Short Selling Debate

[mime]

Anyone heard of this?

Does anyone do it?

 

[stefan]

Re: Short Selling

mime,

There is another thread somewhere regarding short selling.
https://www.aussiestockforums.com/forums/showthread.php?t=276&highlight=shorting

Short selling means you are selling a stock which you don't really own, speculating that the price will go down so that you can buy it back at a cheaper price. But again, check the other thread and/or use the search function to find out more.

Happy trading

Stefan

 

[mime]

Re: Short Selling

hmmmm

So you can't short sell on commsec?

 

[Mofra]

Re: Short Selling

Mime,

I use commsec and they don't allow it. If you're interested, you might want to call some full-service brokers. You an also trade the bear side of the amrket using derivatives and CFDs. good luck

 

[Nick Radge]

I read with disdain that Kohler and his journo cohorts at Business Spectator are razzing up the public about short selling. They suggest that yesterdays plunge in ABS was as simple as hedge funds creaming the stock.

How is this for an atypical comment:

the only true position: Selling something you knowingly don't own is an ILLEGAL act; period!

And, why, pray tell, is IT condoned in a falling market?

I don't seem to remember anyone complaining when the hedge funds, private equity funds and other large money were driving prices up and well beyond their intrinsic values?

We're seeing typical reaction to a typical bubble. Its no different to what we saw in the late 90's. Crap stocks at ridiculous valuations. ABS bought a tonne of US property at the top of the property boom and geared itself so.

As my comments appear to not have made the pages of Kohler's diatribe, quite possibly because they'd spoil the media beat up, then I open discussion here.

Exactly how can these foolish journo's gain knowledge within a few hours of the ABS sell off that is was caused by Hedge funds?

I have been on the receiving end of journo's (specifically AFR) phone calls on wanting to know whats happening. I suspect these dimwits have called their "contacts" who have used broker excuse #234, "hedge funds selling".

READ IN FULL HERE
< mod edit- Nick's comment:
Hedge funds pushed prices up, now they are pushing them down - deal with it
Nick Radge

26 Feb 2008 10:25 PM

Dear me. A stock is allowed to go above its intrinsic value due to greed but not allowed to go below because of fear? Please! The market runs on fear and greed. Always have. Always will. Todays is no different to 1999 or 1987 or 1974. Do we actually have any evidence of short sellers at work, or are we seeing suckers of the bull market getting spat out. Perhaps we're being conned by uninformed journalists whose contacts are uninformed brokers.

The hedge fund slant isn't going to cut it. You people profited handsomely from these guys. You can't change the rules when they ride the boat the other way.

Someone offer me hard evidence that hedge funds made ABS dump today. >

Disclosure: Personally, and unfortunately, I was not short ABS yesterday, although my subscribers had been that since 11 February at $4.11. They were also advised to cover short positions on the open yesterday.

 

[IFocus]

Reading the Australian today Groves trots out the usual excuse of blaming short selling where as some of the guys on the ABS thread had the real reasons nailed ages ago with clear warnings

The Australian has been runing this line of blaming short selling for awhile article below
http://www.theaustralian.news.com.au/story/0,25197,23281780-643,00.html

SHM looks a little deeper
http://business.smh.com.au/whos-next-for-financial-judgment-day/20080227-1v3x.html


This thread explore along the same lines https://www.aussiestockforums.com/forums/showthread.php?t=9938 of blaming short selling while carefully avoiding the real issues at hand driving our market

 

[ROE]

I say bring on hedge funds, it keep dodge company honest
If you stupid enough to leverage up and leave yourself expose to this sort of behavior than that is your problem.

I don't see hedge funds short wonderful company like FLT, WOW, WOR, CSL.
They know these are extremely well run company where they make real money for their share holders and if they short they are going to get burned

Enron gave the same excuse about short selling before it went belly up

 

[Trembling Hand]

Yes it is truly pathetic journalism. In the same league as any rubbish from the tabloid media (bank bashing in reverse)

No mention of course that they are starting to look like idiots. They have been selling themselves as experts and now costing unfortunate people who follow them money. On an interview last week I think on the 7:30 report Kohler was looking and talking like a man who has lost money recently and just coming to the realisation that it may not be coming back to him. He looked a little down and pessimistic.

I would expect to be hearing a whole heap more of this crap. Just wait to the Gov gets in on this

By the way has anyone else thought that Kohler being on the ABC and then pimping himself giving out bull market stock news is a conflict of interest.

 

[Nick Radge]

Looks like the debate has been raging a long time in the US <mod edit- from http://en.wikipedia.org/wiki/Short_selling > :

Short selling has been a target of ire since at least the eighteenth century when England banned it outright. It was perceived as a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century.

The term "short" was in use from at least the mid-nineteenth century. It is commonly understood that "short" is used because the short seller is in a deficit position with his brokerage house.

Short sellers were blamed (probably erroneously) for the Wall Street Crash of 1929. Regulations governing short selling were implemented in the United States in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and was in effect until 2007. President Herbert Hoover condemned short sellers and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997). A few years later, in 1949, Alfred Winslow Jones founded a fund (that was unregulated) that bought stocks while selling other stocks short, hence hedging some of the market risk, and the hedge fund was born.[citation needed]

Some typical examples of mass short-selling activity are during "bubbles", such as the Dot-com bubble.[citation needed] At such periods, short-sellers sell hoping for a market correction. Food and Drug Administration (FDA) announcements approving a drug often cause the market to react irrationally due to media attention; short sellers use the opportunity to sell into the buying frenzy and wait for the exaggerated reaction to subside before covering their position.[citation needed] Negative news, such as litigation against a company will also entice professional traders to sell the stock short. Because both the short seller and the original long holder can sell the same shares at the same time, selling pressures can be artificially magnified during such times, causing larger price drops than would be normally justified by the negative news.

During the Dot-com bubble, shorting a start-up company could backfire since it could be taken over at a higher price than what speculators shorted. Short-sellers were forced to cover their positions at acquisition prices, while in many cases the firm often overpaid for the start-up.

 

[blablabla]

When money is borrowed to buy shares, whether using CFDs or using margin lending, nobody complains loudly - not even the shorters who get hurt when prices rise and not even the people who missed out on the rise because they sold their shares too early or because they didn't buy any in the first place. When shares fall sharply in price the existing shareholders scream blue murder and claim that shortsellers are murderers. The screams are the only major difference between borrowing money to buy shares and borrowing shares to sell them.

Borrowing money to buy shares is gambling/investing/trading/speculating in one direction. Borrowing shares to sell shares is gambling/investing/trading/speculating in the other direction. As far as markets are concerned there is no fundamental difference between the two activities (apart from the screams of those on the wrong side of market movements). Markets will always go up and down. Unbalanced interference in the markets is the only thing that can distort the prices of markets in the long term.

Margin calls can be painful exeriences and when shareholders are forced to sell at never-to-be-repeated low prices the pain is worse, but borrowers of money accept this risk when they borrow. Believe it or not it is exactly the same for shorters if things go the opposite way.

Short selling requires that shares be borrowed. This is morally the same as borrowing money. If shortselling ought to be banned then borrowing money also ought to be banned. Then, for example, borrowed money would no longer be able to distort the housing market. There is no doubt that in the housing market borrowed money causes substantial price distortions. Property would be substantially cheaper if borrowing money to buy houses was illegal. In share markets, the price distortions caused by borrowed money are in effect balanced in the medium to long term by the ability to shortsell.

Banning shortselling would be as fundamentally absurd as banning moneylending. What journos should be campaigning against are problems with market transparency which allow borrowers of money and borrowers of shares to manipulate the markets by concealing their activities and identities.

 

[cuttlefish]

I don't think for a second that short selling is the reason behind the declines in stocks - any stock worth its salt will hold up against a short selling onslaught - these stocks are going down because they are shyte and the shorting would only be a marginal contributor to the process.

But as in the other debate on this in another thread I started I still don't see a particularly functional component to short selling and believe it would be better served by a more formal instrument. Wayne has pointed out that it is an essential part of the process for market makers in the options market and I also accept that allowing a minimal component of short selling also provides objectivity in the market place and can have a positive effect on market efficiency by capping unrealistic valuations.

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.


Money is debt - that is its purpose and nothing else - all money is already backed by productivity commitments and all money that anyone has represents debt whether it be borrowed directly or obtained through earnings (via productivity or investment). Stocks on the other hand are not debt but are equity. Thus borrowing 'stock' doesn't make sense to me. It is of limited supply and its purpose is not to serve as an instrument of debt. Money is elastic and can grow as productivity grows. Equity doesn't have the same elastic characteristics and thus shorting a stock is selling something that doesn't exist. (on the other hand borrowing money is simply expanding the amount of debt that exists in the world).

I'd be interested in hearing counterpoint debate to the above paragraph though.

Shorting on a small scale to enable market makers to provide hedging products and to provide objectivity in the market place I have no great issue with but if allowed on an unrestricted scale I believe it would create structural issues in the market.

And as stated in the first sentence I don't agree with newspaper articles that blame falls in stocks on shorting - a sustained selldown with no retrace can only be achieved if the stock is significantly overvalued in the first place.

 

[IFocus]

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.


Money is debt - that is its purpose and nothing else - all money is already backed by productivity commitments and all money that anyone has represents debt whether it be borrowed directly or obtained through earnings (via productivity or investment). Stocks on the other hand are not debt but are equity. Thus borrowing 'stock' doesn't make sense to me. It is of limited supply and its purpose is not to serve as an instrument of debt. Money is elastic and can grow as productivity grows. Equity doesn't have the same elastic characteristics and thus shorting a stock is selling something that doesn't exist. (on the other hand borrowing money is simply expanding the amount of debt that exists in the world).

I'd be interested in hearing counterpoint debate to the above paragraph though.

An assumption I would make is that money and stocks are both assets all be it in different forms and liquidity and that both can and do change their valuations for different reasons.

Most assets are converted back to cash for ease of liquidity and every one accepts this form of asset to trade what ever, it could be gold etc,but lending stock is lending a asset lending cash is lending a asset IMHO ether way you have to repay the loan.

Shorting allows true price discovery nothing more nothing less.

In every bear market there is pain and I understand the emotion involved in losing and feel for the investors on the wrong side of a move.

I get furious when so called market professionals who know better feed off this to get a headline in to media blurring the truth rather than seriously looking at the real reasons for company's getting hammered it really sucks.

Focus

 

[Trembling Hand]

I get furious when so called market professionals who know better feed off this to get a headline in to media blurring the truth rather than seriously looking at the real reasons for company's getting hammered it really sucks.

At the end of Robert Gottliebsen dripple this morning,
" I must add here that I have units in at least one and possibly two managed funds which on the last statement had a holding in ABC Learning."

 

[blablabla]

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.

If you wish to buy a share you can only buy it by possessing money even if you have to borrow it.

If you wish to sell a share you can only sell it by possessing the share even if you have to borrow it.

It is self-evident that selling a stock is the reverse of buying a stock. Also, for every share sold there is a share bought. This is what makes a market. Nobody is forced to either buy or sell (unless they have agreed to terms such as for a margin loan which they have a free choice to accept or not accept).


Here is another reason why a prohibition on shortselling would distort the markets. If people who wished to sell a stock had to actually own the shares first then only fund managers, large shareholders and large speculators would enjoy the privilege of being able to in effect make shortselling plays. They would be able to do this by playing with the stocks at their disposal, reducing their holdings and then buying them back again as it suited. Remember that any definition of shortselling must include buying back the shares again that were previously sold. So, whatever your intentions might be, nothing would be achieved by banning shortselling. Only the rich would have the ability to short at will.The already uneven playing field of the share market would become even more hazardous for the small player. The only way to achieve what you have proposed would be to prohibit a person from buying shares that they have sold within, say for the sake of argument, the previous month. And then, of course, this could easily be worked around by getting your wife/brother/mate to buy the shares instead. What you have proposed is neither workable nor fair. By allowing everybody to borrow shares and shortsell them then we have a level playing field where everybody has the same rights and obligations, and we have a market that is more liquid and hence more efficient.

 

[theasxgorilla]

I don't think it takes a genius to analyse it's effect on a market just hit by bad news.

As buy orders are withdrawn and genuine selling is amplified by short selling the move down is exacerbated. This forces the hand of yet more sellers who generate volume for the short sellers or those who like to fade over-reactionary moves to cover/buy into.

Personally I think options make more sense. That would be, sense as financial instruments. They still confuse me

ASX.G

 

[2BAD4U]

By the way has anyone else thought that Kohler being on the ABC and then pimping himself giving out bull market stock news is a conflict of interest.

This has actually been raised on a couple of occasions. I think Sunday or one of those type programs did a story on this a few months back. Personally though I think his biggest problem is his Obsessive Compulsive Disorder. Ever notice how every single night we have to have a chart or graph?

 

[cuttlefish]

If you wish to buy a share you can only buy it by possessing money even if you have to borrow it.

If you wish to sell a share you can only sell it by possessing the share even if you have to borrow it.

The difference is when you are borrowing money it is nearly always being created. Money is elastic - the fractional reserve system as authorised by the government, effectively allows ADI's (i.e. banks etc.) to create money. Margin lending is just one example of this. If I loan you some money I can't 'create' the money I loan you, it has to come out of the money I have. But if the bank loans you money they do get to actually create new money.

On the other hand when you are borrowing a share to short it, it is never being created. The term loan is a misnomer because title is being transferred from the lender to the borrower (shorter) and from the borrower to the buyer. The registered holder of the share is the buyer of the share and neither the shorter or the lender have any entitlement to it anymore. Thus for the period of time that the short is in place the lender in fact does not own the stock and only owns a promise (effectively equivalent to currency) that the stock will be returned to them. They have in reality sold the stock to the shorter with an agreement to buy it back. It is NOT a loan. The only people authorised to create shares in a company are the directors of that company under the companies articles of association.

 

[cuttlefish]

To summarise the above - the lender of the stock being shorted is exposing themselves to counterparty risk - the counterparty being the shorter of the stock. There is no loan - the lender exchanges security of title for this counter party risk. Is this risk factored into the lenders pricing for providing this product? I doubt it is factored in properly and its not an efficient and regulated market. So if shorting is going to be allowed it would be better if it were an exchanged regulated derivative (some kind of floating date future?) and thus could be priced properly by the market.

 

[reece55]

I read with disdain that Kohler and his journo cohorts at Business Spectator are razzing up the public about short selling. They suggest that yesterdays plunge in ABS was as simple as hedge funds creaming the stock.

How is this for an atypical comment:



I don't seem to remember anyone complaining when the hedge funds, private equity funds and other large money were driving prices up and well beyond their intrinsic values?

We're seeing typical reaction to a typical bubble. Its no different to what we saw in the late 90's. Crap stocks at ridiculous valuations. ABS bought a tonne of US property at the top of the property boom and geared itself so.

As my comments appear to not have made the pages of Kohler's diatribe, quite possibly because they'd spoil the media beat up, then I open discussion here.

Exactly how can these foolish journo's gain knowledge within a few hours of the ABS sell off that is was caused by Hedge funds?

I have been on the receiving end of journo's (specifically AFR) phone calls on wanting to know whats happening. I suspect these dimwits have called their "contacts" who have used broker excuse #234, "hedge funds selling".

READ IN FULL HERE

Disclosure: Personally, and unfortunately, I was not short ABS yesterday, although my subscribers had been that since 11 February at $4.11. They were also advised to cover short positions on the open yesterday.

Completely agree with you Nick, typical reaction however....

When asset levels were at all time high levels, Kohler was one of the jurno's citing that Aussie could run further and that we were no longer in sync with the US and indeed we lead the NYSE/NASDAQ moves...... Truly he is eating such stupid comments now.....

The reality is that short selling provides the ability to hedge out positions and provides necessary liquidity in the market. Shares are dropping because some directors and senior management of Aussie companies are committing corporate suicide - gearing the crap out themselves at low interest cover levels when debt spreads were at all time low levels. Now that it's all come home to roost, every rich bloke in town is crying foul.... perhaps think next time you leverage crappy pieces of paper (i.e. shares in Companies where the fundamentals are clearly bogus and trust me, there were signs....) - I expect the whining to continue.....

Cheers

 

[Trembling Hand]

the lender of the stock being shorted is exposing themselves to counterparty risk - the counterparty being the shorter of the stock. I doubt it is factored in properly and its not an efficient and regulated market.

cuttlefish you are way off. The broker is controlling the transaction. If the party that is short gets in trouble, because the price moves against him, the broker closes the position. You have to have funds in the account to cover it. Its that simple. Its not like the shorts gets to take the stock home and lose it at a casino.