Uncomfortable in squeezed shorts
It is all very well to carry a big stick when you want to tighten market regulation but you must also have enough of a reach to hit the big offenders with it.
This is the greatest difficulty in the new legislation the Government has introduced to tighten up penalties for illegal short-selling.
The rules themselves remain pretty much what they were before. If you want to sell stock that you do not own you must first borrow it from someone who actually has title to it and you must tell your broker that it is a short sale.
Breaking the rules could now land you with a maximum $100,000 fine and two years' prison instead of $10,000 and a six-month term.
We shall dispense quickly with the immediate brokers' complaints. They say it will stop day trading because people who buy stock in the morning cannot sell it the same afternoon as they will not yet have taken delivery of it.
Very well, this may represent a glitch in the wording of the legislation. We may take the Government at its word that it does not intend to stop day trading, however, in which case this glitch is easily enough fixed.
Some brokers also complain that it is a nuisance to ask short-sellers for proof of stock borrowing.
Tough luck. It means more headache, more work and more cost but dealing rooms over the past 10 years have adjusted themselves to more onerous changes.
The real problem is that while more severe penalties may induce Joe Punter in Hong Kong to think harder about his options when he is bearish on the market and already sold out, they really cannot stop bigger speculators from selling short offshore as much as they have before.
The reach of Hong Kong's law goes only as far as Hong Kong's borders.
Big investment banks in New York are not about to open their books to Hong Kong regulators and are not much deterred by foreign laws under which they do not operate.
It works differently the other way round of course. US courts have proved time and again that they can prise information out of foreign financial concerns under threat of what they can do to the operations of those concerns in the United States.
But we are small and they are big. That's the way life is and we should recognise that there are some loopholes we cannot close when we impose market regulations.
Rather than tighten up control over short-selling, the new penalties may serve only to drive more of it offshore and not only make our control of it looser but deprive local investors of trading flexibility when their foreign counterparts suffer no real loss of this flexibility at all.
There is more to bear in mind here, however. Back in mid-1998 some market manipulators used short-selling as one of their tools in money-making exercises that briefly appeared to destabilise our financial system.
Whether the short-selling itself was as great a threat as it then appeared is a moot question. The currency was under attack in any case, the market was legitimately weak and there were other reasons for our difficulties. Short-selling may have been a visible culprit but it cannot have been the most serious.
Government officials, however, got themselves seriously worked up about it, particularly when it seemed that some shorts were not being squeezed as hard as they could have been following the $120 billion intervention in the market in August of that year.
So here is the question. Are we now getting this move to heavier penalties for illegal short sales because our Government is still worked up about this episode? If so, what we may really need is a cooling off period with more time for calm reflection about whether short-selling is something nasty that manipulators do or whether it is actually a mechanism that allows market prices to adjust more quickly to changing conditions.