Thursday, September 25, 2008

Financial innovation circumvents short-selling ban

Merton Miller, Nobel Laureate in economics, and thesis advisor to my colleague Bill Christie, once wrote that every important financial innovation was designed to circumvent regulation. An example from our textbook is that Euro dollars (dollar denominated savings accounts offered by European banks) were designed to circumvent Regulation Q, the 5.25% price ceiling on what US banks were allowed to pay depositors.

Now we see money flowing into betting markets to circumvent the ban on short-selling financial stocks., a financial bookmaker, has reported volumes up by more than 400 per cent since last Thursday's ban, with almost all the increase in activity in bets against banking stocks.

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