Short sellers are good for markets • Hacker News Board

Re: Short sellers are good for markets

#61

Post by romed » Sat, Oct 13, 2018, 6:06 PM UTC

codewell wrote: post #57

romed wrote: post #44

Earlier quoted context omitted.

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.

I was an investment professional from 2001 to 2009 and I never heard anyone say "short and distort".

https://books.google.com/ngrams/graph?content=%22pump+and+du...

"Ngram not found: short and distort"

Re: Short sellers are good for markets

#62

Post by JesseLivermore » Sat, Oct 13, 2018, 6:06 PM UTC

lordnacho wrote: post #43

What's good for markets is for there to be a variety of opinions about a stock. Long term opinions, short term opinions, positive opinions, negative opinions. Absolute values (TSLA is worth $500), relative values (TSLA should be worth more than GM). What would be bad would be for us to censure certain expressions, so that we only hear certain ideas.

One reason I prefer trading indexes rather than individual stocks kind of for this reason. The market for the Dow is much healthier because there is more diversified participation. Individual stocks always seem to make me more nervous.

Re: Short sellers are good for markets

#63

Post by pimmen » Sat, Oct 13, 2018, 6:24 PM UTC

Short selling is vital. Everyone can say that the emperor is naked, so such allegations can be made without anyone noticing. When someone however dares to bet a large sum of money that emperor is naked people will pay more close attention and reflect.

Fair, efficient markets require investors with a rational mindset. Short sellers can give people a wake up call.

Re: Short sellers are good for markets

#64

Post by aaavl2821 » Sat, Oct 13, 2018, 6:27 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…

I think my statement about not having functioning options markets was stronger than I intended. I just meant you'd have way less liquidity, sometimes so little liquidity that you might as well not have a market

Could you elaborate on your point about hard to borrow options being the most widely traded? I'm not a derivatives person but was at a biotech fund and briefly looked at those options markets, and the bid ask spreads were ridiculous for many names to the point where it was almost pointless to even put in an order. Liquidity was super light as well

Re: Short sellers are good for markets

#65

Post by aaavl2821 » Sat, Oct 13, 2018, 6:32 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.

Yes but you won't have those options markets unless market makers can hedge. You need a market maker to be on the other end of those trades, and from what I can tell, if market makers can't hedge then they either won't show up or will demand super wide bid ask spreads to make up for the delta risk

I'm not a derivatives trader but have explored investing in options when I was at a fund, and that was my experience looking at options for hard to borrow stocks. For market makers out there -- is that a fair assessment?

Re: Short sellers are good for markets

#66

Post by tryptophan » Sat, Oct 13, 2018, 6:38 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.

Just because the price of something drops doesn't make it a "value stock" for value investors to buy.

Re: Short sellers are good for markets

#67

Post by gamblor956 » Sat, Oct 13, 2018, 6:42 PM UTC

illumin8 wrote: post #31

gonehome wrote: post #21

Earlier quoted context omitted.

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…

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/*

Those articles are literally just describing things that SolarCity, Tesla, and Musk actually did* (or in the cases of stated goals/promises, failed to do). How does that count as a "paid hit piece"?

If Tesla wanted to remain a media darling it could have done so very easily: just hit the goals it set for itself. Instead, quarter after quarter, it failed to meet those self-stated goals. Quarter after quarter, they embarked on various stunts to distract investors from its failure to meet its self-stated goals, like selling "flame throwers" and other nonsense. And yet, despite the many quarters of lies, Tesla still has enough media goodwill that a single quarter of two of actually meeting its self-stated goals could result in it becoming a media darling again.

Elon though...Doubling down on the pedophilia remarks and attempting to go to war with multiple government agencies when he was clearly in the wrong is a fast track to becoming a laughing stock, and he deserves the self-inflicted negative media attention he's seen these past 3 months.

Re: Short sellers are good for markets

#68

Post by totalZero » Sat, Oct 13, 2018, 6:44 PM UTC

aaavl2821 wrote: post #64

totalZero wrote: post #51

Earlier quoted context omitted.

> 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…

I think my statement about not having functioning options markets was stronger than I intended. I just meant you'd have way less liquidity, sometimes so little liquidity that you might as well not have a market Could you elaborate on your point about hard to borrow options being the most widely traded? I'm not a derivatives person but was at a biotech fund and briefly looked at those options markets, and the bid ask…

I've seen this many times as an options market-maker: A short-seller fund can't get borrow (which is a requirement for short selling) on a name it's already short, so it can't add to the short position. Thus, they call a bank and buy put options. The bank makes a price that incorporates (charges for) the borrow risk, usually because (A) the bank has an easier time locating borrow and gets a better price, (B) the bank trader/desk has a larger tolerance for P&L swings and can thus take the other side of the trade and hedge the position slowly or not at all, or (C) the bank has better market access and can trade combos (synthetic shares) against a different institution that has stock or a better borrow rate.

As a general rule, there's options activity for names that are very volatile. This doesn't always show up on the open interest count, because many firms trade OTC contracts that don't have the same clearinghouse protections as exchange-listed option contracts.

Option bid/ask spread being wide don't necessarily mean that volatility itself is illiquid. There could be large size on both bid and offer, with every dealer under the sun making a market, but the carry rate spread is wide, and that widens the option price. For example, the put offer will be based on the short rate, and the put bid will be based on the long rate, so if these two rates are divergent (as is the case when a name is hard to borrow), then the spread will be wide even if both sides are priced with the same implied volatility.

BTW even if screens show little more than a 100-lot, a bank will make a price on a much larger block of options. You won't know where liquidity is without quoting dealers. An option market could show a bid/ask that's 2 dollars wide with 200 contracts on either side, but a market maker may make you a two-way price that's 30 cents wide for 10,000 contracts. Depends on a lot of factors (who's the client, what's the position, does the market maker know the name and have a view, what are the catalysts, why is the screen market so wide, etc)

Re: Short sellers are good for markets

#69

Post by Cyphase » Sat, Oct 13, 2018, 6:56 PM UTC

dmortin wrote: post #56

stephengillie wrote: post #18

Earlier quoted context omitted.

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.

> 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.

Figure out how to make that work in the market and you can be a _very_ highly-paid engineer.

Re: Short sellers are good for markets

#70

Post by totalZero » Sat, Oct 13, 2018, 6:57 PM UTC

JumpCrisscross wrote: post #60

totalZero wrote: post #51

Earlier quoted context omitted.

> 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 .

And yet you'd still have a functioning option market, which is the point in question.

You don't have to hedge delta in short shares of the underlier in order to deal options. You can hedge out using your long shares, and then do the remainder in a correlated instrument or leave it without a hedge. For a pure market maker who simply buys and sells to earn spread, hedging is a means of managing P&L variance and protecting oneself against negative selection bias.

Similarly, you also don't have to hedge converts in options.

I'm not sure I understand your point about underwriting. Due to regulations, options don't start trading until several days after an IPO. Options on spinoffs tend to list more quickly, but are delayed as well. Secondary issuances have the advantage of already seeing where the market priced the stock, and are generally small, so there's no need to have a tight options market to hedge them.