Regulatory Responses to Short Selling

Regulatory Responses to Short Selling Abstract It is commonly believed that secondary market prices is not just a sideshow because they contain information that facilitates the efficient allocation of resources. The feedback loop to a real investment decisions allows a short seller to make a profit even in the absence of a fundamental information. This paper analyzes the regulation of manipulative short selling is to impose a cost on short sales. Through setting the short selling cost at an appropriate level, regulators may be able to drive the uninformed speculator, but not the negatively informed speculator, out of the market, and, thus improve the investment efficiency. One of the most fundamental roles of prices is to facilitate the efficient allocation of scarce resouces (Hayek, 1945). A financial market is a place where many speculators with different pieces of infomation meet to trade, attempting to profit from their information. Prices aggregate there diverse pieces of information and ultimately reflect an accurate assessment of firm value. Real decision makers (such as managers, capital providers, directors, customers, regulators, employees, etc.) will learn from this information and use it to guide their decisions, in turn affecting firm cash flows and values (Baumol 1965). In an efficient market, at any point in time market prices of securities provide accurate signals for resource allocation; that is, firms can make production-investment decisions according to stock price (Fama Miller 1972). Unlike the traditional models where prices only reflect expected cash flows, in the new models that incorporate feedback effect prices both affect and reflect firm cash flow. The feedback effect can explain this by two ways, several papers in the literature generate related implication based on models with exogenous feedback, i.e., where firm value or firms investment decison is assumed to be mechanically tied to the price (Khanna Sonti 2004 and Ozdenoren Yuan 2008). However, our focus here is on models that exhibit endogenous feedback, i.e, via learning or incentives. The latter one is through which financail markets may have real effects is by affecting a decision makers incentives to take real decisions, this is most relevant for firm managers, whose compensation is tied to the firms share price, in some sense is a way to discourage â€Å"agency problem†. Particularly, the former one is what we interested here, real decision makers learn from stock price and use it to aff ect real decision. The theoretical research on financial markets traditionally treats the real side of the firm as exogenous. Milgrom Stokey (1982) consider that if cash flows are exogenous, the only way to generate trade is to introduce noise traders in the model. Grossman Stiglitz (1980); Hellwig (1980) developed rational expectations equilibrium models of financial market, in which prices preform a well-articulated role in conveying information from the informed to the uninformed. Kyle (1985) developed a model that is closer to a game-theoretic approch, where the equilibrium concept is similar to the Bayesian-Nash Equilibrium, the information of speculator gets partially reflected in the stock price. However, Fishman Hagerty (1992); Leland (1992); Khanna, Slezak Bradley (1994); and Bernhardt, Hollifield Hughson (1995) present models where different types of speculators-insiders and outsiders-trade on their information, in these models, real decison makers learn from price, but, there is a confl ict between limiting insider trading reduces price efficiency and encouraging outsider trading reduces adverse selection. Similarly, Boot Thakor (1997) and Subrahmanyam Titman (1999) use the feedback effect to rationalize a firms choice to issue publicly traded securities, rather than receving private financing (e.g., from a bank). The traditional view of financial market is stock price has no real effect, thus speculator cannot manipulate stock price to get profit. It is often hard to generate manipulation as an equilibrium phenomennon, given that price impact will cause a manpulator to sell at a low price and buy at a high price and hence lose money overall (Jarrow 1992). Goldstein Guembel (2008) consider a model where the manager of firm learns from the stock price about the profitability of an investment project, thus, manipulation arise as an equilibrium phenomenon. Even the speculator has no information, she can drriven the price down to make the manager belive that there exist negative information, and led to cancel the investment, thus, she can get profit from her short position. Edmans, Goldstein Jiang (2014) extent their model to show that informed speculators are less likely to trade on bad news rather than good news. Consider a speculator who has negative information, if she short sell to lower th e stock price, the manager will learn from it to take corrective action such as reducing investment, downsizing the firm makes it efficient and improve the firms fundamental value, but this reducing the profitability of speculators short position. Thus, the informed speculator must consider this and refrain her short selling in the first place. The feedback effect has also some empirical supports. Luo (2005) show the companies seem to learn from the market during MA. Companies are more likely to learn in pre-agreement deals than in agreement deals. Companies are more likely to learn in non-high-tech deals than in high-tech deals. Smaller bidders are more likely to learn than are larger bidders. Kau, Linck Rubin (2008) extend his analysis and show that such learning is more likely when governance mechanisms are in place to reduce the agency problem between manager and the shareholders. Chen, Goldstein Jiang (2007) show that the sensitivity of investment to price is stronger when there is more private information incorporate into price. Our paper is continue the research question raised by Goldstein Guembel (2008), they provid an asymmetric model to explaine the uninformed speculator can manipulate the stock price to make profit and they suggest by impose a cost on short sales may eliminate this phenomenon, but they didnt anaysis the impact of short selling cost. Conditional the speculator being uninformed, the speculator can make profit for two reasons. First, he knows that the market will not improve the allocation of resources. Thus, he can sell at a price that is higher than the expected value. Second, the speculator can profit by establishing a short position in the stock and subsequently driving down the firms stock price by further short sales. In our analysis of short selling cost can deter the second sources of the uninformed speculators profit. The remainder of the paper is structured as follows. Section 2 gives a brief summary of regulatory response to short selling during the financial crises of 2007-2009 and the European sovereign debt crisis of 2011. Section 3 present the model set-up. Section 4 we derive the benchmark equilibrium when absent the feedback. Section 5 derive the equilibrium when the feedback present. Section 6 concludes. All proofs are in the Appendix. 2 Recent regulatory response to short selling As a result of the financial market turmoil in 2008, the SEC and a number of international financial market regulators put in effect a number of new rules regarding short selling. In July the SEC issued an emergency order banning so-called â€Å"naked† short sellingIn a naked short-sale transaction, the short seller does not borrow the share before entering the short position. In our model, we can consider the short selling cost is zero is a naked short-sale. in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks. In total 18 stocks were included in the ban, which took effect on Monday July 21 and was in effect until August 12. On September 19 2008, the SEC banned all short selling of stocks of financial companies. This much broader ban initially included a total of 799 firms, and more firms were added to this list over time. In a statement regarding the ban, SEC Chairman Christopher Cox said, â€Å"The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.† This broad ban of all short selling in financial institutions was initially set to expire on October 2, but was extended until Wednesday October 9, i.e., three days after the emergency legislation (the bailout package) was passed. In addition to measures taken by the SEC, a number of international financial regulators also acted in response to short selling. On September 21 2008, Australia temporarily banned all forms of short selling, with only market makers in options markets allowed to take covered short positions to hedge. In Great Britain, the Financial Services Authority (FSA) enacted a moratorium on short selling of 29 financial institutions from September 18 2008 until January 16 2009. Also Germany, Ireland, Switzerland and Canada banned short selling of some financial stocks, while France, the Netherlands and Belgium banned naked short selling of financial companies. International restrictions on short selling of financial stocks reappeared in 2011. In August of 2011, market regulators in France, Spain, Italy and Belgium imposed temporary restrictions on the short selling of certain financial stocks as European banks came under increasing pressure as part of the sovereign debt crisis in Europe. For example, both Spain and Italy imposed a temporary bans on new short positions, or increases in existing short positions, for a number of financial shares. France temporarily restricted short selling for 11 companies, including Axa, BNP Paribas and Credit Agricole. On August 26, France, Italy and Spain extended their temporary bans on short selling until at least the end of September. Of course, measures against short selling are not exclusive to these recent episodes. In response to the market crash of 1929, the SEC enacted the uptick rule, which restricts traders from selling short on a downtick. In 1940, legislation was passed that banned mutual funds from short selling. Both of these restriction were in effect until 2007. Going back even further in time, the UK banned short selling in the 1630s in response to the Dutch tulip mania. We revisit the model in Goldstein Guembel (2008). Consider an economy with four dates tin{0,1,2,3} and a firm whose stock is traded in the financial market. The firms manager needs to take an investment decision. In t=0 , a risk-neutral speculator may learn private information about the state of the world omega that determines the profitability of the firms investment opportunity. Trading in the financial market occurs in t=1 and t=2. The speculator may suffers a short selling cost c;(c>0) when he short sales. In addition to the speculator, two other types of agents participate in the financial market: noise traders whose trades are unrelated to the realization of omega and a risk-neutral market maker. The latter collects the orders from the speculator and the noise traders and sets a price at which he executes the order out of his inventory. The information of the speculator may get reflected in the price via the trading process. In t=3, the managers takes the investment decision, which may be affected by the stock price realizations. Finally, all uncertainty is realized and pay-offs are made. Suppose that the firm has an investment opportunity that requires a fixed investment at the amount of K. There are two possible states omegain{l,h} that occur with equal probabilities. Firm valueTo simplifier the model, we do not include the assets in place in the expressions for the value of the firm, even including it will not affect our analysis. can be expressed as a function V(omega,k) of the underlying state omega and the investment decision kin{0,K}: There is one speculator in the model. In t=0, with probability alpha, the speculator receives a perfectly informative private signal sin{l,h} regarding the state of the world omega. With probability 1-alpha he receives no signal, which we denote as s=phi. There are two trading dates : t=1,2. In each trading date, the speculator submits orders u_{t}in{-1,0,1} to a market maker. There is a exogenous noise trader who submits orders n_{t}={-1,0,1} with equal probabilities. The market maker only observes total order flow Q_{t}=n_{t}+u_{t}, and therefore possible order flows are Q_{t}={-2,-1,0,1,2}. Moreover, it is assumed that a market maker faces Bertrand competition and thus sets the price for an asset equal to its expected value, given his information set: p_{1}(Q_{1})=E[Vmid Q_{1}] and p_{2}(Q_{1},Q_{2})=E[Vmid Q_{1},Q_{2}]. In our model, the price is a function of total order flows, thus, to ease the exposition, we assume that the speculator observes Q_{1}, and therefore can directly condition his t=2 trade on Q_{1} instead of p_{1}. Similarly, the firm manager observes Q_{1} and Q_{2} , and may use them in his investment decision. The equilibrium concept we use is the Perfect Bayesian Nash equilibrium. Here, it is defined as follows: †¢ A trading strategy by the speculator {u_{1}(s) and {u_{2}(s,Q_{1},u_{1})} that maximizes his expected pay-off, given the price-setting rule, the strategy of the manager, and the information he has at the time he makes the trade; †¢ An investment strategy by the firm that maximizes expected firm value given all other strategies; †¢ A price-setting strategy by the market maker {p_{1}(Q_{1}) and p_{2}(Q_{1},Q_{2})} that allows him to break even in expectation, given all other strategies; †¢ The firm and the market maker use Bayes rule in order to update their beliefs from the orders they observe in the financial market; †¢ All agents have rational expectations in the sense that each players belief about the other players strategies is correct in equilibrium. As a benchmark, we consider in this section there is no feedback from the financial market to the firms investment decision. We assume the firm manager known well the state of the world, and, thus, the investment decision in t=3 is not affect by the trading outcomes in the financial market in t=1 and t=2. For the speculator, if s=h , he knows that the firms value is V^{+}; if s=l, he knows that the firm value is 0; and if s=phi, he knows the expected firm value is frac{V^{+}}{2} . The market maker also starts with the expectation that the firm value is frac{V^{+}}{2} and updates this expectation after each round of trade. There exists multiple equilibria with no-feedback game when we impose the short selling cost c in t=1. Because there is no feedback and from the proof of Proposition 1., the short selling cost only affect to negatively informed speculator, in order to simplifier the model, we dont impose short selling cost at t=2 . If we impose short selling cost at t=2, we must distinguish not trade or sells in t=1 and buy in t=1 (see the feedback game). . For brevity, we do not develop a particular equilibrium here. The following lemma characterizes the strategy of the positively informed speculator in any equilibrium of the no-feedback game. Building on this lemma, the next proposition establishes an important result regarding the strategy of negatively informed speculator and uninformed speculator, which is the focus of this paper. The trading strategy is rather intuitive. The short selling cost does not affect positively informed speculators trading behavior, since he know the firm value is V^{+} and the firm manager does not learn any information from the stock prices, thus, it is a game only between speculator and the market maker, in the case his information was not revealed to the market maker, the positively speculator will not choose sells in t=1 and t=2. For the positively informed speculator, the only thing is try to hide his information to the market maker, otherwise, the price will equal to the true value of the firm V^{+} and he makes zero profit. The trading strategies are also rather intuitive. For the uninformed speculator, trading in t=1 without information generates losses because buying (selling) pushes the price up (down), so that the expected price is higher (lower) than the unconditional expected firm value. The uninformed speculator does not have the informational advantage over the market maker in t=1, and thus cannot make a profit if he is trading. He may choose trade in t=2 when the market maker set the price is not equal frac{V^{+}}{2}, in this case, he have the informational advantage, he knows each agents trading orders in t=1 and his own trading order in t=2. For the negatively informed speculator, if short selling cost is not too high, he may choose mixes the trading strategies like positively informed speculator in order to hide his information to the market maker; if the short selling cost is too high, he always get negative transaction profit in t=1, in this case, he would like not trade in t=1. In the no-feedback game, the short selling cost actually does not affect the trading behavior of the positively informed speculator and the uninformed speculator, it can only affect to the negatively informed speculator. It is worth noting that in the next section with feedback , the short selling cost will affect not only the negatively informed speculator, but also the uninformed speculator.

Cold War: Cuba and Latin America Essay

There were several motivations for United States policy in Latin America during the 1950’s and the 1960’s. Some of these motivations included the applying of the policy of containment in Latin American to stop the spread of communism. Another motivation was to stop the growing alliance between Cuba and the Soviet Union. All of these motivations were set in place to avoid the development of a second Cuba in Latin America. It was urgent for the United States to act since now there was Soviet Union presence in Latin America offering to be an ally. The United States had numerous justifications for the polices that it followed during it’s presence in Latin America. One of them being President John F. Kennedy’s Alliance for Progress. The United States offered Latin America countries that were developing economically aid; this was a method of applying the policy of containment. The United States need to stop communism motivated them to pass the Alliance for Progr ess. The United States justified the policy by arguing that they needed to have a policy in Latin America that went beyond the Roosevelt Corollary. After 1959, the United State was still devoted to ridding Fidel Castro’s presence from Cuba. The United States policy makers saw the alliance between Cuba and Soviet Union as dangerous thing, particularly after the critical Cuban Missile Crisis. In the Dominican Republic, the Johnson Administration justified the assassination of Rafael Trujillo since his dictatorship had become a liability to the United States. Trujillo was at one point a United States ally because he was willing to protect its interests but he was cruel to his own people and the United States feared he would spark a revolution in the Dominican Republic, much like the one that had brought Fidel Castro to power. There were many things that the United States ignored as it followed the polices that they had enacted. One, being the lack of evidence that there was a relationship between Castro and the Soviet Union before 1959. Another being that the Alliance for Progress was modeled on the Marshall Plan for Western Europe but Latin America was not Western Europe (92). There was also the contradiction between the Alliance for Progress, that it was nice than the method that it followed in Latin America during the 1960’s.

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Yellowstone National Park Geography and Overview

Yellowstone is the United States first national park. It was established on March 1, 1872  , by President Ulysses S. Grant. Yellowstone is mainly located in the state of Wyoming, but it also extends into Montana and a small part of Idaho. It covers an area of 3,472 square miles (8,987 sq km) that is made up of various geothermal features like geysers, as well as mountains, lakes, canyons, and rivers. The Yellowstone area also features many different types of plants and animals.   History of Yellowstone National Park The history of humans in Yellowstone dates back to around 11,000 years ago when Native Americans began to hunt and fish in the region. It is believed that these early humans were a part of the Clovis culture and used the obsidian in the region to make their hunting weapons, mainly Clovis tips, and other tools.   Some of the first explorers to enter the Yellowstone region were Lewis and Clark in 1805. During their time spent in the area, they encountered several Native American tribes such as the Nez Perce, Crow, and Shoshone. In 1806, John Colter, who was a member of the Lewis and Clark expedition, left the group to join fur trappers - at which point he came across one of the parks geothermal areas.   In 1859 some early explorations of Yellowstone took place when Captain William Reynolds, a U.S. Army surveyor, began exploring the northern Rocky Mountains. Exploration of the Yellowstone area was then interrupted due to the beginning of the Civil War and did not officially resume until the 1860s. One of the first detailed, explorations of Yellowstone occurred in 1869 with the Cook-Folsom-Peterson Expedition. Shortly thereafter in 1870, the Washburn-Langford-Doane Expedition spent a month surveying the area, collecting different plants and animals and naming unique sites. Following that expedition, Cornelius Hedges, a writer, and lawyer from Montana who had been a part of the Washburn expedition suggested making the region a national park.   Although there was much action to protect Yellowstone in the early 1870s, serious attempts to make Yellowstone a national park did not occur until 1871 when geologist Ferdinand Hayden completed the Hayden Geological Survey of 1871. In that survey, Hayden gathered a complete report on Yellowstone. It was this report that finally convinced the United States Congress to make the region a national park before it was bought by a private landowner and taken away from the public. On March 1, 1872, President Ulysses S. Grant signed the Act of Dedication and officially created Yellowstone National Park.   Since its founding, millions of tourists have visited Yellowstone. In addition, roads, several hotels like the Old Faithful Inn and visitor centers, such as the Heritage and Research Center, have been constructed within the parks boundaries. Recreational activities like snowshoeing, mountaineering, fishing, hiking, and camping are also popular tourist activities in Yellowstone. Yellowstones Geography and Climate 96% of Yellowstones land is within the state of Wyoming, while 3% is in Montana and 1% is in Idaho. Rivers and lakes make up 5% of the parks land area and the largest body of water in Yellowstone is Yellowstone Lake, which covers 87,040 acres and is up to 400 feet (120 m) deep. Yellowstone Lake has an elevation of 7,733 feet (2,357 m) which makes it the highest altitude lake in North America. The remainder of the park is mostly covered by forest and a small percentage of  grassland. Mountains and deep canyons also dominate much of Yellowstone. Because Yellowstone has variations in altitude, this determines the parks climate. Lower elevations are milder, but in general summers in Yellowstone average 70-80 °F (21-27 °C) with afternoon thunderstorms. Yellowstones winters are normally very cold with highs of just 0-20 °F (-20- -5 °C). Winter snow is common throughout the park. Geology of Yellowstone Yellowstone was initially made famous due to its unique geology caused by its location on the North American plate, which for millions of years has slowly moved across a mantle hotspot via plate tectonics. The Yellowstone Caldera is a volcanic system, the largest in North America, which has formed as a result of this hot spot and subsequent large volcanic eruptions. Geysers and hot springs are also common geologic features in Yellowstone which have formed due to the hotspot and geologic instability. Old Faithful is Yellowstones most famous geyser but there are 300 more geysers within the park. In addition to these geysers, Yellowstone commonly experiences small earthquakes, most of which are not felt by people. However, large earthquakes of magnitudes 6.0 and greater have struck the park. For example in 1959 a magnitude 7.5 earthquake hit just outside the parks boundaries and caused geyser eruptions, landslides, extensive property damage and killed 28 people. Yellowstones Flora and Fauna In addition to its unique geography and geology, Yellowstone is also home to many different species of plants and animals. For example, there are 1,700 species of trees and plants native to the Yellowstone area. It is also home to many different species of fauna- many of which are considered megafaunas such as grizzly bears and bison. There are around 60 animal species in Yellowstone, some of which include the gray wolf, black bears, elk, moose, deer, bighorn sheep and mountain lions. Eighteen species of fish and 311 species of birds also live within Yellowstones boundaries.To learn more about Yellowstone visit the National Park Services Yellowstone page. References National Park Service. (2010, April 6). Yellowstone National Park (U.S. National Park Service). Retrieved from: https://www.nps.gov/yell/index.htm Wikipedia. (2010, April 5). Yellowstone National Park - Wikipedia, the Free Encyclopedia. Retrieved from: https://en.wikipedia.org/wiki/Yellowstone_National_Park