Short sellers are good for markets • Hacker News Board

Re: Short sellers are good for markets

#31

Post by illumin8 » Sat, Oct 13, 2018, 5:14 PM UTC

gonehome wrote: post #21

diminish wrote: post #10

So far I have read in various articles why monopolies, competition, rational actors, irrational actors (for overcoming crisis), long term investors, and short term sellers are good for the markets. Are there any actors which are bad for the market?

People running pump and dump schemes, fraud, ponzi schemes, most ICOs, things the SEC exists to stop. Shorts are good for price correction, but bad when they start trying to manipulate things in order to get a price correction (shorting a company and then killing the CEO for an extreme example).

This. One thing I have noticed is that when you have $billions in short interest in a stock, the manipulation is incredibly subtle, but also incredibly blatant at times.

For example, one can find many media articles that are almost certainly paid hit pieces against Tesla and Musk. When you have this much short interest, and news organizations that have contributors with financial interests aligned with the shorts, it is inevitable: https://insideevs.com/tesla-short-sellers-media-crusade/

I wish the SEC would begin to crack down on these abuses. Taking a short position against a stock is fine, but using your media connections to publish damaging and in many cases inaccurate stories is libel at best, and fraud at worse.

Re: Short sellers are good for markets

#32

Post by Nokinside » Sat, Oct 13, 2018, 5:15 PM UTC

anilshanbhag wrote: post #27

tryptophan wrote: post #13

Something that the article did not mention: Short sellers reduce volatility and lead to smaller drops. Why? Because having shorters guarantees that you will have a buyer for a stock that is falling. To exit a short trade you need to purchase shares. This helps prevent stocks from falling too low out of panic or undervaluation, benefiting people who are long the stock.

This is not true. Highly shorted stocks are some of the most volatile ones. Anyone can buy a stock that is falling, most stocks have little short interest (<10%) meaning volume when stock going up or down is most people buying or selling down their long position.

> Highly shorted stocks are some of the most volatile ones.

I'm not convinced by this argument.

* Is the volatility caused by short selling or does volatility attract short sellers?

* Is it possible that short selling is actually reducing the volatility of very volatile stock?

Australia banned short selling after financial crisis. The result was increased volatility in stocks, less trade and larger spreads.

Re: Short sellers are good for markets

#33

Post by hellogoodbyeeee » Sat, Oct 13, 2018, 5:19 PM UTC

diminish wrote: post #10

So far I have read in various articles why monopolies, competition, rational actors, irrational actors (for overcoming crisis), long term investors, and short term sellers are good for the markets. Are there any actors which are bad for the market?

I think you have formed a bit of a strawman argument here. Monopolies are never good for markets, pretty much but definition. Regulated monopolies, such as utility companies, are sometimes good for consumers though.

I don't exactly know what you mean by irrational actors are good for overcoming a market crisis, but I'd probably say that the market isn't functioning in a crisis and that irrational actors might put it back in a normal state, irrational actors are not good for functioning markets.

Re: Short sellers are good for markets

#34

Post by wdn » Sat, Oct 13, 2018, 5:23 PM UTC

anilshanbhag wrote: post #27

tryptophan wrote: post #13

Something that the article did not mention: Short sellers reduce volatility and lead to smaller drops. Why? Because having shorters guarantees that you will have a buyer for a stock that is falling. To exit a short trade you need to purchase shares. This helps prevent stocks from falling too low out of panic or undervaluation, benefiting people who are long the stock.

This is not true. Highly shorted stocks are some of the most volatile ones. Anyone can buy a stock that is falling, most stocks have little short interest (<10%) meaning volume when stock going up or down is most people buying or selling down their long position.

This is true.

You can verify this yourself by owning a high growth, non-shortable, thinly traded stock (less than 200,000 shares traded a day). On a bad news release (such as earning) or just a bad sell off day such as Wednesday, you will how bad the slippage is on your protected stopped.

For example, you own XYZ and it was at $25 at the close on Friday. There was a bad release over the weekend and the price is going to be opened at $21 on Monday morning. You have your protected stop at $20. You would think you would get out at $20 give or take 10 cents for slippage. But when your received your filled report, you see it was filled at $17.

What happened is there is 0 buyer and everyone just want to get out. If there were short shorters, they would come in at market open to book some profits by buying back the share they have shorted.

Re: Short sellers are good for markets

#35

Post by pg_bot » Sat, Oct 13, 2018, 5:26 PM UTC

stephengillie wrote: post #25

> By seeking out overvalued assets, short-sellers help rein in animal spirits and prevent bubbles from forming. Suddenly this article takes an unexpectedly spiritual turn. What are these "animal spirits" and how do they influence markets? It's reminiscent of the Animal Spirit Guide that helped Chakotay in Star Trek Voyager[0] [0] http://memory-alpha.wikia.com/wiki/The_Cloud_(episode)

It is a phrase popularized by the most famous economist of the 20th century, John Maynard Keynes.

https://en.wikipedia.org/wiki/Animal_spirits_(Keynes)

Re: Short sellers are good for markets

#36

Post by AznHisoka » Sat, Oct 13, 2018, 5:26 PM UTC

Gitnumb wrote: post #30

Short sellers are incentivized to create false rumors and sabotage a a company's reputation. That's not really good.

By your logic, people who are long are incentivized to create false rumors to pump up a company’s reputation.

Re: Short sellers are good for markets

#37

Post by tim333 » Sat, Oct 13, 2018, 5:27 PM UTC

aaavl2821 wrote: post #29

This article doesn't mention this, but short selling is a fundamental piece upon which many other financial instruments are built, because it allows hedging If you take away short selling, you take away many other healthy components of functioning markets. You won't have functioning options markets for example, because market makers can't hedge their positions I'd actually like to see more short selling. Especially i…

Nothing against shorting but you can write puts and calls without being needing short selling. Calls are naturally written by people holding a stock who don't mind selling some and puts by people with cash who don't mind buying some stock.

Re: Short sellers are good for markets

#38

Post by mkagenius » Sat, Oct 13, 2018, 5:28 PM UTC

stephengillie wrote: post #17

Shorting a stock is like renting a car for a year - then selling the car, and still paying rent. At the end of the year, you buy an identical car for a lot less, and give it back to the car rental company. Cars are fungible in this example.

> Shorting a stock is like renting a car for a year

only if stock goes down. Stocks moves up too, in that case the analogy doesnt work.

Re: Short sellers are good for markets

#39

Post by stephengillie » Sat, Oct 13, 2018, 5:30 PM UTC

mkagenius wrote: post #38

stephengillie wrote: post #17

Shorting a stock is like renting a car for a year - then selling the car, and still paying rent. At the end of the year, you buy an identical car for a lot less, and give it back to the car rental company. Cars are fungible in this example.

> Shorting a stock is like renting a car for a year only if stock goes down. Stocks moves up too, in that case the analogy doesnt work.

The analogy still works - you would just extend the car rental. And yes, sometimes short sellers do lose money on this transaction.

Re: Short sellers are good for markets

#40

Post by tim333 » Sat, Oct 13, 2018, 5:31 PM UTC

tryptophan wrote: post #13

Something that the article did not mention: Short sellers reduce volatility and lead to smaller drops. Why? Because having shorters guarantees that you will have a buyer for a stock that is falling. To exit a short trade you need to purchase shares. This helps prevent stocks from falling too low out of panic or undervaluation, benefiting people who are long the stock.

I'd say shorting reduces volatility but not for the reason you state. If prices fall too much stocks are bought by value investors rather than short covering typically. Short sellers help prevent prices going too high both by selling and debunking hype.