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Ask HN: Please explain short selling?

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Re: Ask HN: Please explain short selling?

#51

Post by fexl »

djb_hackernews wrote: post #23

Going to get down voted here but is anyone else concerned that we have people building price prediction systems and hedge fund accountants that admit they don't have a complete understanding of what a short sale is?

I won't down-vote you, even though I'm that hedge fund accountant you're talking about. :) Even without knowing all the minute intricacies of how the share lending occurs, my accounting results can still pass audits with flying colors, year after year.

Just in case anyone thinks I'm proud of my "ignorance," I'm not. I'm discussing things here in order to gain a better understanding, even though that understanding is not crucial to my performance as an accountant.

And yes, I am concerned about the current sorry state of so-called "markets."

Re: Ask HN: Please explain short selling?

#52

Post by ct4ul4u »

megablast wrote: post #8
wdewind wrote: post #2

Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…

Usually the lenders are hedge funds, who hold large amounts of stocks of all sorts. They are playing a different game to shorters, and happy to get a fee for lending stock. So they make money in holding stock, which is what they were going to do anyway.

Actually, the biggest lenders are index funds.

Re: Ask HN: Please explain short selling?

#53

Post by ct4ul4u »

megablast wrote: post #8
wdewind wrote: post #2

Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…

Usually the lenders are hedge funds, who hold large amounts of stocks of all sorts. They are playing a different game to shorters, and happy to get a fee for lending stock. So they make money in holding stock, which is what they were going to do anyway.

Actually, the biggest lenders are index funds.

Re: Ask HN: Please explain short selling?

#54

Post by fexl »

bismuth wrote: post #33

You borrow from large institutional investors. These funds just own large amounts of stock in the hopes of achieving a profit through dividends and growth of the company. A trader who wants to short a stock can borrow some of this stock for a fee. Everybody wins this way. The large institutional collects the borrow-fee, and the trader can profit from a decline because he has borrowed the stock. [pet peeve] Note that…

True. When you buy IBM on margin, you're shorting USD.

So if they reinstate the uptick rule for short selling, shouldn't they add a downtick rule for margin buying? :)

Re: Ask HN: Please explain short selling?

#55

Post by cturner »

garethm wrote: post #17
fexl wrote: post #14

I'm a hedge fund accountant, and my software follows many thousands of trades including short sales. I know exactly how to account for these trades, but I have no idea what's really going on. As an accountant, all I see is that someone sold 1200 XYZ shares at $23.00 each, receiving a grand total of $27,600 cash. To simplify the example, I am not subtracting any commission there. Now the funny thing is, this account d…

The increase in supply is not caused by the final net position. It's in what you see when you look at the market. Suppose there are 100k shares issued. Some traders decide to naked short 50k. Actual holders of the shares say, "Oh crap. Half the company is for sale - better dump my shares while I still can." So they put up a total of 75k for sale. Now 50k of the 75k of actual shares need to be purchased by the people…

    Suppose there are 100k shares issued. Some traders decide
    to naked short 50k. Actual holders of the shares say, "Oh
    crap. Half the company is for sale - better dump my shares
    while I still can." So they put up a total of 75k for
    sale.
I used to believe that, and wrote to this effect in this forum previously. However, I've since been told that you can find out in Bloomberg how many shares are out short on some exchanges, even if they're naked. Hence, my previous statements suggesting that you could inflate stocks to lower prices are probably incorrect.

Re: Ask HN: Please explain short selling?

#56

Post by cturner »

cynicalkane wrote: post #31
lrm242 wrote: post #22

Earlier quoted context omitted.

Really? Given the statement above, which boils down to: "buy low and sell high", what's the difference? Generally, market microstructure tells us there are speculators and value investors, both serving a due purpose in the functioning of a market. Value investors are most adequately described as those who buy an asset below market value, rather than at or above market value. Both types of market participants are in i…

The difference is, for the value investor, the selling part is optional. A company can repay its investors with dividends, liquidation (rare), being bought out... Often value investors end up selling to the market, but you have to break away from the mentality that buy low sell high is the point of "investing". If it is that way, then it's a zero-sum game, so why's it an important part of capitalism again?

    If it is that way, then it's a zero-sum game
No, because the amount of value in the system trends up over time. There is not a fixed amount of wealth in the world.

Re: Ask HN: Please explain short selling?

#57

Post by T_S_ »

You can borrow money from a friend. Right? You can borrow stock from anyone who holds it. If your friend wants his money back, you can pay him cash and the bills don't have to have the same serial numbers as the ones you borrowed. Same with stock. (Entrepreneurs note: You are currency issuers. Think about that.)

The main difference is that everyone holds their shares at a broker so they let the broker handle this loan for them. You borrow the shares via the broker, the broker sells them, and then lets you have access to some of the proceeds (limited by regulation) and uses the rest as a low interest loan to itself.

Small brokerage accounts get nothing out of this even though they lent the shares. That's probably the main reason it seems so mysterious. Most people aren't aware of the mechanism. Your pension fund or insurance company is aware and makes sure they get a cut of the benefits of share lending.

Re: Ask HN: Please explain short selling?

#58

Post by hga »

elecengin wrote: post #16

I think there are plenty of good descriptions of the basics of short selling here, but I wanted to help explain the "who are you borrowing from" aspect. When you trade, you must trade through a broker-dealer. A broker-dealer is authorized to trade on behalf of it's customers. A broker-dealer must uphold certain regulatory requirements put in place by the SEC, and policed by a variety of government and non-government…

Wikipedia matches my memory that the uptick rule was established in the '30s: http://en.wikipedia.org/wiki/Uptick_rule

Re: Ask HN: Please explain short selling?

#59

Post by retube »

I used to trade bonds (amongst other stuff) so I can tell you how it works for bonds. Presumably it's similar for stocks:

As you know, going short means you sell the bond/stock. Generally going short implies you are going negative, as opposed to selling inventory you already own. So if I go short 100 million 10y bunds (German government debt) this means I sell 100m bonds I don't have.

The guy I am selling to doesn't know I am going short, he just knows I've sold him the bonds and he expects delivery at the end of the day (or possibly in 1 or 2 days time, depending on the definition of "spot" and various other things).

So I have to deliver him 100m bonds I don't have. Where do these come from? This is where the "repo" or repurchase market comes in to play. Very simply, the repo market is short-term buy/sell market: Party A agrees to sell Party B some bond at some price, AND additionally agrees to buy it back a short while later for a slightly higher price. What Party A has effectively done is borrow money from B and put up the bond they own as collatoral.

So what happens after I short my bond is that I go to the repo traders and say "hey - I'm short 100m bunds, you need to do a repo trade to flatten my position". So these guys will loan out some cash (around 100m euros) and take as collateral 100m bunds. These I use to deliver to my seller.

Edit: In reality I don't tell the repo traders I've gone short a bond. It's their responsibility to make sure all positions are repo'd out. They see a netted view of all bond positions across the bank and repo just the net positions.

Re: Ask HN: Please explain short selling?

#60

Post by jamesseda »

danielsoneg wrote: post #48
garethm wrote: post #17

Earlier quoted context omitted.

The increase in supply is not caused by the final net position. It's in what you see when you look at the market. Suppose there are 100k shares issued. Some traders decide to naked short 50k. Actual holders of the shares say, "Oh crap. Half the company is for sale - better dump my shares while I still can." So they put up a total of 75k for sale. Now 50k of the 75k of actual shares need to be purchased by the people…

Well, the problem is less that there are more shares of a company for sale than currently exist and more that it can generate high levels of unrealistic downward pressure on a stock. With a normal short sale, there is some balance between the long and short side - that is, you can only short so much before the longs start buying again and stop the downward price movement, and there are only so many people willing to…

Moral equivalent is, If you knew a self employed guy needed to sell his boat to keep his mortgage current, and you bought similar boats and sold them below cost so the guy would go into foreclosure and then you bought his property.
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