Short sellers are good for markets • Hacker News Board

Re: Short sellers are good for markets

#51

Post by totalZero » Sat, Oct 13, 2018, 5:46 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…

> 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 say this isn't actually true. You'd hedge your short deltas and let the long deltas ride, prefer to sell delta to flatten risk (in other words charge more when selling puts and pay less when buying calls to compensate for P&L variance), and expect put-call disparities to level out in a slightly different manner. You could also sell well-correlated futures to hedge, or just trade combos and pass the risk off to someone else.

Empirically, many of the hard to borrow names are the most well-traded in the options world. When people can't sell short, they buy puts and pass the risk off to a market-maker.

Specifically about what I said about put-call parity: In the status quo, if puts are more expensive than stocks, you generally sell a put, sell 100 shares of stock, and buy a call. In the hypothetical world where you can't sell short, if you don't already have long shares then you can't take advantage of the inefficiency. So, put implied vol would trade over, and large banks and other dealers who are already long stock would have an advantage over small shops that don't already have a long shares position.

The only real difference is that options markets would be less liquid, wider and less efficient.

Re: Short sellers are good for markets

#52

Post by smolder » Sat, Oct 13, 2018, 5:48 PM UTC

UncleEntity wrote: post #42

hellogoodbyeeee wrote: post #33

Earlier quoted context omitted.

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…

> Monopolies are never good for markets, pretty much but definition. Regulated monopolies, such as utility companies, are sometimes good for consumers though. I actually have the exact opposite opinion, natural monopolies are good for the market while government granted monopolies are not. Natural monopolies (i.e., ones not protected by fiat) gained their position through being the best in that space and there's noth…

Natural monopolies in any sizable market don't stay natural. They get their fingers in government or use their relative size in a legal system that favors money to create unreasonable barriers to entry. Once they make it to #1 they no longer have to be the best. Same goes for markets run by a duopoly or any number of entities that cooperate in some way to lower competition.

Re: Short sellers are good for markets

#53

Post by codewell » Sat, Oct 13, 2018, 5:50 PM UTC

AznHisoka wrote: post #36

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.

It's true that longs and shorts could both benefit from spreading false rumors. But shorts have an expiration date which can cause them to be much more incentivized to drive a rapid price change.

Re: Short sellers are good for markets

#54

Post by nemo44x » Sat, Oct 13, 2018, 5:50 PM UTC

tim333 wrote: post #37

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.

Shorting a stock doesn't include the time element of options not to mention the relative lack of liquidity in derivatives as opposed to the equity.

Saying that, for most amateurs I'd recommend selling puts than shorting since shorting has unlimited downside risk.

Sometimes shorting against the box makes sense if you have the asset in another account and can't sell it there. You could short it in your primary account and then move the shares over which make take a few days locking in a sell price. When the shares arrive in your primary account it covers the short position.

Re: Short sellers are good for markets

#55

Post by JesseLivermore » Sat, Oct 13, 2018, 6:01 PM UTC

tim333 wrote: post #40

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.

Only a short has the courage to buy in a real panic (like the 1987 crash). Value investors generally only play the long side. Market makers will withdraw from the market reducing liquidity in times of volatility.

Re: Short sellers are good for markets

#56

Post by dmortin » Sat, Oct 13, 2018, 6:01 PM UTC

stephengillie wrote: post #18

warent wrote: post #3

Earlier quoted context omitted.

a) Try a different network b) Get a subscription to The Economist

Why should a a highly-paid engineer spend a few dollars, when they can spend the time-equivalent of dozens of dollars to not pay?

I'd pay some tiny amount for a single article, but I don't want a full subscription if I don't read the Economist otherwise. Also, I don't want dozens of subscriptions for different sites.

I'd like a system when some tiny amount would be deducted automatically from my account every time I read an article on different sites.

Re: Short sellers are good for markets

#57

Post by codewell » Sat, Oct 13, 2018, 6:01 PM UTC

romed wrote: post #44

AznHisoka wrote: post #36

Earlier quoted context omitted.

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

In practice, it is far, far more common for bad actors to run the pump and dump than to short and issue fake news. The latter is rare enough that we don't have a word for it. The former is common enough to be called "pump and dump". There's a good reason why shorting is not a common scam technique: your gains are capped at 100% and your risk is unlimited. On the long side, it's the opposite. A pump-and-dump has unlim…

The short version is called short and distort. I'd like to see stats on which is more common.

Re: Short sellers are good for markets

#58

Post by sonnyblarney » Sat, Oct 13, 2018, 6:01 PM UTC

tormeh wrote: post #26

sonnyblarney wrote: post #19

Earlier quoted context omitted.

Insider trading is definitely bad for the market because there would be no outside investing ever if insider trading was the mode that information came about. Execs have not only access to 'current oil' stores, but basically everything about the company. It'd be crazy to invest in a company where execs can do as they please, it would be utterly gamified and suppressive to the entire market.

With insider trading, the knowledge of insider traders would be priced in. If you're trying to just buy the market you'd get the same (maybe better?) returns. You'd only lose from insider trading if you were trying to outsmart the market, in which case you'd be at a disadvantage.

"With insider trading, the knowledge of insider traders would be priced in."

Yes and the price would be near 0 (i.e. 'priced in' crazy risk) because nobody is stupid enough to buy shares from those who have massive leverage over them.

Would you play poker against a guy who can look at your cards, but you can't look at his?

Investing is not just 'putting money in a productive vehicle' it's buying and selling based in information. What person would be stupid enough to trade with someone with a massive information advantage over them?

Nobody.

You'd have only Private Equity firms and execs owning shares, where the PE firms would have some kind of leverage.

There wouldn't be much of a market for equity, there certainly wouldn't be any 'publicly traded companies' because that would be pointless.

It would massively depress the market and lead to considerably less investment.

Re: Short sellers are good for markets

#59

Post by hellogoodbyeeee » Sat, Oct 13, 2018, 6:02 PM UTC

UncleEntity wrote: post #42

hellogoodbyeeee wrote: post #33

Earlier quoted context omitted.

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…

> Monopolies are never good for markets, pretty much but definition. Regulated monopolies, such as utility companies, are sometimes good for consumers though. I actually have the exact opposite opinion, natural monopolies are good for the market while government granted monopolies are not. Natural monopolies (i.e., ones not protected by fiat) gained their position through being the best in that space and there's noth…

You want utility companies to be a regulated monopoly because of their economies of scale. Consumers would be worse off with two small electric companies because their per unit of electrical price would be higher. Competition can't price away the fixed costs of building a power plant or stringing electrical wires all over town. However the monopoly has pricing power and needs the government regulation to prevent it from unfairly raising prices for consumers like they would to maximize profit without the regulation.

Natural monopolies are bad because they can use their market position to unfairly prevent new entrants to the market. For example, Amazon may buy all of a key supplier's product and prevent the upstart from even having a chance because they can't buy any of that product. The monopoly can raise prices to whatever level they want, despite what the market would dictate because the consumer doesn't have another alternative.

Re: Short sellers are good for markets

#60

Post by JumpCrisscross » Sat, Oct 13, 2018, 6:04 PM UTC

totalZero wrote: post #51

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…

> 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 say this isn't actually true. You'd hedge your short deltas and let the long deltas ride, prefer to sell delta to flatten risk (in other words charge more when selling puts and pay less when buying calls to c…

> The only real difference is that options markets would be less liquid, wider and less efficient

Which raises costs for new share issuances (by making underwriting riskier), convertible debt (by making it more expensive to hedge the stock component), certain other flavours of debt, acquisitions, et cetera.