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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, th

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.

kgwgk 6y ago
> As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. No, the stream of dividends doesn't have identical value. There are other relevant corporate actions. Shares can vote, your stream of dividends cannot vote. If the company spins-off a segment it may distribute shares of the new company to shareholders while the owners of that third-party stream of dividends won't get anything. If someone wants to acquire the company they will make an offer to buy outstanding shares, they won't care at all about those syntethic streams of dividends. In general, if you want to sell a delta-one derivative that's fine. But you cannot sell that to someone who wants to buy a stock! Would you want to be delivered a derivative when you bought a share in the market? That wouldn't be shorting the stock, it would be selling something else. Related but far from identical.
- dcolkitt 6y ago
  Those are all great points, but IMO not really that difficult to handle. > If the company spins-off a segment A spinoff is just a divided in the form of stock in the new segment. This is easy to handle. The short is now simply short both one share of the original and one share of the spinoff. The long now owns synthetic shares in both. > If someone wants to acquire the company An acquisition is just a one-time terminal dividend to the company. In a cash acquisition the short owes the long the value paid for the stock. In a stock acquisition the short is now short the equivalent shares of the acquiring company. > Shares can vote, your stream of dividends cannot vote. This is the biggest wrinkle. But it basically still exists even in the current system. If a stock has short interest of 50%, then there's 150 shares held long for every 100 shares of float. In practice it's not really that big a deal because 99% of investors just vote the proxy. At voting time, some investors will find they own synthetics and some will find they own originals. Just the same as today some will find their stocks on loan, and they can't vote. It doesn't really seem to make a difference. IMO I think a requirement for public listing should be letting all beneficial owners, including those who own synthetic shares/have shares on loan. I think if anything it strengthens corporate governance, by avoiding voting rights shenanigans. The two classes have equal interest in setting the company perform well.
  - kgwgk 6y ago
    > Shares can vote, your stream of dividends cannot vote. This is the biggest wrinkle. But it basically still exists even in the current system. If a stock has short interest of 50%, then there's 150 shares held long for every 100 shares of float. In the "current system" there is no problem at all. Those who lent out their shares cannot vote.
  - kgwgk 6y ago
    > not really that difficult to handle. Sure, you can write a contract detailing all the possibilities. Maybe even get those derivatives listed. But you could be doing that already! I'm not sure what are you proposing that should replace "the current system". Do you suggest that when you buy a share of J&J or whatever, and pay the price of a share of J&J, you may find later that what you got is a derivative product issued by "I can't believe it's not stock! Ltd"?
dhruvdh 6y ago
> The point is that the value of AAPL is just the value of its future dividends This is simply not true at all. Like anything that can be bought and sold shares derive their value from supply and demand.
- dcolkitt 6y ago
  The demand for shares is the demand for its discounted future cash flows. No rational investor buys for any other reason.
  - dhruvdh 6y ago
    Okay, for anyone who agrees with you on this the price of shares are predominantly decided by irrational investors. And in a market where price of shares are predominantly decided by irrational investors, none of your purported benefits apply.
    - dcolkitt 6y ago
      That's the point. Short selling acts as a tax on irrational investors. That's why short selling is linked to a reduction in speculative[1], corporate fraud[2], and price inefficiency[3]. It makes the market more rational, by driving irrational investors out of the market. [1]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.... [2]https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [3]https://academic.oup.com/rfs/article-abstract/26/2/287/1581906 https://academic.oup.com/rfs/article-abstract/26/2/287/15819...
      - dhruvdh 6y ago
        Again, you are living in a textbook. See the real-world effects of short selling on TSLA, and all the irrational investors that made bank on the same. If irrational investors are being driven out why is there an evident trend of increasingly irrational stock prices over time?

kgwgk 6y ago

> As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. No, the stream of dividends doesn't have identical value. There are other relevant corporate actions. Shares can vote, your stream of dividends cannot vote. If the company spins-off a segment it may distribute shares of the new company to shareholders while the owners of that third-party stream of dividends won't get anything. If someone wants to acquire the company they will make an offer to buy outstanding shares, they won't care at all about those syntethic streams of dividends. In general, if you want to sell a delta-one derivative that's fine. But you cannot sell that to someone who wants to buy a stock! Would you want to be delivered a derivative when you bought a share in the market? That wouldn't be shorting the stock, it would be selling something else. Related but far from identical.

dcolkitt 6y ago
Those are all great points, but IMO not really that difficult to handle. > If the company spins-off a segment A spinoff is just a divided in the form of stock in the new segment. This is easy to handle. The short is now simply short both one share of the original and one share of the spinoff. The long now owns synthetic shares in both. > If someone wants to acquire the company An acquisition is just a one-time terminal dividend to the company. In a cash acquisition the short owes the long the value paid for the stock. In a stock acquisition the short is now short the equivalent shares of the acquiring company. > Shares can vote, your stream of dividends cannot vote. This is the biggest wrinkle. But it basically still exists even in the current system. If a stock has short interest of 50%, then there's 150 shares held long for every 100 shares of float. In practice it's not really that big a deal because 99% of investors just vote the proxy. At voting time, some investors will find they own synthetics and some will find they own originals. Just the same as today some will find their stocks on loan, and they can't vote. It doesn't really seem to make a difference. IMO I think a requirement for public listing should be letting all beneficial owners, including those who own synthetic shares/have shares on loan. I think if anything it strengthens corporate governance, by avoiding voting rights shenanigans. The two classes have equal interest in setting the company perform well.
- kgwgk 6y ago
  > Shares can vote, your stream of dividends cannot vote. This is the biggest wrinkle. But it basically still exists even in the current system. If a stock has short interest of 50%, then there's 150 shares held long for every 100 shares of float. In the "current system" there is no problem at all. Those who lent out their shares cannot vote.
- kgwgk 6y ago
  > not really that difficult to handle. Sure, you can write a contract detailing all the possibilities. Maybe even get those derivatives listed. But you could be doing that already! I'm not sure what are you proposing that should replace "the current system". Do you suggest that when you buy a share of J&J or whatever, and pay the price of a share of J&J, you may find later that what you got is a derivative product issued by "I can't believe it's not stock! Ltd"?

dhruvdh 6y ago

> The point is that the value of AAPL is just the value of its future dividends This is simply not true at all. Like anything that can be bought and sold shares derive their value from supply and demand.

dcolkitt 6y ago
The demand for shares is the demand for its discounted future cash flows. No rational investor buys for any other reason.
- dhruvdh 6y ago
  Okay, for anyone who agrees with you on this the price of shares are predominantly decided by irrational investors. And in a market where price of shares are predominantly decided by irrational investors, none of your purported benefits apply.
  - dcolkitt 6y ago
    That's the point. Short selling acts as a tax on irrational investors. That's why short selling is linked to a reduction in speculative[1], corporate fraud[2], and price inefficiency[3]. It makes the market more rational, by driving irrational investors out of the market. [1]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.... [2]https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [3]https://academic.oup.com/rfs/article-abstract/26/2/287/1581906 https://academic.oup.com/rfs/article-abstract/26/2/287/15819...
    - dhruvdh 6y ago
      Again, you are living in a textbook. See the real-world effects of short selling on TSLA, and all the irrational investors that made bank on the same. If irrational investors are being driven out why is there an evident trend of increasingly irrational stock prices over time?