
Short sellers are good for markets - godelmachine
https://www.economist.com/finance-and-economics/2018/10/13/short-sellers-are-good-for-markets
======
aaavl2821
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 in small biotech
companies. It is either impossible or expensive to short these shares, so no
one does it. Valuations can therefore be sustainably too high -- it's as if
these stocks live in a world of lower gravity

Having an active short market would also enable all kinds of interesting
options trading strategies, and I think smart math-minded people would have a
field day

~~~
tim333
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.

~~~
nemo44x
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.

~~~
dm3
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.

~~~
nemo44x
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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tryptophan
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.

~~~
tim333
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.

~~~
JesseLivermore
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.

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lordnacho
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.

~~~
JesseLivermore
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.

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Nokinside
I understand why Musk don't like short sellers. They diminish his leverage.

Musk has heavily leveraged his TSLA holdings. 40% of his Tesla shares were
collateral for loans as of year-end 2017. TSLA is down 19% from that point.

Leveraging holdings of heavily leveraged company is typical Musk high-risk
gamble. Aiming for the stars even in finance using leverage as a rocket fuel.
Musk is probably using this leverage to fund his other businesses. If TSLA
tanks he may receive margin call and must sell part of his SpaceX stock to
compensate.

edit: TSLA total debt to total equity ratio is 286.29 for the "Musk-Tesla
Inc." that ratio is almost double.

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diminish
So far I have read in various articles why monopolies, competition, rational
actors, irrational actors (for overcoming crisis), long term investors, and
short term sellers are good for the markets.

Are there any actors which are bad for the market?

~~~
fossuser
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).

~~~
illumin8
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 is inevitable: [https://insideevs.com/tesla-short-sellers-
media-crusade/](https://insideevs.com/tesla-short-sellers-media-crusade/)

I wish the SEC would begin to crack down on these abuses. Taking a short
position against a stock is fine, but using your media connections to publish
damaging and in many cases inaccurate stories is libel at best, and fraud at
worse.

~~~
gamblor956
_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/*](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.

~~~
palunon
> 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.

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stephengillie
> _By seeking out overvalued assets, short-sellers help rein in animal spirits
> and prevent bubbles from forming._

Suddenly this article takes an unexpectedly spiritual turn. What are these
"animal spirits" and how do they influence markets? It's reminiscent of the
Animal Spirit Guide that helped Chakotay in Star Trek Voyager[0]

[0] [http://memory-alpha.wikia.com/wiki/The_Cloud_(episode)](http://memory-
alpha.wikia.com/wiki/The_Cloud_\(episode\))

~~~
pg_bot
It is a phrase popularized by the most famous economist of the 20th century,
John Maynard Keynes.

[https://en.wikipedia.org/wiki/Animal_spirits_(Keynes)](https://en.wikipedia.org/wiki/Animal_spirits_\(Keynes\))

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pimmen
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.

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cjbenedikt
[https://alphaarchitect.com/2017/12/18/academic-research-
insi...](https://alphaarchitect.com/2017/12/18/academic-research-insight-
industry-herding-short-sellers-signals-conditions-changing/)

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stephengillie
Shorting a stock is like renting a car for a year - then selling the car, and
still paying rent. At the end of the year, you buy an identical car for a lot
less, and give it back to the car rental company. Cars are fungible in this
example.

~~~
mkagenius
> 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.

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

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

~~~
stephengillie
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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andrewtbham
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...](https://teslamotorsclub.com/tmc/threads/elon-musk-vs-short-
sellers.118431/)

~~~
xiphias2
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).

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joshsyn
Is short selling banned in australia?

~~~
rstuart4133
Short selling is fine. [https://www.bwts.com.au/index.cfm/resources/ask-
colin/569-wh...](https://www.bwts.com.au/index.cfm/resources/ask-
colin/569-why-is-it-not-possible-to-sell-short-on-the-australian-stock-mar/)

Naked short selling is banned in Australia, as it should be everywhere.

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carbocation
This article is not readable even in incognito mode, where it claims that I've
read my share of articles this month. Tried the 'web' option which also had no
effect.

~~~
godelmachine
We need someone to post a paywall-bypass link. I don’t have the means or the
knowledge to find such a link.

~~~
JamieF1
Here you go: [https://outline.com/https://www.economist.com/finance-and-
ec...](https://outline.com/https://www.economist.com/finance-and-
economics/2018/10/13/short-sellers-are-good-for-markets)

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Gitnumb
Short sellers are incentivized to create false rumors and sabotage a a
company's reputation. That's not really good.

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

~~~
romed
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 unlimited upside and the you can only lose
100%.

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

~~~
romed
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...](https://books.google.com/ngrams/graph?content=%22pump+and+dump%22%2C%22short+and+distort%22&year_start=1800&year_end=2000&corpus=15&smoothing=3&share=&direct_url=t1%3B%2C%22%20pump%20and%20dump%20%22%3B%2Cc0)

"Ngram not found: short and distort"

~~~
codewell
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](https://en.wikipedia.org/wiki/Pump_and_dump)
[1]
[https://www.investopedia.com/terms/s/shortanddistort.asp](https://www.investopedia.com/terms/s/shortanddistort.asp)

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cheez
Just remember that many people shorted Netflix early to their detriment.

