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Short sellers are good for markets

economist.com

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Re: Short sellers are good for markets

#71

Post by aaavl2821 »

totalZero wrote: post #68
aaavl2821 wrote: post #64

Earlier quoted context omitted.

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…

Thanks, that makes sense

Do you have any experience with pre commercial biotech option markets, like making markets around binary events like Phase 2 trial results? I feel like the pricing of that volatility is quite inefficient but don't know enough about options math or market structure to really test that hypothesis

Re: Short sellers are good for markets

#72

Post by andrewtbham »

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…

Betting against a team is different from trying to rig the game. An unfortunate side effect is that it incentives hedge funds to discredit legitimate companies.

Re: Short sellers are good for markets

#73

Post by aaavl2821 »

andrewtbham wrote: post #72
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…

Betting against a team is different from trying to rig the game. An unfortunate side effect is that it incentives hedge funds to discredit legitimate companies.

that goes both ways though, hedge funds talk their book on the long and short side

The difference is that it is generally much easier to make money on the long rather than short side. Stocks generally tend to rise in value, which acts to passively eat away at the returns to shorting. And with shorting you have unlimited downside while your loss is capped with a long position

So if you are shorting you are fighting gravity and have to sometimes be more vocal to compensate for that. If it were easier to short stocks, maybe people could make money without being as vocally critical

Re: Short sellers are good for markets

#74

Post by stephengillie »

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.

This sounds like the same situation as the music industry, bundling in an album 12 songs you don't want, along with the 2 you do want.

Or newspapers, where you pay for the 4 sections you won't read, along with the 2 you do read. Or streaming services, paying for the thousands of shows you won't watch, along with the dozen you do watch.

Re: Short sellers are good for markets

#75

Post by mkagenius »

stephengillie wrote: post #39
mkagenius wrote: post #38

Earlier quoted context omitted.

> 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.

I always thought that the price of a car always go down.

Re: Short sellers are good for markets

#76

Post by JumpCrisscross »

totalZero wrote: post #70
JumpCrisscross wrote: post #60

Earlier quoted context omitted.

> 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 protect…

> you'd still have a functioning option market

Most of the time. Professional options market makers would be degraded.

(As an aside, you'd also spawn systemic risks. Increased market-making risk favors small shops; access to inventory large. To bridge the gap, shorting would be replicated–more expensively, less transparently, and more riskily–through banks swapping their inventory to funds writing options. Add in your suggestion that hedging rely on historical correlations and you have a recipe for a preventable crisis.)

On underwriting, secondary issuances for seasoned issuers don't require options markets. But it reduces risk. That, in turn, reduces the cost of market access.

Australia's short-seeing ban "reduced trading activity, increased bid and ask spreads and increased intraday volatility" while providing "no evidence for lasting price support from the restrictions" [1]. It's a stupid idea that raises costs for everyone while sounding cute to the naive.

[1] https://epublications.bond.edu.au/cgi/viewcontent.cgi?refere...

Re: Short sellers are good for markets

#77

Post by palunon »

gamblor956 wrote: post #67
illumin8 wrote: post #31

Earlier quoted context omitted.

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…

> like selling "flame throwers" and other nonsense

AFAIK, Tesla never sold flamethrowers, another company (the boring company) did.

And they weren't flamethrowers, more gun-shaped blowtorches.

Re: Short sellers are good for markets

#79

Post by codewell »

romed wrote: post #61
codewell wrote: post #57

Earlier quoted context omitted.

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"

Perhaps it's a newer term. Now "short and distort" is around, for instance prominently as section 3 in the wikipedia article on "pump and dump" [0], and investopedia [1] also describe it.

[0] https://en.wikipedia.org/wiki/Pump_and_dump [1] https://www.investopedia.com/terms/s/shortanddistort.asp

Re: Short sellers are good for markets

#80

Post by stephengillie »

mkagenius wrote: post #75
stephengillie wrote: post #39

Earlier quoted context omitted.

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

I always thought that the price of a car always go down.

Not always, but you're right it's uncommon for cars to appreciate in value. And yes it does stretch the analogy pretty thin.
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