3 ms·

Hagiography, maybe. But the notion that shorts kept the market going is just crazy. Short sellers get a bad rap, but if you think about it, shorts are the pins

by T_S_ 16y ago

Hagiography, maybe. But the notion that shorts kept the market going is just crazy. Short sellers get a bad rap, but if you think about it, shorts are the pins we need to pop the bubbles before they get too big. The only problem with shorts, but this is equally true of the longs, is that investment activity is secret and information fails to be spread around; big risks creep into the markets without enough discussion taking place. If markets run on information, our markets are running on fumes. No wonder they sputter a lot.

billjings 16y ago
How is it crazy? A trader takes a short position on CDOs. They find a way to go further with that short position by driving up the amount of toxic debt in the market and betting on that. There's nothing to limit the amount to which they can short the market because they've figured out how to hedge their risk and make a small profit as long as the bubble stays up. That's essentially what many of these hedge funds managed to do. And of course, that's what they're paid to do - they're just good at their jobs. Which is why there's a larger issue at stake here about what constitutes ethical trading behavior in modern markets, and I think this is part of that discussion. It's completely inaccurate to say that short bets are wrong, because as you say, they are so crucial to keeping liquidity in the marketplace. At the same time, to take a position that you know for a fact will drive the bubble up to be larger, to fall harder, well - are you completely irresponsible for the consequences of those trades? When you get right down to it, this is why regulation is necessary. This is why we have referees in sports - nasty behavior is encouraged and necessary in competition, so there needs to be some sort of line to say what is in and outside of the realm of acceptable behavior. And the boundaries of what is and is not acceptable are always changing. Rules aren't static in baseball and football - they change as people figure out how to play within and around them and change strategies.
- yummyfajitas 16y ago
  At the same time, to take a position that you know for a fact will drive the bubble up to be larger, to fall harder... A long position drives prices up and inflates the bubble. A short position lowers prices and lets a little bit of air out of the bubble.
  - billjings 16y ago
    That's not necessarily true in the land of derivatives. A derivative is a bet on the change in value of something. Essentially hedge funds would build a market for a crap asset and then use derivatives to bet that the value would go down. So while the position was short, assembling it drove the bubble up higher.
- deleted 16y ago
  [deleted]
- T_S_ 16y ago
  Don't agree with your understanding of hedge funds and markets. Also, I am in favor of regulation. Just not the kind that gets dished out like bad cafeteria food in this country. I am in favor of big banks listing each and every position for all to see--not just for the cozy Fed or the dozy SEC. Real transparency would allow problems like these to be seen and analyzed by people with the skills to do so--perhaps you yourself. And we don't have to pay such people a cent--just don't shoot them when they don't like the bets others make and take the other side by shorting. I can understand why short sellers who operate with little information get a bad rap. In a market starved of information, it pays to start panics with rumors. Let's add more information to the market so these people can serve some use.
  - billjings 16y ago
    I didn't mean to imply that you were anti-regulation, nor did I intend to come across as attacking your call to transparency - I just disagree with your stance on shorts. No doubt I elaborated a bit too much on the implications of this, but in a concrete, real sense, short positions in the market helped to drive the bubble higher than it would otherwise go. Eventually those positions did "pop" the bubble and bring prices down. AIG was the company sitting on the other side of a lot of those short positions when they finally popped the bubble. Most of my understanding of how these short positions drove the bubble comes from articles like this propublica report: http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going http://www.propublica.org/feature/the-magnetar-trade-how-one.... Any explanation I'd give would just be a summarization of what I've picked up there. I found the case pretty compelling.

by T_S_ 16y ago

billjings 16y ago

How is it crazy? A trader takes a short position on CDOs. They find a way to go further with that short position by driving up the amount of toxic debt in the market and betting on that. There's nothing to limit the amount to which they can short the market because they've figured out how to hedge their risk and make a small profit as long as the bubble stays up. That's essentially what many of these hedge funds managed to do. And of course, that's what they're paid to do - they're just good at their jobs. Which is why there's a larger issue at stake here about what constitutes ethical trading behavior in modern markets, and I think this is part of that discussion. It's completely inaccurate to say that short bets are wrong, because as you say, they are so crucial to keeping liquidity in the marketplace. At the same time, to take a position that you know for a fact will drive the bubble up to be larger, to fall harder, well - are you completely irresponsible for the consequences of those trades? When you get right down to it, this is why regulation is necessary. This is why we have referees in sports - nasty behavior is encouraged and necessary in competition, so there needs to be some sort of line to say what is in and outside of the realm of acceptable behavior. And the boundaries of what is and is not acceptable are always changing. Rules aren't static in baseball and football - they change as people figure out how to play within and around them and change strategies.

yummyfajitas 16y ago
At the same time, to take a position that you know for a fact will drive the bubble up to be larger, to fall harder... A long position drives prices up and inflates the bubble. A short position lowers prices and lets a little bit of air out of the bubble.
- billjings 16y ago
  That's not necessarily true in the land of derivatives. A derivative is a bet on the change in value of something. Essentially hedge funds would build a market for a crap asset and then use derivatives to bet that the value would go down. So while the position was short, assembling it drove the bubble up higher.
deleted 16y ago
[deleted]
T_S_ 16y ago
Don't agree with your understanding of hedge funds and markets. Also, I am in favor of regulation. Just not the kind that gets dished out like bad cafeteria food in this country. I am in favor of big banks listing each and every position for all to see--not just for the cozy Fed or the dozy SEC. Real transparency would allow problems like these to be seen and analyzed by people with the skills to do so--perhaps you yourself. And we don't have to pay such people a cent--just don't shoot them when they don't like the bets others make and take the other side by shorting. I can understand why short sellers who operate with little information get a bad rap. In a market starved of information, it pays to start panics with rumors. Let's add more information to the market so these people can serve some use.
- billjings 16y ago
  I didn't mean to imply that you were anti-regulation, nor did I intend to come across as attacking your call to transparency - I just disagree with your stance on shorts. No doubt I elaborated a bit too much on the implications of this, but in a concrete, real sense, short positions in the market helped to drive the bubble higher than it would otherwise go. Eventually those positions did "pop" the bubble and bring prices down. AIG was the company sitting on the other side of a lot of those short positions when they finally popped the bubble. Most of my understanding of how these short positions drove the bubble comes from articles like this propublica report: http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going http://www.propublica.org/feature/the-magnetar-trade-how-one.... Any explanation I'd give would just be a summarization of what I've picked up there. I found the case pretty compelling.