Why do we allow short selling?

[Judd]

At the very least it adds liquidity to the marketplace. Considering it takes massive pressure on both sides of supply and demand to make a stock move, the added liquidity does not hurt.

And why does a stock have to move? Aside from the the effort involved in driving all those cattle to market of course.

 

[LostMyShirt]

And why does a stock have to move? Aside from the the effort involved in driving all those cattle to market of course.

Sorry, I think you've misunderstood. No amount of short selling is going to drive a price lower. Having said that, if overall sentiment of a security drives the price higher, short selling is just stupid. I mean, go throw your money in the bin.

If you gather overall sentiment is going to lessen, then go short.

Why does a stock need to move? Well it doesn't NEED to, but people at times are willing to purchase securities at higher prices.

 

[explod]

hi explod, can you give us some of your insight regarding this question?

The fact that one can bet on something going down does put it in the realms of gambling and not the ordinary trading of goods for fair value.

 

[wayneL]

The fact that one can bet on something going down does put it in the realms of gambling and not the ordinary trading of goods for fair value.

In your view should short selling be banned in commodities futures also?

 

[Judd]

Sorry, I think you've misunderstood. No amount of short selling is going to drive a price lower. Having said that, if overall sentiment of a security drives the price higher, short selling is just stupid. I mean, go throw your money in the bin.

If you gather overall sentiment is going to lessen, then go short.

Why does a stock need to move? Well it doesn't NEED to, but people at times are willing to purchase securities at higher prices.

My sincere apologies, LostMyShirt, my sense of humour is occasionally warped. I was having a play on words. Again, my sincere apologies.

However, it is a fascinating subject. Still have an interest in the subject even though I gave trading away many, many moons ago for various reasons; the main one being associated with your nick. Now I only place money in the sharemarket assuming I'll never see it again. Makes for a simpler and much less stressful life.

I don't believe that the tribes will ever reach a consensus on the shorting of shares. I can appreciate the arguments for it but personally I am not in favour, especially naked shorts - there is a joke about that but I am not going to go there.

It becomes an attitudinal thing is some respects as to what people expect the share market represents, either a place where securities are traded or a reflection of human endeavour and intellectual progress where new companies and new products are provided an opportunity to grow.

Regards

 

[LostMyShirt]

My sincere apologies, LostMyShirt, my sense of humour is occasionally warped. I was having a play on words. Again, my sincere apologies.

However, it is a fascinating subject. Still have an interest in the subject even though I gave trading away many, many moons ago for various reasons; the main one being associated with your nick. Now I only place money in the sharemarket assuming I'll never see it again. Makes for a simpler and much less stressful life.

I don't believe that the tribes will ever reach a consensus on the shorting of shares. I can appreciate the arguments for it but personally I am not in favour, especially naked shorts - there is a joke about that but I am not going to go there.

It becomes an attitudinal thing is some respects as to what people expect the share market represents, either a place where securities are traded or a reflection of human endeavour and intellectual progress where new companies and new products are provided an opportunity to grow.

Regards

Lol, sorry man I didn't even pick up that it was humour. I guess I'm a dull guy!

Well it is good to hear that you still remain in the market at least. Your trading style makes sense - given the right amount of time and analysis, profits will yield.

Personally I'm not a trader but the ability to short securities, in my opinion, is beneficial to the market.

I don't know, I am not a Guru, but from what I've read it seems to be beneficial.

 

[mazzatelli]

The fact that one can bet on something going down does put it in the realms of gambling and not the ordinary trading of goods for fair value.

So say we see mis-pricing between Cth govt bills and Cth govt bill futures. To bring this mis-pricing back in line, we need to trade an arbitrage which will get the relationship back to fair value.

The transaction would involve for example shorting the govt bills and going long the bill futures. But shorting in this case would not be allowed?

 

[Julia]

The fact that one can bet on something going down does put it in the realms of gambling and not the ordinary trading of goods for fair value.

How does betting on something going down differ from betting on something going up?

 

[young-gun]

How does betting on something going down differ from betting on something going up?

+1. everything to do with stocks whether it be long short options or any form of derivative is indeed a gamble, given that no-one can actually say with certainty(other than those with insider info) that they are definitely going to profit from their decision or position taken.

gamble - any of the below sound familiar?

v.intr.
1.
a. To bet on an uncertain outcome, as of a contest.
b. To play a game of chance for stakes.
2. To take a risk in the hope of gaining an advantage or a benefit.
3. To engage in reckless or hazardous behavior(im sure you all have)

v.tr.
1. To put up as a stake in gambling; wager.
2. To expose to hazard; risk

n.
1. A bet, wager, or other gambling venture.
2. An act or undertaking of uncertain outcome; a risk:

ok so you can educate yourself to minimise risk and attempt to maximise returns, but i can do that in black jack.

 

[Tyler Durden]

+1. everything to do with stocks whether it be long short options or any form of derivative is indeed a gamble, given that no-one can actually say with certainty(other than those with insider info) that they are definitely going to profit from their decision or position taken.

gamble - any of the below sound familiar?

v.intr.
1.
a. To bet on an uncertain outcome, as of a contest.
b. To play a game of chance for stakes.
2. To take a risk in the hope of gaining an advantage or a benefit.
3. To engage in reckless or hazardous behavior(im sure you all have)

v.tr.
1. To put up as a stake in gambling; wager.
2. To expose to hazard; risk

n.
1. A bet, wager, or other gambling venture.
2. An act or undertaking of uncertain outcome; a risk:

ok so you can educate yourself to minimise risk and attempt to maximise returns, but i can do that in black jack.

I think there are a lot of people who wouldn't consider the share market as gambling.

 

[wayneL]

I think there are a lot of people who wouldn't consider the share market as gambling.

There are a lot of people using the market as a casino too, whether they realize it or not.

But in the truest sense almost everything in life is a gamble, from opening a business to trying to chat up the gorgeous woman whose tattooed monster of a boyfriend might just walk in at any moment.

But there are smart gambles and dumb gambles.

Consider the casino itself. There are two sides to every bet. Casino patrons are playing against negative expectancy and unless the punter finds a way to reverse that, they are the dumb gamblers.

The house has a positive expectancy, long term they know that there is an overwhelming probability that they will make a gross profit. Are they gambling? That gross profit still has to be higher than their enormous expenses. So yes they are gambling that they can attract enough muppets to turn over enough bets to get a return on their investment.

Trading and even investing is no different.

If short selling is gambling, then so is going long. Each requires a higher sale price than buy price to turn a profit, only the order is reversed. In both cases a risk and the outcome is uncertain.

Investing for dividends? You have no idea whether the company can remain profitable or if so, whether it can maintain it's current level of profit and dividends. The directors may reduce or suspend the dividend at any time at their discretion, for any reason they see fit. That's a gamble. Perhaps an educated gamble in many peoples case, but still a gamble.

This is why smart traders and investors create plans to increase the probability of positive expectancy. Yes they are still gambling in the truest sense, but it's 'smart' gambling, just like the casino.

============

On short selling; Without short selling, many markets would cease to exist.

There would be no futures markets, because for there to be a long position, a corresponding short position must exist. Producers and consumers of commodities would not be able to hedge their production.

There would be no functional options market. Ignoring that each long option contract requires a corresponding short, market makers would not be able to hedge their delta, vis a vis there would be no market makers willing to step up to take the other side of your trade. The option exchanges would become ghost town.

Also consider these points:

• Banning short selling does not prevent normal sales and will not prevent precipitous falls in stock prices
• There are many stocks for which you cannot short sell. Save for normally lower volumes, the price action is no different. They can get hammered too.
• Every short must be bought be someone, so for every short sale there must be a willing buyer.
• A normal sale may never result in another purchase, if someone sells a stock, they may never buy that stock ever again
• A short sale however must ALWAYS result in a purchase at some point in the future, hence the phenomenon of short covering rallies.

I don't agree with naked short sales, I think they should be banned (and are in many jurisdictions) because they have the effect of artificially increasing the float, i.e. creating new 'shadow' shares not issued by the company. That creates imbalances.

However I firmly agree with covered short sales (stock is lent to the short seller) for the reasons above.

Look, there are many buffoons running around blaming short selling for the losses in their portfolio. That's bullshyte. If the shorters did manage to push prices down, value investors would rush in with ears pinned back.

Your losses are because you bought a pile of overvalued crap in moments of irrational exuberance and rational value has been restored.

 

[nulla nulla]

For the benefit of readers is it worth distinguishing between "naked short selling", "short selling borrowed shares" and/or "short selling through cfd's"?
Also what about scale, large hedge funds versus Joe Bloggs daytrader?

 

[sinner]

It's pretty hard to get worked up over short selling on the ASX, if you take a look at
http://www.asx.com.au/data/shortsell.txt

You can see short selling doesn't even make half of 1% of the float for all shorted stocks. Billabong being the highest % of float under short with Lynas not far behind. If I had to bet, I'd guess probably half those shorts are longs holding hedges from a higher price. Those are longs that would probably sell their shares if shorting wasn't allowed.

 

[explod]

wayneL

Having another obnoxious attack Mr Plod?

Go have another look in the thread instead polluting Dutchie's thread with crap, you will see that it is your silence that is indeed deafening.

See you there for your answers to the questions asked of you.

Thought I would move this quote over to the right place as directed.

In answer, not at all and believe you are not really seeing my point and if you do you resort to bluster when you disagree..

I can agree with some of the cases put up for short selling but as regulation over markets is poor to almost non-existent it enables the savvy to rob the rank and file.

In my view.

 

[skc]

It's pretty hard to get worked up over short selling on the ASX, if you take a look at
http://www.asx.com.au/data/shortsell.txt

You can see short selling doesn't even make half of 1% of the float for all shorted stocks. Billabong being the highest % of float under short with Lynas not far behind. If I had to bet, I'd guess probably half those shorts are longs holding hedges from a higher price. Those are longs that would probably sell their shares if shorting wasn't allowed.

When short selling was banned during the GFC and more recently in Europe, it didn't stop the share market from falling further. Short selling can't drive prices down forever, nor does short selling changes the fundamentals of a company. JB Hi-Fi was top 10 most shorted stocks for a long time last year, yet I somehow doubt that the shorting caused the reduced sales and profits...

It's easy for one to blame short selling for their trading/investment losses... but I'd like to challenge anyone who can point to an example where a company is fundamentally changed by short selling activity. The only exception may be capital raising activities - but in most cases prices are actually manipulated up before a capital raising announcement anyway.

Short selling does cause prices to be lower, but that's no different to long buying causing prices to be higher. "Evil market manipulators" can short a stock, drive prices lower, so they can buy at a lower price. But the same evil market manipulators can also long a stock, drive prices higher so they can sell at a higher price. Does that offer grounds for banning long buying?

And for those who opposes it from an ethical ground, because short sellers gain at the expense of long buyers. Well, for a long buyer to profit you are doing so at the expense of whoever it was that sold you the share, as they forego their profits. It's a zero sum game and one person's gain is always someone else's loss. Shorting is no more ethical or unethical than long buying.

Let's not forget that the sharemarket is by and large a secondary market... "investing" in shares doesn't actually mean that goods are produced or jobs are created. So there is no moral high ground from there for the long buyers either.

There really isn't that much difference between long buying and short selling in terms of their function and moral. The only difference is the order to which buying and selling happens.

 

[Timmy]

Short selling should be encouraged and fostered. Improves liquidity, improves risk management.

ps. Chinese authorities are making shorting easier:

China is poised to unveil measures to bolster the country's nascent short-selling industry in an effort to deepen its capital markets, according to securities officials and fund managers.....Defenders of the practice say it increases liquidity and provides income for shareholders who are willing to lend their securities.

From the FT
http://www.ft.com/cms/s/0/f9356138-36aa-11e1-9ca3-00144feabdc0.html#axzz1j3verjFM

 

[wayneL]

wayneL

Having another obnoxious attack Mr Plod?

Go have another look in the thread instead polluting Dutchie's thread with crap, you will see that it is your silence that is indeed deafening.

See you there for your answers to the questions asked of you.

Thought I would move this quote over to the right place as directed.

In answer, not at all and believe you are not really seeing my point and if you do you resort to bluster when you disagree..

I can agree with some of the cases put up for short selling but as regulation over markets is poor to almost non-existent it enables the savvy to rob the rank and file.

In my view.

Let's get my comments into context shall we Plod?

It was in reply your reply tech's comment about the silence is deafening" viz:

Yep, its a bit like me stirring the dogs on the "short the market thread"

It's nothing to do with "bluster".

That comment was inaccurate, offensive, obnoxious and monumentally hypocritical, as we've come to expect from you.

You haven't answered one question here, just silence until I poked you in the ribs about it, and not really answers, just a grudging acceptance that you have no answers.

Try treating people with respect instead of referring to your fellow forumites as "dogs". It is derogatory and nasty and against the spirit of the rules of the forum.

 

[skc]

Here's a story on a ASIC review of the short selling ban during the GFC.

''The ban on short-selling may have exacerbated market volatility. It also potentially inhibited price discovery in the market and may have reduced market liquidity.''

''The short-selling measures potentially contributed to a number of other outcomes, which had negative impacts on the efficient operation of the Australian market. These included higher bid-ask spreads, lower turnover and encumbered price discovery.''

''Negative impacts may have been exacerbated by the length of the period of the Australian short-selling ban compared with those in other highly developed markets.''

http://www.smh.com.au/business/little-gratitude-for-the-ban-that-saved-the-bacon-20120924-26hec.html

 

[Superb Parrot]

There really isn't that much difference between long buying and short selling in terms of their function and moral. The only difference is the order to which buying and selling happens.

If you short (sell) your own shares, no problem, but selling a borrowed share ????.... why not short property ?

 

[Trembling Hand]

If you short (sell) your own shares, no problem, but selling a borrowed share ????.... why not short property ?

You cannot short your own sheres that is just selling them so you have no position!!