Short selling serves no market function

[Trembling Hand]

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.

 

[CecilHills]

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!

 

[cordelia]

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.

 

[Trembling Hand]

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"

 

[Timmy]

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.

 

[wayneL]

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.

 

[wayneL]

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.

 

[cuttlefish]

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.

 

[wayneL]

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.

 

[Trembling Hand]

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.

 

[cuttlefish]

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.

 

[cuttlefish]

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?

 

[Trembling Hand]

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.

 

[cordelia]

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

 

[Trembling Hand]

Cordelia,
No I'm with you.

 

[cordelia]

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....

 

[cuttlefish]

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.

 

[cuttlefish]

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?

 

[nomore4s]

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.

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?

 

[cordelia]

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.

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....