Short Selling Debate

[CFD]

I've always valued the opinions of TH and wayneL, so I guess I should leave off there to.

 

[stoxclimber]

If one looks at the stock market as a mechanism of delivering capital to businesses for investment as part of the circular flow, there's nothing wrong with short selling per se. It adds liquidity and (at least in theory, although it doesnt play out that well in practice) can help correct price signals to ensure efficient flow of money.

Where there is a problem with short selling is when it's used to manipulate stock prices to trigger large sales of stock (i.e. for margin calls) - this distorts price signals - or where it encourages the spread of false or misleading information (i.e. 'rumourtrage' although I hate the phrase). The latter can be applicable to going long as well, however. Although its obviously more profitable on the downside if done effectively - up by the stairs and down by the elevator and all.

 

[Trembling Hand]

this distorts price signals - or where it encourages the spread of false or misleading information (i.e. 'rumourtrage' although I hate the phrase). The latter can be applicable to going long as well, however. Although its obviously more profitable on the downside if done effectively - up by the stairs and down by the elevator and all.

That whats I find absolutely dumbfounding. Everyone's happy to jump on the party bus becoming bull market experts and when the tide turns its all manipulation. The same 'manipulators' spend most of there time LONG. How can everyone in all honesty say that shorts are bad when they play the same games 80% of the time LONG. Classic example recently was commodities. They, funds, ran them up big time and everyone falls in love with Gold. It was GOLD, GOLD, GOLD everyone is on the bandwagon telling you how good it is. Then the funds slip out the back door and its manipulation.

Give me a break!!

 

[metric]

interesting article on naked short selling.


The naked truth

Every day Australian stockbrokers are phoned by the ASX around 11am and asked if they wouldn’t mind, please, just withdrawing that buy order they made three days ago, because it’s not going to settle today and the CHESS system has to balance at midday each day.

Under the T+3 settlement system, sellers have three days to provide stock to the buyer (and the buyer has three days to cough up the cash).

Brokers believe the reason there are failures to settle virtually every day is that hedge funds are gaming the ASX fines with “naked short selling”.

That is, they are selling short, but not borrowing the stock in time to meet settlement in three days as required.

That’s because the fine for failing to settle is 0.1 per cent of the amount outstanding, with a floor of $50 and a maximum of $2,000.

With almost every trade it is much cheaper to pay the fine than to borrow the stock from a securities lender, so naturally hedge funds just pay the fines. There are no other consequences: it is, for them, just a cost of doing business.

For the buying broker it is more than irritating. If a broker buys shares on behalf of a client but does not deliver the scrip in three days, it must give the client’s money back. There is no choice in this and it comes off the broker’s capital. One day a small broker will go to the wall because a big order did not settle.
to continue..http://www.businessspectator.com.au/bs.nsf/Article/The-naked-truth-DFRYP?OpenDocument

 

[wayneL]

Herb Greenberg dispels the notion that short-sellers short circuited Bear Stearns.

http://blogs.marketwatch.com/greenb...p-why-it-wasnt-a-short-conspiracy/?mod=MWBlog

 

[dotocom]

The thing I don't understand about short selling is the fact it seems so easy to make millions of profit if all you have to do is speculate that ie-ANZ's share price will go down due to subprime, which in this example, seems very predictable.

For example, if you decided to start off at the beginning of this yr (jan 08), ANZ was around $27. Given it was fairly predictable upon reading newspapers, etc, that the financial sector is and will struggle for another 6+months, why didn't everybody in the world decide to borrow the share at $27 and short sell it now at $19 making a return of around 42%?

I'm sorry in advance because I'm a newbie, I'm still very naive about shares. But if it seems that predictable, I can't see why the risk would be that high and I can't see why not to invest. Are there any limitations to the ANZ example above? Thanks

 

[Timmy]

The thing I don't understand about short selling is the fact it seems so easy to make millions of profit if all you have to do is speculate that ie-ANZ's share price will go down due to subprime, which in this example, seems very predictable.

For example, if you decided to start off at the beginning of this yr (jan 08), ANZ was around $27. Given it was fairly predictable upon reading newspapers, etc, that the financial sector is and will struggle for another 6+months, why didn't everybody in the world decide to borrow the share at $27 and short sell it now at $19 making a return of around 42%?

I'm sorry in advance because I'm a newbie, I'm still very naive about shares. But if it seems that predictable, I can't see why the risk would be that high and I can't see why not to invest. Are there any limitations to the ANZ example above? Thanks

Hi dotocom - Short selling is a fairly simple process, can be done with the physical shares or through CFDs.
So what you say makes sense. The only thing I have an issue with is where you say " why didn't everybody in the world decide ...". Basically, if you have done your work and decide a share is a short-sell candidate don't concern yourself with what everybody else in the world is doing or not doing.

It does all look very predictable, especially 6 months after the fact, but if you have a view going forward, then go for it. Just make sure you have done the research and know the ins and outs of risk management etc.

 

[dotocom]

Thanks for the kind reply Timmy.

I just wanted to ask 2 more questions:

1. Given as I said it is predictable, is it difficult to acquire the shares at the ask price? ie - if ANZ current market price at $27, would it be hard to borrow that share for short selling purposes at $27, would they normally charge a lot more?

2. Would YOU be able to decide when/whether to short sell the shares when the share price goes down ie - ANZ goes down to $20? Or do you have to specify the period? (I think im confused with futures and options but all short selling are options am i right?)
-i only ask because i read that sometimes, the brokers ask you to buy back the shares at a random time.

 

[Timmy]

1. When shorting shares you either want to get set by selling at the ask (someone is going to have to deal at your offer/ask) or by you selling at the bid price (you hit the bid, so no waiting for anyone else to deal at your price).

The number of shares you can sell if you are sitting on the ask is going to be dependent on how many are bought from you, whereas the number of shares you sell at the bid price is going to be dependent on the number of shares on the bid at the time.

So if the current market price on the share is, for example, bid at $27.00 and offered at $27.05 then you could sell immediately at $27.00 (up to the amount of shares on the bid) or you could place an offer in the market anywhere from $27.01 to $27.05 and wait for someone to hit your ask price, hopefully for the amount you want to deal in. Obviously there is risk of not getting set on your position by placing an offer, and the higher the offer the more risk of not getting set you will have (i.e. more likely to attract a buyer at $27.01 than at $27.02).

2. No, short selling is not the same as options. For more general short sell info on the ASX, found here. This is the sort of stuff you will need to familiarise yourself with before starting to trade from the short side. Options can be used to get set into a short share position, but this is different to short selling.

 

[MichaelD]

Given as I said it is predictable

Newbie error #1.

Share price movements are not predictable in advance. You will go broke very quickly if you trade based on prediction. In hindsight it seems so easy, but when you're trading the hard right edge of the chart it ain't so.

Newbie error #2.

Newspapers, tip sheets and mates are not a profitable source of information. They are, however, great at projecting the past onto the future.


Profitable traders will form a view of what a share price might do and will then act accordingly. This means quickly conceding when they are incorrect in their view and making the most of the situation when they are correct in their view.

 

[brianwh]

Lending to short sellers - why would you do it?

I get the gist of the arguments in favour of allowing covered short selling - but what is in it for the lender of the stock? Surely the small payment for the use of the stock will not be compensation for the loss in value. And sometimes this loss in value is total as for example in the case of ABC Learning. I have seen the suggestion that the lenders can trade on this "insider" knowledge but apart from the dubious legal nature of such dealings, this explanation seems a bit too cynical.

Can anyone enlighten me?

 

[Trembling Hand]

Re: Lending to short sellers - why would you do it?

Can anyone enlighten me?

Probably not but I will try.

What makes you think just because a stock is sold short its going to go down?

Its more than likely to go up.

 

[cutz]

Re: Lending to short sellers - why would you do it?

but what is in it for the lender of the stock?
Can anyone enlighten me?

One example i can think of is if you want to buy on margin you need to agree that you will lend out your stock (depending on your broker), therefore it's a win win situation for both parties.

EDIT>> Also agree with TH, stocks can get trashed even with the ban in place/rally hard with no ban, just check out MQG's history, ban was in place, stock got hammered from the start of the ban into mid November and again Jan to March.

 

[brianwh]

Re: Lending to short sellers - why would you do it?

Probably not but I will try.

What makes you think just because a stock is sold short its going to go down?

Its more than likely to go up.

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it. But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

 

[alphaman]

Re: Lending to short sellers - why would you do it?

Surely the small payment for the use of the stock will not be compensation for the loss in value. And sometimes this loss in value is total as for example in the case of ABC Learning.

You've got price and value mixed up. By now, with the benefit of hindsight, it's pretty clear that ABC Learning never had much value. It was overpriced. The short sellers made the right call.

If you take a longer term, bigger picture view, the short sellers actually prevented* futher erosion of value by preventing naive investors from wasting more $ in the crap company.

 

[Trembling Hand]

Re: Lending to short sellers - why would you do it?

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it. But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

Tell us were are all this companies that are getting "trashed" by short sellers?

Where are the companies that are getting Large % of market cap sold short

 

[Timmy]

Re: Lending to short sellers - why would you do it?

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it.

It is the same argument for stock lending to short sellers by stock owners - it must work very well well often enough or they wouldn't do it.

Also, ever heard of a short squeeze?

But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

Ummmm, someone short selling a share is NOT the same as 'trashing' the share price. Someone has mentioned ABC, was the share price trashed by short sellers or by longs trying to get the hell out when they realised how that 'business' was being run?

 

[Largesse]

Re: Lending to short sellers - why would you do it?

It is the same argument for stock lending to short sellers by stock owners - it must work very well well often enough or they wouldn't do it.

Also, ever heard of a short squeeze?




Ummmm, someone short selling a share is NOT the same as 'trashing' the share price. Someone has mentioned ABC, was the share price trashed by short sellers or by longs trying to get the hell out when they realised how that 'business' was being run?

I think ABC Learning is an extreme example to use. Was a spooge company run by a C grade financial engineer

Lehmann's didn't deserve the treatment they recieved. That was blatant abusive short selling to hit stops and trigger a collapse.

but i agree on the whole that short selling is a non-issue

 

[Trembling Hand]

Re: Lending to short sellers - why would you do it?

Also, ever heard of a short squeeze?

The really frustrating thing about this argument is 2 things,

1 If 0.5% of market cap can have a significant long term effect on prices what the hell are the other 99.5% of market cap doing?? Its just a joke!!

and 2 It would be a safe bet that most institutional shorts are arbitrage not straight directional shorts.

 

[Timmy]

Re: Lending to short sellers - why would you do it?

I think ABC Learning is an extreme example to use. Was a spooge company run by a C grade financial engineer

I think saying that shorting a share is 'trashing' it is extreme too.

ABC might have been a 'spooge' company (not familiar with that term) but the short sellers did a whole heap of people a favour, stopping idiot buyers from pouring more money into it and the share price.

Whoops, alphaman said it more eloquently than me, and first!:

If you take a longer term, bigger picture view, the short sellers actually prevented* futher erosion of value by preventing naive investors from wasting more $ in the crap company.