Short Selling Debate

[cuttlefish]

If thats the case then the counterparty risk of the lender is with the broker rather than the shorter - either way the lender is exchanging secure title/equity for counterparty risk.

 

[Kauri]

gee whiz... and I thought it was down to "profit-taking" ...
Cheers
.........Kauri

 

[RichKid]

Thanks for alerting to us to recent instances of the debate Nick.

Generally, for those interested in the topic, there are a number of threads on short selling on ASF already for those looking to conduct research. Use the Search tool and search by title with 'short selling' or similar keywords or phrases.

A thread that is relevant to this thread is 'Short selling serves no market function".

Also note the list of 'Similar Threads' at the foot of this page.

 

[RichKid]

gee whiz... and I thought it was down to "profit-taking" ...
Cheers
.........Kauri

hehehe, nice one! I guess the journos will need a whole new collection of phrases to deal with the short side.

 

[blablabla]

I have noticed that many arguments put forward against shortselling are red herrings, and that attempts are constantly being made to convolute and confuse issues with irrelevance. I don't know what is the reason for this but I do know that this is a propaganda technique routinely used by governments, political parties and religious organisations.

For example, it is postulated that definitions of the items being traded are material to the act of trading. In an exchange where only two things can be traded it is irrelevant what the fundamental definitions of the two things are. In a stock exchange only stocks and money can be exchanged in a controlled manner. The existence of the exchange assumes that the users of the exchange know enough about the items they are trading to be able to trade. The definitions of the items traded and how they were created may be relevant to economies, producers and users but they are in the main irrelevant to trading. Shortselling is applicable to trading on an exchange such as the stock exchange where two types of items are traded for each other. On a stock exchange the two items are stocks and money, and as far as trading is concerned there is no factual difference between borrowing stock to trade and borrowing money to trade.

Here is an example that I hope will illuminate the issue for those who are still in doubt. If there was a demand for it there could be an exchange for any pair of items that can be traded even if one item of the pair is not money. There could be an exchange where oil and corn are exchanged. On such an exchange there would be no factual difference between borrowing oil to trade and borrowing corn to trade. In such a case, most of the arguments against shortselling can be seen to be what they are - irrelevant hogwash.

 

[cuttlefish]

As the person to have responded to your post prior to the one above I make the assumption that your comments above are partially directed my way.

I take a lot of offense to your post above because it implies that the people debating the 'no' case against short sellling have some kind of hidden agenda and are willing to resort to deceptive practices ("red herrings", "propoganda", "attempts to convolute and confuse") to achieve it.

I believe I've taken the time to put forward considered comments for discussion. If you are incapable of understanding or responding to well constructed argument without resorting to these sorts of implications then there is no point having a debate about it.

Labelling something "irrelevant hogwash" doesn't exactly explain your case.

 

[Timmy]

Cuttlefish - I wont speak for 3bla but I will say I read his comments as referring to the drivel (and it really is drivel from people who should know better and due to their position really should think a little before they open their respective mouths) produced by the media such as Kohler et al, which was the original topic of the thread. Your posts, and I think everyone would agree, are well-reasoned and raise some good questions and points; and while I don't agree with their content I will say they require thought on behalf of those who advocate short-selling as a legitimate market practice.

 

[cuttlefish]

Cuttlefish - I wont speak for 3bla but I will say I read his comments as referring to the drivel (and it really is drivel from people who should know better and due to their position really should think a little before they open their respective mouths) produced by the media such as Kohler et al, which was the original topic of the thread. Your posts, and I think everyone would agree, are well-reasoned and raise some good questions and points; and while I don't agree with their content I will say they require thought on behalf of those who advocate short-selling as a legitimate market practice.

Thanks for your comments Timmy - I wasn't sure from 3bla's post whether he was responding to my previous post debating the difference between stock borrowing and margin lending or just having a general dig.

That being said I think I'm coming around to the point of view that I don't really have an issue with short selling, but more an issue with the lack of transparency and regulation around it.

As long as the rules are clear and its all transparent then its just another product in the market place. The other things is that at the end of the day the only people bearing risk are the borrower and shorter, not unwitting market participants. The stock lender and stock borrower are knowingly entering into the contract that they are participating in so if it doesn't work out thats their problem and nobody elses.

As long as I know that when I purchase a stock via the ASX it is always settled with unencumbered real equity and as long as I know that same equity can never be encumbered again (i.e. lent) without my knowledge and approval then it doesn't directly affect me. (and I believe these two things to be the case).


The lack of transparency around the practise of stock lending/borrowng is probably a valid issue for all market participants though, in the same way the lack of transparency around sub-prime debt (and other forms of debt) is an issue for participants in credit markets and for those investing in participants in the credit markets.

 

[Trembling Hand]

Alan Kohler & Bob Gob get some sleep your starting to look dumb.

 

[Timmy]

The lack of transparency around the practise of stock lending/borrowng

Yes spot on, for me thats the real issue ... let's get these things transparent. One thing that irks me particularly is the delay in issuing the short-sell list ... in an electronic market such as the ASX this info could be distributed more-or-less in real time ... grrrrr.

 

[Timmy]

Alan Kohler & Bob Gob get some sleep your starting to look dumb.

starting?

 

[shaunnell]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

 

[shaunnell]

I have just read that to short sell yoou actually borrow the shares from institutions so my previous post may be wrong.
Are these shares held in escrow whilst the short is in effect?

 

[Trembling Hand]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

Nope. People long a GOOD stock should welcome short sellers. When you short sell from that instant you are now some time in the future a buyer. The short must be covered. Have a look at allco yesterday when leaders recalled their shares, up it goes.

 

[Timmy]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

The number of shares on issue does not change, this is a fixed number (unless the company issues more to raise capital etc. or buys shares back - but these situations are not relevant to the question at hand).

Let's say a company has 1,000 shares on issue.
A potential short seller then borrows 20 shares from a holder of the shares (let's call these holders group X), and then short-sells these shares (the potential short seller is now an actual short seller). Now, in effect, there are 1,020 shares held by group X, even though there have been no new shares issued and the actual number of shares issued remains at 1,000.

So, to my understanding, while in reality there are 1,000 shares on issue, in supply and demand terms there are 1,020. Has this, in effect, increased the supply of shares? Not in reality it hasn't, but in effect, I would argue. it has. That is, right now, there are 1,020 shares available for trading.

 

[chops_a_must]

Why not ban buying puts? Or writing calls for that instance!

Hell, lets just wreck liquidity at a time when liquidity is shrinking in the markets.

I bet the ASX isn't going to ban short selling of the CFD's it makes money from.

Just more rubbish from the people that only want markets to go one way.

Wouldn't look good if they ban short selling when they can't even sort out incredibly dubious director and insider transactions.

 

[Timmy]

Anyone read The Age this morning? There is a good article in it (link below) that raises many more questions than it answers (a pretty good sign of a journo doing his (in this case) job). Instead of Kohler and co. prating away, this guy points out some unpleasant truths.

Article.

 

[gilbo]

Whilst short-selling does add liquidity to the market and in that regard is a good thing I think that things go a wee bit far when hedge funds can circumvent disclosure rules to target a company and bring it down to the point of collapse.

Investors should be used to the fluctuations of a share price and it is part of the risk/reward equation, but few people (investors, employees, creditors etc) win from a company being forced to sell assets at a vastly discounted price and restructure a business just so a few can make a lot of money from the exercise.

Now I'm not defending over-leveraged directors who thought it was easy to make vast sums of money whilst putting their companies ultimately at risk, but surely the whole practice of being able to short a stock whilst being able to keep the entire exercise out of the gaze of investors and market regulators is not something that should be supported by the market?

 

[Trembling Hand]

surely the whole practice of being able to short a stock whilst being able to keep the entire exercise out of the gaze of investors and market regulators is not something that should be supported by the market?

What are you talking about????????
That is what a down trend is. More sellers than buyers. It doesnt matter if its shorters or longs exiting, they do it for the same reason. The companies are overvalued. Nothing secret about a down trend.

 

[gilbo]

What are you talking about????????
That is what a down trend is. More sellers than buyers. It doesnt matter if its shorters or longs exiting, they do it for the same reason. The companies are overvalued. Nothing secret about a down trend.

Trembling - sorry but I'm not talking about down trends. I'm talking about deliberately shorting a stock away from the usual disclosure rules (i.e. borrowing from institutions) and specifically targeting a company that takes it to the brink of collapse. I have no problem with short-sellers per se.