your broker
who lends you the shares, but the clearing bank, which is a central
organization working with a great many brokers. The different brokers
themselves work with different clearing banks. Although the clearing
bank your broker works with may have no shares of that stock, another
competing clearing bank may have shares. If you really insist on executing
a short in a stock that your broker’s clearing bank doesn’t hold, you can