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Wow, it seems like none of the top commenters here have put in at least minimal effort to read and understand this. The author does not complain about short se

by rsp1984 6y ago

Wow, it seems like none of the top commenters here have put in at least minimal effort to read and understand this. The author does not complain about short sellers per se or about the fact that more than 100% of a stock's float can be shorted. That is all nice and fine. Instead what the author does complain about is that fact that the (supposedly regulated) mechanisms for shorting a stock are fraught with loopholes and exceptions that make it possible for brokers and the DTC to create stocks "out of thin air" for the short sellers and never neutralize. This dilutes the company's stock in the process and thereby damages the company's shareholders. It is an issue that, if true, should absolutely be brought to public and regulator's attention.

neffy 6y ago
Can only agree. There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short, and there aren't enough shares available. It really is that simple. While this doesn't mean a price of infinity, since price is also constrained by the available money for the purchase, in reality this then becomes a liquidity trap which is guaranteed to bankrupt the least liquid short sellers until enough positions have gone under to bring the short position down under the float size. So whilst some flexibility may make sense to resolve some of the buffering issues with settling, if that is being deliberately exploited as claimed in the article, that is a huge regulatory problem.
- dcolkitt 6y ago
  > There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short The point of a naked short system is that short sellers never need to cover their positions. Naked shorting allows any credit worthy institution to create synthetic shares as long as they continue to pay the dividends. That’s what makes it IMO a superior system. It eliminates the disruptive problem of short squeezes. Shorts can never get recalled, because they’re simply synthetic cash flow streams. Overall we want more short selling in the market, and therefore want to remove as many constraints to short selling as possible. Short selling improves price efficiency[1], increases liquidity[2], reduces corporate fraud[3], and helps protect against speculative bubbles[4] [1] https://academic.oup.com/rfs/article-abstract/24/3/821/1590469 https://academic.oup.com/rfs/article-abstract/24/3/821/15904... [2] https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenceofShortSellingRestrictions.pdf https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenc... [3] https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [4] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2006.00868.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261....
  - alisonkisk 6y ago
    It also bankrupts viable businesses, when there is more short speculation than long speculation.
    - nradov 6y ago
      No that's false. Short selling a stock doesn't reduce the business's assets (except for treasury stock) or increase it's liabilities. Even if theoretically short sellers drove the $GME share price to zero the GameStop business would still exist.
      - felipeko 6y ago
        But it will make it more expensive than otherwise to raise capital. That can make or break any company.
      - snarf21 6y ago
        It could also make it harder to attract talent if compensation includes stock options.
  - kgwgk 6y ago
    > That’s what makes it IMO a superior system. Wouldn't you want to know if what you bought are actually, say, AAPL shares or "synthetic shares"? An AAPL share will always be worth an AAPL share. What can you say about those "synthetic shares"?
    - dcolkitt 6y ago
      The point is that the value of AAPL is just the value of its future dividends. As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. The biggest asterisk is hand waving away the credit worthiness of the synthetic issuer. But this is a solved problem. We have plenty of derivative markets, where a counterparty guarantees some cash flow related to an underlying security. You just use central clearing houses and set reasonable margin. Nobody worries about whether their options will actually payoff or if their futures contract will default.
wpietri 6y ago
That isn't correct. He complains in incredibly hyperbolic terms about short-selling in general. For example, "It is important to understand that selling a stock short is not an investment in American enterprise. [...] A successful short manipulation takes money from investment in American enterprise and diverts it to feed Wall Street's insatiable greed—the company that was attacked is worse off and the investing public has lost money. [...] This national disgrace is a parasite on the greatest capital market in the world." The tone of this is just short of complaining about "the international Communist conspiracy to sap and impurify all of our precious bodily fluids". But what they say is all exactly true of all speculation, short and long. The only thing that's actually an "investment in American enterprise" is buying new shares in a public offering. The rest is just gambling on the outcome to "feed Wall Street's insatiable greed". Indeed, one could argue, as short-sellers do, that unchecked positive hype is more damaging to market participants, because it obscures the underlying value of a instrument causing people to overpay. When people buy something overvalued, they've already lost money; they just don't know it yet. Shorting helps keep those dastardly long-sellers in check, keeping them from stealing the hard-earned money of retail investors everywhere. If shorts manage to momentarily drive a price down below the intrinsic value, why they've just created a bargain for savvy investors. They are in fact doing a public service that otherwise would have to be performed by intrusive regulators. Etc, etc. I think the truth lies between. Speculation, short and long, is economically valuable because it aids in price discovery, creating a liquid market so that actual investors in a company can exit, freeing up capital for further new investment. One could argue (and I often do) that we have way more speculation than we need to fill that economic purpose. But complaining bitterly about just the skeptical side of that speculation is like arguing that Hacker News should only allow positive comments about startups.
- mrmino 6y ago
  The technicality of there being lackluster oversight of naked short selling which may lead to creating a share out of thin air is still true. Who cares about the tone? It's f**ing dumb.
  - wpietri 6y ago
    Ah yes, the brand new account coming to swear at people with POVs he doesn't like. You seem like a great person to take advice about tone from. But the reason to care is the same in both cases: people with good points generally don't need to cover them up in a lot of bonkers language.
thetanil 6y ago
I had to go way to far down in the page to find someone who actually read it.
deleted 6y ago
[deleted]
bo1024 6y ago
Yes and thank you for calling it out! I had hoped for much deeper discussion.

neffy 6y ago

Can only agree. There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short, and there aren't enough shares available. It really is that simple. While this doesn't mean a price of infinity, since price is also constrained by the available money for the purchase, in reality this then becomes a liquidity trap which is guaranteed to bankrupt the least liquid short sellers until enough positions have gone under to bring the short position down under the float size. So whilst some flexibility may make sense to resolve some of the buffering issues with settling, if that is being deliberately exploited as claimed in the article, that is a huge regulatory problem.

dcolkitt 6y ago
> There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short The point of a naked short system is that short sellers never need to cover their positions. Naked shorting allows any credit worthy institution to create synthetic shares as long as they continue to pay the dividends. That’s what makes it IMO a superior system. It eliminates the disruptive problem of short squeezes. Shorts can never get recalled, because they’re simply synthetic cash flow streams. Overall we want more short selling in the market, and therefore want to remove as many constraints to short selling as possible. Short selling improves price efficiency[1], increases liquidity[2], reduces corporate fraud[3], and helps protect against speculative bubbles[4] [1] https://academic.oup.com/rfs/article-abstract/24/3/821/1590469 https://academic.oup.com/rfs/article-abstract/24/3/821/15904... [2] https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenceofShortSellingRestrictions.pdf https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenc... [3] https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [4] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2006.00868.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261....
- alisonkisk 6y ago
  It also bankrupts viable businesses, when there is more short speculation than long speculation.
  - nradov 6y ago
    No that's false. Short selling a stock doesn't reduce the business's assets (except for treasury stock) or increase it's liabilities. Even if theoretically short sellers drove the $GME share price to zero the GameStop business would still exist.
    - felipeko 6y ago
      But it will make it more expensive than otherwise to raise capital. That can make or break any company.
    - snarf21 6y ago
      It could also make it harder to attract talent if compensation includes stock options.
- kgwgk 6y ago
  > That’s what makes it IMO a superior system. Wouldn't you want to know if what you bought are actually, say, AAPL shares or "synthetic shares"? An AAPL share will always be worth an AAPL share. What can you say about those "synthetic shares"?
  - dcolkitt 6y ago
    The point is that the value of AAPL is just the value of its future dividends. As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. The biggest asterisk is hand waving away the credit worthiness of the synthetic issuer. But this is a solved problem. We have plenty of derivative markets, where a counterparty guarantees some cash flow related to an underlying security. You just use central clearing houses and set reasonable margin. Nobody worries about whether their options will actually payoff or if their futures contract will default.

wpietri 6y ago

That isn't correct. He complains in incredibly hyperbolic terms about short-selling in general. For example, "It is important to understand that selling a stock short is not an investment in American enterprise. [...] A successful short manipulation takes money from investment in American enterprise and diverts it to feed Wall Street's insatiable greed—the company that was attacked is worse off and the investing public has lost money. [...] This national disgrace is a parasite on the greatest capital market in the world." The tone of this is just short of complaining about "the international Communist conspiracy to sap and impurify all of our precious bodily fluids". But what they say is all exactly true of all speculation, short and long. The only thing that's actually an "investment in American enterprise" is buying new shares in a public offering. The rest is just gambling on the outcome to "feed Wall Street's insatiable greed". Indeed, one could argue, as short-sellers do, that unchecked positive hype is more damaging to market participants, because it obscures the underlying value of a instrument causing people to overpay. When people buy something overvalued, they've already lost money; they just don't know it yet. Shorting helps keep those dastardly long-sellers in check, keeping them from stealing the hard-earned money of retail investors everywhere. If shorts manage to momentarily drive a price down below the intrinsic value, why they've just created a bargain for savvy investors. They are in fact doing a public service that otherwise would have to be performed by intrusive regulators. Etc, etc. I think the truth lies between. Speculation, short and long, is economically valuable because it aids in price discovery, creating a liquid market so that actual investors in a company can exit, freeing up capital for further new investment. One could argue (and I often do) that we have way more speculation than we need to fill that economic purpose. But complaining bitterly about just the skeptical side of that speculation is like arguing that Hacker News should only allow positive comments about startups.

mrmino 6y ago
The technicality of there being lackluster oversight of naked short selling which may lead to creating a share out of thin air is still true. Who cares about the tone? It's f**ing dumb.
- wpietri 6y ago
  Ah yes, the brand new account coming to swear at people with POVs he doesn't like. You seem like a great person to take advice about tone from. But the reason to care is the same in both cases: people with good points generally don't need to cover them up in a lot of bonkers language.

thetanil 6y ago

I had to go way to far down in the page to find someone who actually read it.

deleted 6y ago

[deleted]

bo1024 6y ago

Yes and thank you for calling it out! I had hoped for much deeper discussion.