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Something that the article did not mention: Short sellers reduce volatility and lead to smaller drops. Why? Because having shorters guarantees that you will ha

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.

anilshanbhag 8y ago
This is not true. Highly shorted stocks are some of the most volatile ones. Anyone can buy a stock that is falling, most stocks have little short interest (<10%) meaning volume when stock going up or down is most people buying or selling down their long position.
- Nokinside 8y ago
  > Highly shorted stocks are some of the most volatile ones. I'm not convinced by this argument. * Is the volatility caused by short selling or does volatility attract short sellers? * Is it possible that short selling is actually reducing the volatility of very volatile stock? Australia banned short selling after financial crisis. The result was increased volatility in stocks, less trade and larger spreads.
  - tim333 8y ago
    Also if you look at the price graph for Tesla it's been kind of flat for the last 5 years with the price around $200-300 give or take.
- wdn 8y ago
  This is true. You can verify this yourself by owning a high growth, non-shortable, thinly traded stock (less than 200,000 shares traded a day). On a bad news release (such as earning) or just a bad sell off day such as Wednesday, you will how bad the slippage is on your protected stopped. For example, you own XYZ and it was at $25 at the close on Friday. There was a bad release over the weekend and the price is going to be opened at $21 on Monday morning. You have your protected stop at $20. You would think you would get out at $20 give or take 10 cents for slippage. But when your received your filled report, you see it was filled at $17. What happened is there is 0 buyer and everyone just want to get out. If there were short shorters, they would come in at market open to book some profits by buying back the share they have shorted.
tim333 8y ago
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 8y ago
  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.
- tryptophan 8y ago
  Just because the price of something drops doesn't make it a "value stock" for value investors to buy.
Nokinside 8y ago
Short selling is generally good. The negative reputation comes mainly from the cases where short selling is used for market manipulation like coordinated bear raids. If the market regulators are awake, this should not be a reason to oppose short selling in general.

anilshanbhag 8y ago

This is not true. Highly shorted stocks are some of the most volatile ones. Anyone can buy a stock that is falling, most stocks have little short interest (<10%) meaning volume when stock going up or down is most people buying or selling down their long position.

Nokinside 8y ago
> Highly shorted stocks are some of the most volatile ones. I'm not convinced by this argument. * Is the volatility caused by short selling or does volatility attract short sellers? * Is it possible that short selling is actually reducing the volatility of very volatile stock? Australia banned short selling after financial crisis. The result was increased volatility in stocks, less trade and larger spreads.
- tim333 8y ago
  Also if you look at the price graph for Tesla it's been kind of flat for the last 5 years with the price around $200-300 give or take.
wdn 8y ago
This is true. You can verify this yourself by owning a high growth, non-shortable, thinly traded stock (less than 200,000 shares traded a day). On a bad news release (such as earning) or just a bad sell off day such as Wednesday, you will how bad the slippage is on your protected stopped. For example, you own XYZ and it was at $25 at the close on Friday. There was a bad release over the weekend and the price is going to be opened at $21 on Monday morning. You have your protected stop at $20. You would think you would get out at $20 give or take 10 cents for slippage. But when your received your filled report, you see it was filled at $17. What happened is there is 0 buyer and everyone just want to get out. If there were short shorters, they would come in at market open to book some profits by buying back the share they have shorted.

tim333 8y ago

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 8y ago
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.
tryptophan 8y ago
Just because the price of something drops doesn't make it a "value stock" for value investors to buy.

Nokinside 8y ago

Short selling is generally good. The negative reputation comes mainly from the cases where short selling is used for market manipulation like coordinated bear raids. If the market regulators are awake, this should not be a reason to oppose short selling in general.