The German authorities have recently banned short selling in a company called Wirecard – this is the wrong decision.
It misses the point of what markets are actually about, namely finding the correct price for something. If that happens to be rather lower than the present one, then certainly we would like to know about it.
The background is that Wirecard is a fintech company specialising in payment processing, albeit one that’s moved from collecting the money for porn sites on to writing software for all sorts of other ventures. There’s been grumbling – often from the FT – about whether all is entirely tickety-boo in the accounts, especially with respect to its operations in Singapore.
It is of such differences of opinion that markets are made. Maybe everything is fine and the stock is undervalued, maybe it’s worse than some imagine and the stock is over-valued. We don’t know. The best method of finding out is to ask absolutely everyone who has a view and take the balance. This is known as Galton’s Ox, the idea that the average of all views is often very accurate indeed – and it’s exactly what markets do so well.
Or rather, it is what a perfect market would do. A perfect market is best described as being one in which the strong version of the Efficient Markets Hypothesis works. Crudely put, EMH posits that all known information about a stock is already factored into its price, meaning that ‘beating the market’ becomes very difficult indeed.