I have a preformed opinion about short selling, but I’m not sure I understand the big picture around it. So, educate me - what real, tangible, or meaningful reason is there to ever allow short selling in the market? What purpose does it serve?
Explain to me how it interacts with the traditional supply/demand based speculative model to properly price stock? I’m not seeing it. It’s effectively a bet against our economy, and an unnecessary hedge. That’s a big deal because the only time you should allow hedging is when it serves a bigger purpose other than an opportunity for some 3rd party to get rich. A short sale creates nothing positive or tangible…
[QUOTE=NinerAdvocate;388918]I have a preformed opinion about short selling, but I’m not sure I understand the big picture around it. So, educate me - what real, tangible, or meaningful reason is there to ever allow short selling in the market? What purpose does it serve?
Explain to me how it interacts with the traditional supply/demand based speculative model to properly price stock? I’m not seeing it. It’s effectively a bet against our economy, and an unnecessary hedge. That’s a big deal because the only time you should allow hedging is when it serves a bigger purpose other than an opportunity for some 3rd party to get rich. A short sell creates nothing positive or tangible…[/QUOTE]
Personally, I have no idea why it is used (especially since the uptick rule isn’t used- the concept has been abused) when there are other defensive means available IMO- options (writing, or buying puts) are a good downside hedge for a long position. Straight shorting is nothing but a money grab. “Shorters” feed on blood in the water, not by maintaining a defensive posture.
While I don’t like short selling myself, economists theorize that if it weren’t for short selling, then when something is bad, it would never get traded, & the whole system would shut down. Kind of like Japan since 1990 for example.
One of my WS buddies compares it to if you were only to bet a game and were only allowed to bet 1 team to win and nothing else.
Also the true value of a stock is not always the value it is being traded at, so in theory if you think a stock is overvalued, you would short it and when that stock comes back to reality you make your money.
The biggest problem other than ignoring or getting rid of the uptick rule, is there is so much insider information and planned attacks on companies so to speak that even if something is valued fairly, the $$$ at work can make it fold.
[QUOTE]Advocates of short sellers say that the practice is an essential part of the price discovery mechanism.[URL=http://en.wikipedia.org/wiki/Short_%28finance%29#cite_note-13][14][/URL] They state that short-seller scrutiny of companies’ finances has led to the discovery of instances of fraud which were glossed over or ignored by investors who had held the companies’ stock long. Some [URL=http://en.wikipedia.org/wiki/Hedge_fund]hedge funds[/URL] and short sellers claimed that the accounting of [URL=http://en.wikipedia.org/wiki/Enron]Enron[/URL] and [URL=http://en.wikipedia.org/wiki/Tyco_International]Tyco[/URL] was suspicious months before their respective [URL=http://en.wikipedia.org/wiki/Financial_scandal]financial scandals[/URL] emerged. Financial researchers at Duke University have provided statistically significant support for the assertion that short interest is an indicator of poor future stock performance and that short sellers exploit market mistakes about firms’ fundamentals.[URL=http://en.wikipedia.org/wiki/Short_%28finance%29#cite_note-14][15][/URL]
Such noted investors as [URL=http://en.wikipedia.org/wiki/Seth_Klarman]Seth Klarman[/URL] and [URL=http://en.wikipedia.org/wiki/Warren_Buffett]Warren Buffett[/URL] have said that short sellers help the market. Klarman argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street,[URL=http://en.wikipedia.org/wiki/Short_%28finance%29#cite_note-15][16][/URL] while Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.[URL=http://en.wikipedia.org/wiki/Short_%28finance%29#cite_note-16][17][/URL] In response to the UK and US moves to ban short selling in September 18 and 19 of 2008, [URL=http://en.wikipedia.org/wiki/UBS_AG]UBS[/URL] stated:
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In short, short selling is necessary to properly value a stock. It also provides liquidity to the market.
I don’t see how in a market where we are down 50% you view shorting as an unnecessary hedge. You can profit from shorting just as much as anyone else.
In short, short selling is necessary to properly value a stock. It also provides liquidity to the market.
I don’t see how in a market where we are down 50% you view shorting as an unnecessary hedge. You can profit from shorting just as much as anyone else.[/QUOTE]
You’re misunderstanding what I mean by necessary hedge. Hedging is done by companies to alleviate risk. Short selling does not do this. In fact, it introduces even more risk into the market.
In my example, I am the 3rd party. I’m thinking bigger than myself here.
A better question would be why should we ban short selling? A couple of things to remember:
There are two sides to every transaction - so for every short, someone is betting long.
Shorts take on the same risk as long - with the added benefit (serious sarcasm) of the margin call. Don’t know what it is? Look it up and quit complaining about shorts.
As for the uptick rule… If you own a security and wish to sell it, why should the government have any say in what price you chose to sell? It’s no different than someone deciding to sell their house in this crappy market, at a discount, because they want to move, or no longer own the property.
As for the shorts eating stocks alive … if the market sentiment was that these companies are strong, or will be strong in the near-mid future, there would be plenty of support in certain price regions and shorts would get slammed eventually.
Lastly … whenever this thing turns around, you will see plenty of shorts biting the big one. Then perhaps, people can complain about buyers?
If you read the article (particularly the statement by the 9/11 commission), you will see the hedging benefit of shorting.
It can also be used to provide protection to an investor who is attempting to reduce risk exposure.
E.g. I want to buy GE, but I’m afraid of it tanking… I can subsequently buy puts (or as you would say, bet against it) with a strike price at a lower value. That’s a non-institutional hedge.
You're misunderstanding what I mean by necessary hedge. Hedging is done by companies to alleviate risk. Short selling does not do this. In fact, it introduces even more risk into the market.
In my example, I am the 3rd party. I’m thinking bigger than myself here.
I apologize, I thought you were using the only rich people make money from shorting because the normal person is too stupid to do so and therefore no one should be able to do it argument. Short selling and naked shorting are very different. Using your terminology you are creating something when you engage in a normal short sell because you had to borrow that stock.
