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> The issue is that you can short any high risk high reward play and make money if they fail Or (as a short) you can lose massive amounts of money if they're i

> The issue is that you can short any high risk high reward play and make money if they fail Or (as a short) you can lose massive amounts of money if they're incredibly successful - in fact, your losses are actually uncapped. And anyway, that seems like a good thing - there should be a force tempering high risk endeavors. > But then enough shorting can cause them to fail, because it makes it more difficult to raise money by selling new shares or using shares as collateral. That sounds like a good thing. If your company has an appreciable amount of short interest the likely reason is that the company's overvalued, not that Jim Chanos is colluding with Andrew Left and Bill Ackman just to bring down your company and profit off your failure. Further, I don't know that I've ever seen a mid+ cap company take any sort of significant hit from short interest where there was nothing to substantiate the short's claims, and there have been plenty of inverse situations (companies growing in value even when there were substantial issues brought to light by a short seller). EDIT: Actually I take that back, I have seen some - because the SEC brought fraud charges against them. It's the short version of P&D and it's just as illegal. > And causing a large undertaking to fail when it otherwise wouldn't have is obviously not efficient. On the flip side, causing a large undertaking to fail faster when it was doomed from the beginning is obviously more efficient. > It also increases volatility because on one side the existence of the shorts makes the company more likely to fail Many people are worried that volatility is too low these days (thus why Feb was such a big deal), so I'm not sure that's a great argument.

AnthonyMouse 8y ago
> And anyway, that seems like a good thing - there should be a force tempering high risk endeavors. The point is that it does the opposite. Suppose you have a high risk company with a million shares and a would-be share price of $1000, but 20% of the shares are shorted so the share price is $900. Now if the company fails, the total losses to the actual shareholders are 8% higher even though the price per share was lower because there are de facto more shares in existence. Meanwhile if the company succeeds, the shareholders make significantly more, because there are de facto 20% more shares in existence and the shareholders paid $900 each instead of $1000, with the shorts having to pay the difference. Which is why the total (e.g. $900 times 1.2M instead of $1000 times 1M) is more -- because it's attracting more total investment into the stock by having the shorts reduce the cost of buying shares today and then heavily subsidize potential gains tomorrow. > If your company has an appreciable amount of short interest the likely reason is that the company's overvalued, not that Jim Chanos is colluding with Andrew Left and Bill Ackman just to bring down your company and profit off your failure. Haven't they tended on average to lose money on shorting? > On the flip side, causing a large undertaking to fail faster when it was doomed from the beginning is obviously more efficient. True in theory, but is that actually what happens? Large companies rarely do anything fast. Even when the shorts are right, it's usually months or years before it all shakes out. And as above, when they're right what they're really doing is increasing total third party exposure to the loss. > Many people are worried that volatility is too low these days (thus why Feb was such a big deal), so I'm not sure that's a great argument. People are worried about volatility as an indicator, not because it's a good in its own right that society benefits from creating artificially.
- MR4D 8y ago
  Maybe the right answer is that high risk companies should not be public. If you take the notion of “ongoing concern”, then there is a good argument for this thinking. I have no problem with high risk firms being shorted. Too many times they should not have gone public.
- wgerard 8y ago
  > there are de facto more shares in existence. > because there are de facto 20% more shares in existence Sorry, what? Am I misunderstanding you? How does short selling increase outstanding shares? It's hard to parse the rest of this given what seems like a grave oversight. Once you borrow the shares from firm A and sell them to person B, person B is the holder of record for those shares now. Firm A doesn't own them anymore - that's why you have to pay out company dividends to firm A from your own pocket while you're borrowing them. Regardless of how they track their positions, the only thing firm A owns is an obligation from you to give them shares back at some point. There's no change in the number of outstanding shares. Or are you talking about naked shorting? Because that's been illegal since 2008 (regardless of whether it still occurs). > People are worried about volatility as an indicator, not because it's a good in its own right that society benefits from creating artificially. Well, for one: People are worried that volatility has become a good in its own right - hence the famous "Volatility has become a player on the field" quote and why the $XIV delisting was such a big deal. For two: You said that short selling increased volatility. I said volatility is really low, to the point that some people are concerned it's too low. Clearly, short selling hasn't had a major impact on volatility.
  - AnthonyMouse 8y ago
    > Sorry, what? Am I misunderstanding you? How does short selling increase outstanding shares? Selling short requires borrowing shares. It's the same way that banks create money. There were 1000 shares, then 200 more were borrowed and resold. The buyer of the 200 shares have shares, so in practice does the original lender who is owed a share by the short seller. The IOU isn't technically a share but for most practical purposes it is. If you want to sell it, it's worth a share. If the share price goes up or down, so does the IOU price. If the share price gains $1, the owner and the lender make $1 each. If it falls $1, they each lose $1. > Firm A doesn't own them anymore - that's why you have to pay out company dividends to firm A from your own pocket while you're borrowing them. Right, which is why it acts like another share again -- the original dividend is paid to the person the short seller sold the share to but the lender still gets it too. There are de facto two dividends because there are de facto two shares. There are actual differences of course (e.g. IOUs can't vote), but for questions of exposure to price fluctuations and that sort of thing, it's effectively creating a new share.

AnthonyMouse 8y ago

> And anyway, that seems like a good thing - there should be a force tempering high risk endeavors. The point is that it does the opposite. Suppose you have a high risk company with a million shares and a would-be share price of $1000, but 20% of the shares are shorted so the share price is $900. Now if the company fails, the total losses to the actual shareholders are 8% higher even though the price per share was lower because there are de facto more shares in existence. Meanwhile if the company succeeds, the shareholders make significantly more, because there are de facto 20% more shares in existence and the shareholders paid $900 each instead of $1000, with the shorts having to pay the difference. Which is why the total (e.g. $900 times 1.2M instead of $1000 times 1M) is more -- because it's attracting more total investment into the stock by having the shorts reduce the cost of buying shares today and then heavily subsidize potential gains tomorrow. > If your company has an appreciable amount of short interest the likely reason is that the company's overvalued, not that Jim Chanos is colluding with Andrew Left and Bill Ackman just to bring down your company and profit off your failure. Haven't they tended on average to lose money on shorting? > On the flip side, causing a large undertaking to fail faster when it was doomed from the beginning is obviously more efficient. True in theory, but is that actually what happens? Large companies rarely do anything fast. Even when the shorts are right, it's usually months or years before it all shakes out. And as above, when they're right what they're really doing is increasing total third party exposure to the loss. > Many people are worried that volatility is too low these days (thus why Feb was such a big deal), so I'm not sure that's a great argument. People are worried about volatility as an indicator, not because it's a good in its own right that society benefits from creating artificially.

MR4D 8y ago
Maybe the right answer is that high risk companies should not be public. If you take the notion of “ongoing concern”, then there is a good argument for this thinking. I have no problem with high risk firms being shorted. Too many times they should not have gone public.
wgerard 8y ago
> there are de facto more shares in existence. > because there are de facto 20% more shares in existence Sorry, what? Am I misunderstanding you? How does short selling increase outstanding shares? It's hard to parse the rest of this given what seems like a grave oversight. Once you borrow the shares from firm A and sell them to person B, person B is the holder of record for those shares now. Firm A doesn't own them anymore - that's why you have to pay out company dividends to firm A from your own pocket while you're borrowing them. Regardless of how they track their positions, the only thing firm A owns is an obligation from you to give them shares back at some point. There's no change in the number of outstanding shares. Or are you talking about naked shorting? Because that's been illegal since 2008 (regardless of whether it still occurs). > People are worried about volatility as an indicator, not because it's a good in its own right that society benefits from creating artificially. Well, for one: People are worried that volatility has become a good in its own right - hence the famous "Volatility has become a player on the field" quote and why the $XIV delisting was such a big deal. For two: You said that short selling increased volatility. I said volatility is really low, to the point that some people are concerned it's too low. Clearly, short selling hasn't had a major impact on volatility.
- AnthonyMouse 8y ago
  > Sorry, what? Am I misunderstanding you? How does short selling increase outstanding shares? Selling short requires borrowing shares. It's the same way that banks create money. There were 1000 shares, then 200 more were borrowed and resold. The buyer of the 200 shares have shares, so in practice does the original lender who is owed a share by the short seller. The IOU isn't technically a share but for most practical purposes it is. If you want to sell it, it's worth a share. If the share price goes up or down, so does the IOU price. If the share price gains $1, the owner and the lender make $1 each. If it falls $1, they each lose $1. > Firm A doesn't own them anymore - that's why you have to pay out company dividends to firm A from your own pocket while you're borrowing them. Right, which is why it acts like another share again -- the original dividend is paid to the person the short seller sold the share to but the lender still gets it too. There are de facto two dividends because there are de facto two shares. There are actual differences of course (e.g. IOUs can't vote), but for questions of exposure to price fluctuations and that sort of thing, it's effectively creating a new share.