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Short sellers are good for markets

economist.com

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Re: Short sellers are good for markets

#81

Post by logicchains »

simonh wrote: post #28
logicchains wrote: post #16

Earlier quoted context omitted.

Insider trading isn't necessarily bad for _the market_; it brings more information to the market faster, so prices more accurately reflect all factors. Compare for instance a hedge fund using satellite imagery to notice that a refinery has much less oil and trading on this information vs some exec at the oil refinery trading on that information. The former is completely accepted, because of the information it brings…

I think this view is very naive because it doesn't take into account the perverse incentives legalising insider trading could create. Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price…

>Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price, buy, and then change the plans to ones that will attract investors and pocket the difference when the price goes back up.

Legalising insider trading wouldn't legalise such behaviour per se, as such behaviour would still constitute a breach of the leader's fiduciary duties. Look for instance at how Musk was prosecuted for doing that kind of thing; such prosecution was unrelated to insider trading laws, and could still occur without them.

Re: Short sellers are good for markets

#82

Post by logicchains »

sonnyblarney wrote: post #58
tormeh wrote: post #26

Earlier quoted context omitted.

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…

>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.

Even without insider trading laws, it would still be illegal for executives to do things that hurt the company in the name of their own financial gain, as this would be a breach of their fiduciary duty to the company. It's a separate issue to insider trading.

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

This is simply false, as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency (or equities markets before insider trading regulations were introduced).

Re: Short sellers are good for markets

#83

Post by xiphias2 »

andrewtbham wrote: post #50

This article does not address the core issue with today's short sellers. They target companies that are dependent on financing and use fear uncertainty and doubt to ruin the company's reputation. They corrupt journalists, analysts, regulators, law enforcement, and ratings agencies... They work with known criminals and recruit saboteurs. Details in this link https://teslamotorsclub.com/tmc/threads/elon-musk-vs-short-s…

The real problem is not short sellers: it's borrowing people's stocks for shorting without their knowledge. When you think you own a stock, you don't own it, as the ownerahip lies with the custody institution (unless you have a stock certificate).

Re: Short sellers are good for markets

#84

Post by sonnyblarney »

logicchains wrote: post #82
sonnyblarney wrote: post #58

Earlier quoted context omitted.

"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…

>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. Even without insider trading laws, it would still be illegal for executives to do things that hurt the company in the name of their own financial gain, as this would be a breach of their fiduciary duty to the company. It's a separate issue to insider trading. >…

One - you would not knowingly trade with someone who has fundamentally more information than you, so there would be ver y little demand for equities that can be traded by insiders.

Two - there would be absolutely no way to prove in most cases, one way or the other if the 'insiders activity' was damaging or not for the company. For example, a bunch of insiders discover something disastrous and start selling cheap, sending a panic into the value of the stock. Is this 'bad for the company'? Or not? Then the 'problem' turns out to be not such a big deal, and they buy back on the cheap. Was this damaging to investors? Even if the insiders were acting legitimately, i.e. selling when something was wrong, buying when it was not ... it would 100% not be in the best interests of other investors - you see from this example that the very nature of 'insider information' makes 100% of trades by insiders 'not in the interests of other investors'.

"as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency

This is wrong.

Real estate can generally be independently valued. That's why it's required by law in many countries to have 'independent' assessments of a home's value. Same can be done with commercial.

In commodities and currency there are no 'insiders'. There's nothing built into the price but the inherent value of the commodity itself. Corn is corn is corn. Insider trading would definitely apply to a big agri-business, but for corn futures, or USD or even Bitcoin - there literally are no 'insiders'.There are 'insiders' in companies, but a market does not have insiders. Just intelligent people researching, analyzing, with their fingers on the pulse.

Demand for stocks would dwindle to nothing without insider trading laws, that's why they exist in every developed market.

Re: Short sellers are good for markets

#85

Post by dm3 »

nemo44x wrote: post #54
tim333 wrote: post #37

Earlier quoted context omitted.

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…

Should be "buying puts" if you replicate a short.

It's not a clear-cut situation - in times of turmoil, when many traders are considering a short, the price of options will rise. If the situation then calms down and the price of the underlying decreases steadily, the drop in the option price due to lower volatility will offset a lot of the potential gain.

When expressing a trade using options one has a lot more parameters to deal with in order to formulate the risk-reward properly. I'd say it's exactly the sort of thing most amateurs shouldn't be doing.

Re: Short sellers are good for markets

#89

Post by icedchai »

carbocation wrote: post #6
icedchai wrote: post #5

Earlier quoted context omitted.

It's probably simpler and cheaper to just clear all your cookies for economist.com and any subdomains.

Cookies are not preserved in incognito mode; this suggestion does not work.

Note that it is possible for sites to detect incognito mode... https://gist.github.com/jherax/a81c8c132d09cc354a0e2cb911841...

(You are correct though: my suggestion still doesn't work, for other reasons!)

Re: Short sellers are good for markets

#90

Post by nemo44x »

dm3 wrote: post #85
nemo44x wrote: post #54

Earlier quoted context omitted.

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…

Should be "buying puts" if you replicate a short. It's not a clear-cut situation - in times of turmoil, when many traders are considering a short, the price of options will rise. If the situation then calms down and the price of the underlying decreases steadily, the drop in the option price due to lower volatility will offset a lot of the potential gain. When expressing a trade using options one has a lot more param…

Yeah, meant to say buying a put - thanks!

My biggest caution against shorting a stock VS a put is the potential loss. At least with a put your loss is capped.

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