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Shorting stocks, in general, is a beneficial action for the market because it helps prevent shares from becoming overvalued. I think this situation has actuall

Shorting stocks, in general, is a beneficial action for the market because it helps prevent shares from becoming overvalued. I think this situation has actually highlighted the fact that shorting stocks needs to be easier. Currently, it's too easy to purposefully trigger a short squeeze. With the goal of efficient prices in mind, short squeezes are bad, and enabling shorting is good.

jMyles 6y ago
> With the goal of efficient prices in mind, short squeezes are bad, and enabling shorting is good. Yeah? Aren't they equally useful as market messages? If I am willing to tie up some money holding an instrument afloat at overvalued prices longer than you are willing to remain in your short position, haven't we ultimately, together in our conflict, created a useful message about the underlying asset? Maybe I think Company G is worth $20 but not $40, but if you are selling it short at $5, and I'm prepared to be illiquid for a while, don't I send the correct market signal by squeezing you out of your short?
- Hamuko 6y ago
  >If I am willing to tie up some money holding an instrument afloat at overvalued prices longer than you are willing to remain in your short position, haven't we ultimately, together in our conflict, created a useful message about the underlying asset? I'd say it really only sends a message about your assets.
- fairity 6y ago
  > Maybe I think Company G is worth $20 but not $40, but if you are selling it short at $5, and I'm prepared to be illiquid for a while, don't I send the correct market signal by squeezing you out of your short? In this example, you'd be sending the "correct market signal" if you sold your shares as soon as it appreciated to $20. Anything more, and you're moving the market away from its efficient price. The problem with the squeeze is that certain participants are put into a position where they're being forced to buy. And, that creates an incentive for other shareholders to hold onto their shares well past their fair value. Holding onto shares well past their fair value is antithetical to efficient price discovery.
  - jMyles 6y ago
    > In this example, you'd be sending the "correct market signal" if you sold your shares as soon as it appreciated to $20. Anything more, and you're moving the market away from its efficient price. Is that true? Isn't anything above that price a 'reward' for being correct? And isn't that part of the signal according to a perfect information paradigm?
    - fairity 6y ago
      Well, it's definitely a reward. But as I mentioned in my last reply, it's rewarding the wrong behavior if our goal is efficient price discovery.
      - jMyles 6y ago
        I don't see how; it creates a disincentive to take short positions which are too low (good for price discovery) and provides a reward for discovering and outing them (good for price discovery).
  - midasuni 6y ago
    S and P is up 15% on its precovid levels while 20% of the poorest quintile in America are unemployed. That’s the only thing unethical here.
    - fairity 6y ago
      Assuming the index is priced correctly, the fact that SPY is up 20% means the net present value of future cash flows for the largest companies on the exchange have increased through covid. In and of itself, there’s nothing unethical about that. Unless you’re claiming they’re maliciously profiting off the backs of the unemployed? Would be interested in any evidence of that.
postalrat 6y ago
I hear that argument then I heard the argument that short selling doesn't reduce the price.
- fairity 6y ago
  The process of shorting involves selling shares now with the intent of buying shares later. Price will drop in the near term bc you're increasing supply. In theory, without short selling, the market would still eventually arrive at the correct price, but short selling expedites the process.
- threedots 6y ago
  It does reduce prices because it increases the supply of available shares, it's just that reducing prices isn't necessarily a bad thing. We want the prices of bad things (e.g. frauds) to go down and more generally we want prices to reflect reality which happens more effectively when informed investors can express negative views through shorting.
  - notahacker 6y ago
    It's worth adding the qualifier that increasing the supply of available shares need not reduce prices at all if there is enough demand to buy shares at the original price (which there should be if the price is definitely correct and the market is efficient enough). Even without perfectly efficient markets the shorters don't make money if enough other market participants think they're wrong
    - Dylan16807 6y ago
      > if there is enough demand to buy shares at the original price (which there should be if the price is definitely correct and the market is efficient enough) That's true in a weird abstract "perfectly efficient" world where nobody has to buy or sell stocks except for liquidity, and we all just know the correct price. The normal model of the market posits that different people have different biases and scraps of information, and we use buying and selling to find the "correct" price. Under that model, selling will always reduce the price compared to what it would have been.
jandrese 6y ago
The second order effects are problematic though. Someone shorting a stock has an incentive to see a company fail. Sometimes people will put out rumors or even go on fiance shows talking about how poorly run some company is. Maybe they make a discreet call to their buddy at the ratings agency and have them downgraded a step. If the market's stated purpose is to help companies find the capital they need to succeed, then short sellers run counter to that purpose. If however the purpose of the market is to be a big game for people with huge amounts of mostly virtual currency to gamble with then short selling is a vital instrument. One problem with the market is that value is not based on what a company is worth, it is based on what investors think it might be worth in the future, which is largely just a guess. So the whole thing becomes divorced from reality while investors play games with each other to try to make the numbers go up as fast as possible.
- kansface 6y ago
  > Someone shorting a stock has an incentive to see a company fail. How is that incentive any different than the incentives of someone taking the opposite position: > Sometimes people will put out rumors or even go on fiance shows talking about how ~poorly~ well run some company is.
- valuearb 6y ago
  The stock markets purpose isn’t to help companies find money, that Pr spin. It’s to help investors invest their monies more cheaply and safely. The side effect is that companies get cheaper access to investment funds. Without short sellers frauds would be even more prevalent, investor costs would be higher and companies would raise less money. If you have a solvent company brought down by a short seller, you never had a solvent company. And value != price. True investors like Buffett don’t really mind the casino aspect, because volatility creates opportunities when value diverges far from price.
- jcranmer 6y ago
  > Sometimes people will put out rumors or even go on fiance shows talking about how poorly run some company is. Maybe they make a discreet call to their buddy at the ratings agency and have them downgraded a step. Some people buy a stock, and then put out rumors or even go on finance shows talking about how great this company is and how its stock is undervalued. And then sell it at the peak, leaving others holding the bag. Yet people don't run around saying that we should ban people from being able to buy stock because of that. Both the scenarios (the one you describe and the one I describe) are illegal market manipulation. Sure, I would not be surprised if market manipulation of the short side were vastly underprosecuted, but I don't think that's a reason to complain about short selling per se.

jMyles 6y ago

> With the goal of efficient prices in mind, short squeezes are bad, and enabling shorting is good. Yeah? Aren't they equally useful as market messages? If I am willing to tie up some money holding an instrument afloat at overvalued prices longer than you are willing to remain in your short position, haven't we ultimately, together in our conflict, created a useful message about the underlying asset? Maybe I think Company G is worth $20 but not $40, but if you are selling it short at $5, and I'm prepared to be illiquid for a while, don't I send the correct market signal by squeezing you out of your short?

Hamuko 6y ago
>If I am willing to tie up some money holding an instrument afloat at overvalued prices longer than you are willing to remain in your short position, haven't we ultimately, together in our conflict, created a useful message about the underlying asset? I'd say it really only sends a message about your assets.
fairity 6y ago
> Maybe I think Company G is worth $20 but not $40, but if you are selling it short at $5, and I'm prepared to be illiquid for a while, don't I send the correct market signal by squeezing you out of your short? In this example, you'd be sending the "correct market signal" if you sold your shares as soon as it appreciated to $20. Anything more, and you're moving the market away from its efficient price. The problem with the squeeze is that certain participants are put into a position where they're being forced to buy. And, that creates an incentive for other shareholders to hold onto their shares well past their fair value. Holding onto shares well past their fair value is antithetical to efficient price discovery.
- jMyles 6y ago
  > In this example, you'd be sending the "correct market signal" if you sold your shares as soon as it appreciated to $20. Anything more, and you're moving the market away from its efficient price. Is that true? Isn't anything above that price a 'reward' for being correct? And isn't that part of the signal according to a perfect information paradigm?
  - fairity 6y ago
    Well, it's definitely a reward. But as I mentioned in my last reply, it's rewarding the wrong behavior if our goal is efficient price discovery.
    - jMyles 6y ago
      I don't see how; it creates a disincentive to take short positions which are too low (good for price discovery) and provides a reward for discovering and outing them (good for price discovery).
- midasuni 6y ago
  S and P is up 15% on its precovid levels while 20% of the poorest quintile in America are unemployed. That’s the only thing unethical here.
  - fairity 6y ago
    Assuming the index is priced correctly, the fact that SPY is up 20% means the net present value of future cash flows for the largest companies on the exchange have increased through covid. In and of itself, there’s nothing unethical about that. Unless you’re claiming they’re maliciously profiting off the backs of the unemployed? Would be interested in any evidence of that.

postalrat 6y ago

I hear that argument then I heard the argument that short selling doesn't reduce the price.

fairity 6y ago
The process of shorting involves selling shares now with the intent of buying shares later. Price will drop in the near term bc you're increasing supply. In theory, without short selling, the market would still eventually arrive at the correct price, but short selling expedites the process.
threedots 6y ago
It does reduce prices because it increases the supply of available shares, it's just that reducing prices isn't necessarily a bad thing. We want the prices of bad things (e.g. frauds) to go down and more generally we want prices to reflect reality which happens more effectively when informed investors can express negative views through shorting.
- notahacker 6y ago
  It's worth adding the qualifier that increasing the supply of available shares need not reduce prices at all if there is enough demand to buy shares at the original price (which there should be if the price is definitely correct and the market is efficient enough). Even without perfectly efficient markets the shorters don't make money if enough other market participants think they're wrong
  - Dylan16807 6y ago
    > if there is enough demand to buy shares at the original price (which there should be if the price is definitely correct and the market is efficient enough) That's true in a weird abstract "perfectly efficient" world where nobody has to buy or sell stocks except for liquidity, and we all just know the correct price. The normal model of the market posits that different people have different biases and scraps of information, and we use buying and selling to find the "correct" price. Under that model, selling will always reduce the price compared to what it would have been.

jandrese 6y ago

The second order effects are problematic though. Someone shorting a stock has an incentive to see a company fail. Sometimes people will put out rumors or even go on fiance shows talking about how poorly run some company is. Maybe they make a discreet call to their buddy at the ratings agency and have them downgraded a step. If the market's stated purpose is to help companies find the capital they need to succeed, then short sellers run counter to that purpose. If however the purpose of the market is to be a big game for people with huge amounts of mostly virtual currency to gamble with then short selling is a vital instrument. One problem with the market is that value is not based on what a company is worth, it is based on what investors think it might be worth in the future, which is largely just a guess. So the whole thing becomes divorced from reality while investors play games with each other to try to make the numbers go up as fast as possible.

kansface 6y ago
> Someone shorting a stock has an incentive to see a company fail. How is that incentive any different than the incentives of someone taking the opposite position: > Sometimes people will put out rumors or even go on fiance shows talking about how ~poorly~ well run some company is.
valuearb 6y ago
The stock markets purpose isn’t to help companies find money, that Pr spin. It’s to help investors invest their monies more cheaply and safely. The side effect is that companies get cheaper access to investment funds. Without short sellers frauds would be even more prevalent, investor costs would be higher and companies would raise less money. If you have a solvent company brought down by a short seller, you never had a solvent company. And value != price. True investors like Buffett don’t really mind the casino aspect, because volatility creates opportunities when value diverges far from price.
jcranmer 6y ago
> Sometimes people will put out rumors or even go on fiance shows talking about how poorly run some company is. Maybe they make a discreet call to their buddy at the ratings agency and have them downgraded a step. Some people buy a stock, and then put out rumors or even go on finance shows talking about how great this company is and how its stock is undervalued. And then sell it at the peak, leaving others holding the bag. Yet people don't run around saying that we should ban people from being able to buy stock because of that. Both the scenarios (the one you describe and the one I describe) are illegal market manipulation. Sure, I would not be surprised if market manipulation of the short side were vastly underprosecuted, but I don't think that's a reason to complain about short selling per se.