# Short selling serves no market function



## cuttlefish (21 January 2008)

Can anyone explain to me what constructive function short selling serves in a marketplace? 

I can understand the purpose that futures serve - originally created to allow producers to plan and hedge, and speculators are happy to take on that risk and sit on the other side of the trade.

I can understand the purpose of various derivatives, again to serve a hedging purpose and thus provide a useful function for everyone from producers to portfolio managers to investors etc.

But I can not see what function shorting serves.


Also I do not understand how the shorting process can be justified as legitimate trading activity by the markets that allow it.

To short a stock you first need to 'borrow' that stock from another holder.
You then 'sell' that borrowed stock - now in my language if you are selling something that isn't yours then its not yours to sell, so how is this allowed suddenly in the stock market and considered valid.  Then to pay back the 'borrow' you close the short position by buying back stock.  The flaw is, in theory there would be a situation that you cannot actually return the borrowed stock because there's none left to purchase.  Thus the word 'borrow' is a misnomer to my thinking and a better way of expressing it would be that the lender is actually transferring title to the stock with an agreed timeframe for equivalent stock to be transferred back from the borrower.

Consider a company that has three shares on issue.  Holder A has 1 share.  Holders B and C also have 1 share.

Mr E comes along and borrows Mr A's 1 share and 'short' sells it to Mr C.

In a few days Mr E wants to buy back 1 share to return the 'borrow'.  But nobody wants to sell at any price - B and C both steadfastly hold and will not sell at any price.   This means Mr E CAN NOT return the 'borrowed' stock.  Thats because he actually sold something that wasn't his.  So when reduced to fundamentals like this the word 'borrow' is actually technically incorrect.  The stock has really been transferred ('sold') with an agreed price and timeframe for it to be returned.  (transferred from lender to shorter for $0 with an agreement the lender will transfer equivalent stock back to lender for $0 in an agreed timeframe).

I've asked this question once before on another thread - but where does borrowed stock used by shorters actually come from, and do the holders of that borrowed stock actually know their stock is being loaned for shorting purposes?

Also why would anyone lend their stock to somebody that is going to push the price down?  (perhaps because you want to buy more yourself?).  What benefit is there in that and shouldn't the lender reap some benefit from this exercise as well?


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## Gundini (21 January 2008)

Well done, and well written.

But I don't know the answer


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## Timmy (21 January 2008)

Good questions and I wont pretend to have all the answers, but have some suggestions.

Shares that are being short sold are borrowed usually from institutions.  The instos are paid "interest" on these shares (its not interest, but the concept is the same).  So the insto has the stock, gets the dividends etc. and earns extra "interest.

The shares are borrowed without a necessarily fixed time frame for return.  They can be called back by the owner of the shares at his or her discretion.

As for its not lending but is transferring of title - I am sure you don't want to get into some semantic or legalistic argument ... and I am not qualified to anyway  but if the shares actually have title transferred then doesn't that make the "borrower" the owner and he/she is not actually shorting at all!  (There is a broker that arranges shorting in this manner ... again the legals are beyond me).

I like your 3 shareholder model - this is how a 'short squeeze' could play out in the market, sending the price higher.  Of course the real world is more complicated and as the price rises it will attract a seller, or sellers, and these sellers will be in competition to get their sale done at a high price, so putting a limit on the price rise.

Do instos know that stock being borrowed from them is being used for shorts?  I would be (very) surprised if they didn't, but you'll have to ask them to be sure...

Why would they lend shares to someone who is going to push the price down.  Well, there are risks to the short seller (maybe lowish in the current climate!).  But a short seller becomes a potential buyer too, and yes, maybe if the price does fall the insto will be happy to buy more (might create a bit of short squeeze as a side benefit, too).

Short selling can be used in conjunction with option strategies too.


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## wayneL (21 January 2008)

Timmy said:


> Short selling can be used in conjunction with option strategies too.




Bingo! If you want a market function, option traders need to be able to sell short in order to hedge. Without this capability, you say goodbye to option liquidity as market makers could not operate.


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## battiwallah (21 January 2008)

See the explanation in Wikipedia:

http://en.wikipedia.org/wiki/Short_selling

This sets it out clearly.


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## Trembling Hand (21 January 2008)

So when the market crashes there is someone there to buy it off the panicking bulls that bought it at too high a price.


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## bunyip (21 January 2008)

cuttlefish said:


> Can anyone explain to me what constructive function short selling serves in a marketplace?




I don't have the answers. I've played the short side of the market many times, in fact I'm doing so right now in this bear market, and loving it. But I've only done it with CFD's or options, never with stocks themselves.

I don't have any figures, but I reckon these days that many short sellers would be using derivatives to do it.

Bunyip


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## cuttlefish (21 January 2008)

thanks for the informative responses all.



			
				Trembling hand said:
			
		

> So when the market crashes there is someone there to buy it off the panicking bulls that bought it at too high a price.



lol




			
				battiwallah said:
			
		

> See the explanation in Wikipedia:



cheers.

The wikipedia article states: _While the shares are lent, two investors have a right to sell the same shares._  If this is true then to my mind it highlights how ludicrous the concept of a 'borrow' is.  How can delivery occur if the lender has also sold his shares? Which purchaser actually owns the 'real' shares.  This also highlights the sort of odd distortions that seem to become possible when electronic trading systems replace physical ones.

In the world of share certificates having to be delivered to settle a trade surely this situation (two people being entitled to sell the one lot of shares) wouldn't be possible because delivery couldn't be effected to both purchasers?

I know the markets put limits on the percentage of stock that can be shorted and also make sure a lender has been locked in before allowing a short to occur in order to counter the risks in this activity, but overall conceptually it seems to be a bit bogus.


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## Trembling Hand (21 January 2008)

cuttlefish said:


> I know the markets put limits on the percentage of stock that can be shorted and also make sure a lender has been locked in before allowing a short to occur in order to counter the risks in this activity, but overall conceptually it seems to be a bit bogus.




So would you also have Margin loans vanquished in your new ,only one way market, up. That is borrowing something you don't own and entering a position.
And if you are in a bad mood at the moment you should be blaming the leveraged longs for that. And They are more than 1% of the market and responsible for the prices being so high and these nasty corrections. 

And then why not all derivatives. in fact why not all borrowing in the whole economy. what function does that create. See sub-prime!!


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## cuttlefish (22 January 2008)

Trembling hand said:
			
		

> And then why not all derivatives. in fact why not all borrowing in the whole economy. what function does that create. See sub-prime!!




lol Trembling hand I'm interpreting that the above post is intended light heartedly, but in case its not I just want to state for the record that I didn't start this thread because I'm in a bad mood or because I have any vendetta against practitioners of short selling.  (if its available then make use of it I'm not stopping you). I'm averse to CFD's so use eto's for short positions.  I've got access to day short selling but it doesn't match my trading/investing style even though I suspect its been pretty lucrative for some of late. 

I am just interested in having a full understanding of the mechanics of the markets, partly because in extreme circumstances mechanical flaws can create distorted effects that might provide potential opportunities (or help to avoid pitfalls).




> So would you also have Margin loans vanquished in your new ,only one way market, up. That is borrowing something you don't own and entering a position.
> And if you are in a bad mood at the moment you should be blaming the leveraged longs for that. And They are more than 1% of the market and responsible for the prices being so high and these nasty corrections.




I think this is a pretty valid point about borrowed money driving up markets, though of course a market doesn't need short sellers to fall. (and doesn't need margin lenders to rise).  Also as you state, sub prime is the outcome of over zealous lending morphed via complex instruments. (maybe not so complex either).

But do two wrongs make a right?  (manufacturing of stock via the shorting process being a bit analogous to manufacturing of capital that occurs via bank lending)


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## Trembling Hand (22 January 2008)

Not meant to be stirring you. But it does provide a pretty important part of a liquid and stable functioning market. Think about it this way.

Stock prices are basically set by good liquid supply and demand. If the supply or demand of anything is illiquid priced distortions occur. Short sellers protect bulls by supplying added liquidity to the market.


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## cuttlefish (22 January 2008)

> Stock prices are basically set by good liquid supply and demand. If the supply or demand of anything is illiquid priced distortions occur. Short sellers protect bulls by supplying added liquidity to the market.




I think thats well put Trembling hand, I can buy that argument. 

In thinking about it, in property markets, off-the-plan sales are sort of an equivalent - creating additional supply somewhat out of thin air. If demand is genuine the supply materialises and becomes real, if it doesn't the off-the-plan projects get pulled.  (actually maybe thats a bit more like fading the sell side of the market depth lol).


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## CecilHills (1 February 2008)

Quote:- Short sellers protect bulls by supplying added liquidity to the market.

True or False?
1.The added liquidity was originally the bulls!
2.The bull would be better protected if his stock wasn't short sold in the first place.


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## ithatheekret (1 February 2008)

I think that all depends on the player , there's a buyer and a seller only one can win .


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## cuttlefish (1 February 2008)

CecilHills said:


> Quote:- Short sellers protect bulls by supplying added liquidity to the market.
> 
> True or False?
> 1.The added liquidity was originally the bulls!
> 2.The bull would be better protected if his stock wasn't short sold in the first place.




The riskiest time to short a stock is at the height of the bull, but its also the time that it serves its function properly.  Asset prices reflecting value is in the best interests of any functioning market so shorting does serve a function of sorts.  Though as well as tempering the bull they also exacerbate the bear and create the short covering volatilty on the way down.

I think Trembling Hand's argument makes sense but would be interested in counterpoint because it could also be argued that the short squeeze enhances volatility in the late stages of the bull. The supply is still artificial and needs to be covered.


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## Trembling Hand (1 February 2008)

CecilHills said:


> 2.The bull would be better protected if his stock wasn't short sold in the first place.






Protected. From what. His own ramping of prices then panicking and running for the door while everyone else is loosing their minds?

I do not see what the so called Bulls are worried about with shorts. If you have anyone to be annoyed with its your own camp. It was not the shorts that caused this or any meltdown, its the long and leveraged.

If anything the Shorts help in a crash as that's when they buy, creating a market that the Bulls are either to scared to do or unable because they have no more cash left from buying high.


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## BeterValue (2 February 2008)

trembling Hand said:


> Protected. From what. His own ramping of prices then panicking and running for the door while everyone else is loosing their minds?
> 
> I do not see what the so called Bulls are worried about with shorts. If you have anyone to be annoyed with its your own camp. It was not the shorts that caused this or any meltdown, its the long and leveraged.
> 
> If anything the Shorts help in a crash as that's when they buy, creating a market that the Bulls are either to scared to do or unable because they have no more cash left from buying high.




So now there are two people selling the same stock high in the hope to buy it low again.  So it does sound like it is skewing the market into the selling side.  But it does bring more liquidity.  

Is there any time frame on these transactions?  Could I short and then just hang on to this "liability"?


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## Timmy (2 February 2008)

BeterValue said:


> So now there are two people selling the same stock high in the hope to buy it low again.




The two selling the same stock high are selling to buyer or buyers.  This buyer, or buyers, is/are hoping (wash your mouth out) it goes up further.  At any time the number of share bought = number of shares sold.


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## Nick Radge (2 February 2008)

The same argument can be applied to stock speculation. What function does it provide?

Liquidity.

Short selling is a value-add to speculation and in turn creates more liquidity.


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## CecilHills (2 February 2008)

Quote: Protected. From what. His own ramping of prices then panicking and running for the door while everyone else is loosing their minds?

No, He is protected from his stock being artificially devalued by someone selling who never influenced the price upwards by first buying.

I have no problem with people shorting only those in denial about its effect.


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## Trembling Hand (3 February 2008)

CecilHills said:


> No, He is protected from his stock being artificially devalued by someone selling who never influenced the price upwards by first buying.




Not true once you are short a stock you are now a buyer. Therefore you will be at some stage having an "influence" in upward price movement.


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## CecilHills (6 February 2008)

A very Simple Example:
A number of merchants all sell Product X into the same market. Mr. Bear loans some product from one merchant and satisfies market demand ,at a low price, for the time being.
Many of the other merchants now have no demand for product X but still have costs and overhead to meet. Mr Bear now buys the Product X he needs from a panicy merchant at a very low price and returns the original loaned quantity.
QED
Draw your own conclusions about the merits of the players.

Beware of Half Truths!


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## cordelia (6 February 2008)

actually the way I look at it is this.....

Mr S (the shorter) sells the stock to Mr B (who thinks the sp will go up) for $1. This is a transaction between a buyer and a seller.

Now for Mr S to profit the share must devalue. Mr S (as an individual) does not cause the sp  to go down but he believes it will (for whatever reason) just in the same way as Mr B  believes the value of the share will increase.

Just suppose the sp devalues to .80c and Mr S buys it off  Mr C (who by the way could be another shorter or a bull who's taking a profit). This is simply another transaction between buyer and seller.

If the sp had increased Mr B would be the winner.

Shorting a stock in the belief it will devalue is the same principle as going long hoping the sp will increase. They are simply two ends of the same pole.....Which way you go is based on what you believe the sp will do and we all try to get it right.

I don't see there is any difference. To assume that the value of shares can only increase without going down is ridiculous.


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## Trembling Hand (6 February 2008)

cordelia said:


> To assume that the value of shares can only increase without going down is ridiculous.




Yes but that will not stop some complaining that's its everyone/someone else who has caused their problem.

By the way if you are licking your wounds and feeling pissed off at the Bears have a look at the percentages that are short sold.

http://www.asx.com.au/data/Shortsell.txt

If you thing a short sold market at less than 1% of issued shares has caused this greater than 20% drop..... well you need to stop trading and learn some basic maths.

Or maybe you can start a new thread "Derivative Traders are to blame for me buying to high"


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## Timmy (6 February 2008)

Trembling Hand said:


> Yes but that will not stop some complaining that's its everyone/someone else who has caused their problem.




There seems to be an assumption in this thread from those opposed to short selling that short sellers are somehow better traders and that all that needs to happen for the share price to fall is someone short sells it?  Automatically the buyers 'panic' and sell to the shorter so he can bank his profits. (I am simplifying but that seems to be assumption).  I would really like if this were true but, sadly, it is not the case!  I would suggest that the distribution of trading talent is fairly equally distributed between those with a penchant for buying and those preferring short selling, and those who can do both (now theres an idea...).

Have a look at a long-term chart of the All Ords or any other broad-based index.  See how the upswings ALWAYS more than cancel out the downswings?  How the market, over time, goes up?  The odds are with buyers over time.  Short sellers will have periods of relatively better trading conditions (falls in the market), but these will be outnumbered by times when the odds are against them.  Short sellers will increase their odds of profitable trading if they can find either bad companies at high prices (and would buyers really want to be holding these?) or good companies at silly high prices.  But there are no guarantees that short-selling a share will result in a profitable trade.


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## wayneL (6 February 2008)

Timmy said:


> There seems to be an assumption in this thread from those opposed to short selling that short sellers are somehow better traders and that all that needs to happen for the share price to fall is someone short sells it?  Automatically the buyers 'panic' and sell to the shorter so he can bank his profits. (I am simplifying but that seems to be assumption).  I would really like if this were true but, sadly, it is not the case!  I would suggest that the distribution of trading talent is fairly equally distributed between those with a penchant for buying and those preferring short selling, and those who can do both (now theres an idea...).
> 
> Have a look at a long-term chart of the All Ords or any other broad-based index.  See how the upswings ALWAYS more than cancel out the downswings?  How the market, over time, goes up?  The odds are with buyers over time.  Short sellers will have periods of relatively better trading conditions (falls in the market), but these will be outnumbered by times when the odds are against them.  Short sellers will increase their odds of profitable trading if they can find either bad companies at high prices (and would buyers really want to be holding these?) or good companies at silly high prices.  But there are no guarantees that short-selling a share will result in a profitable trade.



Great observations Timmy, all true.


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## wayneL (6 February 2008)

Trembling Hand said:


> Not true once you are short a stock you are now a buyer. Therefore you will be at some stage having an "influence" in upward price movement.



This is a really important point I had not really given a lot of thought to. (because it doesn't really apply to futures)

The person who simply sells their shares may never buy those (or any) shares ever again, yest the short seller must, I repeat MUST, buy those shares at some point in the future to cover their position.

We've all seen those savage short squeezes as the shorts rush to cover.

Overall, shorters therefore must add to upward pressure (applies only to stocks) by this logic. In fact, a high short interest is a bullish contrarian signal.

Yep, look for someone else to blame for the market tanking.


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## cuttlefish (6 February 2008)

cordelia said:
			
		

> To assume that the value of shares can only increase without going down is ridiculous



I don't think being opposed to, or questioning the wider economic/market efficiency contribution that short selling makes necessarily implies that the opponent believes shorting has made stock prices fall, or thinks share prices go up forever, or is opposed to people (including themselves) utilising the shorting service if its available.

But markets do serve an underlying economic function wider than the wims of traders and most of the products in the market place, including derivatives like options and futures, have a positive contribution to this wider economic function. 

On the other hand, there are valid arguments that shorting might not contribute to this wider market function and that it also has the potential to create structural problems in a market when extreme situations apply.

The fact that the ASX and other markets put quite aggressive limits on the amount of stock that can be shorted as well as putting rules around the way short transactions are carried out (e.g. only able to sell short on an uptick) demonstrates an awareness by the ASX of the structural risks that shorting can create in a market.

And just to paint another analogy of the illogicality of the way the term 'borrow/loan' is used when referring to short trades consider this situation:

I go to the fruit and vege market.  Bill has three potatoes for sale and I buy all of them.  Fred borrows a potatoe from Bill and also sells me that potato.

So I've bought four potato's.  How are they going to deliver them to me so I can go home and fry up some chips? They can't - the only way they can deliver them is to hope that someone will sell Fred a potato (at whatever price) before I'm ready to cut them up for the deep fryer.

The best argument I've seen in support of short selling so far is the liquidity argument provided by some of the contributors (e.g. Trembling Hand).

Having a shorting function allows non-holders of stocks to participate in correcting over bought situations - and providing this capability on a well managed scale does to my mind validate the inclusion of short selling in a market because it contributes to market efficiency - in some ways providing a level of objectiveness from people outside the 'situation' of the stock.  

However it could be argued that in a situation of hyper bullishness, where bullish buyer demand overcomes all supply including the supply coming from short traders, the resultant short squeeze could have the potential to exacerbate the overbought situation even further.

I believe reasonable arguments could be made that short selling exacerbates volatility in down trending stocks as well.


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## wayneL (6 February 2008)

cuttlefish said:


> The best argument I've seen in support of short selling so far is the liquidity argument provided by some of the contributors (e.g. Trembling Hand).




I've mentioned it already in this thread; if you want a market "function" for short selling, look no further than the options market.

Not withstanding the liquidity argument, short selling shares is essential for option market makers to be able to hedge their delta exposure. Without short selling, you can kiss the option market goodbye as MMs would be required to take up too much risk.


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## Trembling Hand (6 February 2008)

cuttlefish said:


> So I've bought four potato's.  How are they going to deliver them to me so I can go home and fry up some chips? They can't - the only way they can deliver them is to hope that someone will sell Fred a potato (at whatever price) before I'm ready to cut them up for the deep fryer.




No the broker liquidates the position as the short seller is now getting reamed by a short squeeze.

Or in simpler terms the fruiterer goes into the cupboard and takes them back.


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## cuttlefish (6 February 2008)

WayneL said:
			
		

> Not withstanding the liquidity argument, short selling shares is essential for option market makers to be able to hedge their delta exposure. Without short selling, you can kiss the option market goodbye as MMs would be required to take up too much risk.




Thanks Wayne - I do recall you mentioning it - I didn't realise how important it was to market makers.  I'll digest the implications of this.


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## cuttlefish (6 February 2008)

Trembling Hand said:


> No the broker liquidates the position as the short seller is now getting reamed by a short squeeze.
> 
> Or in simpler terms the fruiterer goes into the cupboard and takes them back.




Not really sure what you mean by this - which fruiterer - Bill or Fred?  And what if the cupboard is bare?


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## Trembling Hand (6 February 2008)

cuttlefish said:


> Not really sure what you mean by this - which fruiterer - Bill or Fred?  And what if the cupboard is bare?




A short sell is a margin loan. when the price goes against you. ie. goes up because there is no supply you get a margin call you then have to close the position, give your broker more $$ or your broker liquidates your position by buying back.

The cupboard will not be bare at some price, shares are not consumables. The broker (fruiterer) will find them at a price.


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## cordelia (6 February 2008)

Trembling Hand said:


> By the way if you are licking your wounds and feeling pissed off at the Bears have a look at the percentages that are short sold.




Are u directing this comment at me specifically or just making a general observation? To set the record straight I am not pissed off at the bears...I play both sides of the coin regularly. My point is that whether you are short or long there is a basic action of exchange. Who cares what the reasons are.....

As I pointed out....if you buy a share from someone they could be one of two sellers..a shorter who expects the price to fall and hopes to buy back later at a cheaper price...or conversely a bull who has bought at a lower price and is now taking a profit.....

There's no point in whining about losing money because someone has the foresight to short the market....good on them I say.....

In fact the title of this thread is ludicrous at best....obviously shorting the market serves a purpose otherwise nobody would do it


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## Trembling Hand (6 February 2008)

Cordelia,
No I'm with you.


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## cordelia (6 February 2008)

hee hee just clarifying!!!! It would be a boring stock market indeed if everything always went up....


I think going short is great ...I just wish I was more confident at it....It certainly is a different way of looking at trading and at first it is hard to get your head around......but if your clever it makes sense....

Personally I am enjoying the uncertainty and volatility of the market at the moment. I have lost a fair bit of money too but I have learnt a lot too....I just can't believe that people expect everything to be easy and regular all the time....


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## cuttlefish (6 February 2008)

cordelia said:


> In fact the title of this thread is ludicrous at best....obviously shorting the market serves a purpose otherwise nobody would do it




but using that logic, playing pokies serves a purpose (people do it) and watching daytime television serves a purpose (people do that too).

The title is about questioning the mechanics from a market benefit perspective, in that the primary purpose of the market is to provide a vehicle for raising capital and an efficient market for trading holdings in companies.  I can see how derivatives (options, futures, warrants etc.) contribute to that purpose.  I couldn't see how shorting did.  There's been some arguments presented that do make some sense though I still question the mechanics of the borrow/settlement process and see the term 'borrow/loan' as a misnomer in the case of shorting.

On that basis I think its a bit harsh to call the thread title ludicrous.

The ASX could introduce all sorts of silly rules (e.g. trades made between 11:15 and 11:45 in stock codes that start with 'D' and that are trading above intraday VWAP will be randomly cancelled on a 1 in 10 basis). This would be tradeable and people would come up with trading plans that capitalised on this rule, and good luck to them, but it wouldn't serve any market function.


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## cuttlefish (7 February 2008)

out of curiousity how many actually use direct short selling (as opposed to shorting via derivatives or via CFD's etc.) and if using direct short selling how long are you able to keep positions open?


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## nomore4s (7 February 2008)

cuttlefish said:


> but using that logic, playing pokies serves a purpose (people do it) and watching daytime television serves a purpose (people do that too).
> 
> The title is about questioning the mechanics from a market benefit perspective, in that the primary purpose of the market is to provide a vehicle for raising capital and an efficient market for trading holdings in companies.  I can see how derivatives (options, futures, warrants etc.) contribute to that purpose.  I couldn't see how shorting did.  There's been some arguments presented that do make some sense though I still question the mechanics of the borrow/settlement process and see the term 'borrow/loan' as a misnomer in the case of shorting.
> 
> ...





Does it have to serve a market function?

IMO brokers provide this service as it's another way for them to make money (fees for "borrowing" stock, commissons for selling & buying etc), it also gives them another service to provide to customers therefore bringing in more business.

Why does it need to have a market function besides another way to make (and lose brokers and traders money?


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## cordelia (7 February 2008)

cuttlefish said:


> but using that logic, playing pokies serves a purpose (people do it) and watching daytime television serves a purpose (people do that too).
> 
> The title is about questioning the mechanics from a market benefit perspective, in that the primary purpose of the market is to provide a vehicle for raising capital and an efficient market for trading holdings in companies.  I can see how derivatives (options, futures, warrants etc.) contribute to that purpose.  I couldn't see how shorting did.  There's been some arguments presented that do make some sense though I still question the mechanics of the borrow/settlement process and see the term 'borrow/loan' as a misnomer in the case of shorting.
> 
> ...




I am not an economist but is the primary purpose of the market to raise capital? A market is a market....people buy and people sell....if someone has something you want you pay for it....if someone has something a lot of people want you have to pay more...supply and demand...


example: if mrs B and all her day time soap opera friends like fluffy pink slippers and the only company that manufactures them is the Fluffy Pink Slipper Company then I guess shares in the Fluffy Pink Slipper Company (FPS) are the ones to have.

Where is the value in fluffy pink slippers apart from the fact that a bunch of bored rich housewives like them? Get the drift....


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## nomore4s (7 February 2008)

cuttlefish said:


> out of curiousity how many actually use direct short selling (as opposed to shorting via derivatives or via CFD's etc.) and if using direct short selling how long are you able to keep positions open?




I use direct short selling through Mac Prime, as far as I'm aware I can keep the position open for as long as I want, but I'm sure they could close the position at any time to "reclaim" the stock but that wouldn't happen very often I wouldn't think.


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## refined silver (7 February 2008)

Trembling Hand said:


> By the way if you are licking your wounds and feeling pissed off at the Bears have a look at the percentages that are short sold.
> 
> http://www.asx.com.au/data/Shortsell.txt
> 
> If you thing a short sold market at less than 1% of issued shares has caused this greater than 20% drop..... well you need to stop trading and learn some basic maths.




Thanks for the link. My understanding is that the ASX just announced possibly changing the short selling rules because it was so easy to get round them, and much short selling is not recorded in the official figures. Eg Look up the short positions in the HUI, (US based gold/silver index) http://www.financialsense.com/metals/shorts.html and some shares have short positions of over 10%, virtually everyone is way above 1%, so I find it hard to believe the above Australian figures are remotely accurate, which is why the ASX wants to tighten rules.

BTW I've no problem with short-selling, it serves a valuable purpose, the only problem is manipulative or illegal short selling (eg up til very recently you could only short sell on an uptick, but this was never followed), where big guys always fleece the little guys, and when majors are caught, they pay settlements to SEC or the like, for a few million, without admitting liability, while pocketing 10x more as proceeds of their crime.


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## refined silver (7 February 2008)

Links for the ASX/ASIC shorting rules needing to be updated. 

Each one is different but gives a revealing picture of how things are manipulated and very different to the official stats.


http://www.theaustralian.news.com.au/story/0,25197,23145967-643,00.html

http://www.news.com.au/business/story/0,23636,23146895-462,00.html

http://www.theaustralian.news.com.au/story/0,25197,23166412-16941,00.html


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## Timmy (7 February 2008)

refined silver said:


> Links for the ASX/ASIC shorting rules needing to be updated.




There are requirements to report short sale activity, but getting that information to the market is ridiculously slow .  Making the information available in a more timely manner than at present is well overdue.  

It will be interesting to see what a review of short selling rules comes up with, if anything.  The SEC in the US have recently removed the uptick rule there...

Thanks for the links silver.


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## cuttlefish (7 February 2008)

cordelia said:


> I am not an economist but is the primary purpose of the market to raise capital? A market is a market....people buy and people sell....if someone has something you want you pay for it....if someone has something a lot of people want you have to pay more...supply and demand...
> 
> 
> example: if mrs B and all her day time soap opera friends like fluffy pink slippers and the only company that manufactures them is the Fluffy Pink Slipper Company then I guess shares in the Fluffy Pink Slipper Company (FPS) are the ones to have.
> ...




Fair enough point - the market provides a vehicle for trading products - as long as the rules around those products are clear then why not.  So I don't have a problem with your scenario as long as:

* nobody lends my fluffy pink slippers to somone else to 'sell' without telling me about it - I'm very particular about what happens to my slippers.

* when I buy a fluffy pink slipper, they're real ones and not someone's promise to buy me pink slippers when I need them - I mean I don't want to be the only one at the soapie party that didn't get my fluffy pink slippers delivered. 

equity is equity, and if two people are selling the same piece of equity one of them is selling either hot air or a promise.

Reading the articles that refined silver posted - it does highlight the issue - I didn't realise covered shorts weren't in the reported list. But I also think anyone blaming shorting for their bad long positions needs their head read - any stock with real value will always eventually find support if oversold. On the other hand, if the turkey's fried then it doesn't need shorters to help it out the door it'll go down either way.


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## ROE (7 February 2008)

There are speculators on upside why not speculate on down side


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## cordelia (7 February 2008)

Timmy said:


> Good questions and I wont pretend to have all the answers, but have some suggestions.
> 
> Shares that are being short sold are borrowed usually from institutions.  The instos are paid "interest" on these shares (its not interest, but the concept is the same).  So the insto has the stock, gets the dividends etc. and earns extra "interest.
> 
> The shares are borrowed without a necessarily fixed time frame for return.  They can be called back by the owner of the shares at his or her discretion.




From reading the above I think you have to agree to lend your shares for shorting and you get paid for it.


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