4 ms·

Can you explain the conflict of interest?

idkidkidkidk 5y ago
I assume author means, people who invest in mutual funds/retirement accounts want the value to go up, thats why they bought shares. Author is saying that then the money from share purchase is then lent to short sellers who short the stocks included in those retirement accounts/mutual funds which works to lower the price of the value of those shares. I think when it comes to preventing money from being made available to short sellers probably wouldn't improve the financial system long-term, but i see how this could be interpreted as a frustrating facet of our current system.
- chii 5y ago
  > lower the price of the value of those shares short selling doesn't lower the price of a stock. Short selling is one of the actions which may reveal the true price, which may be lower than the current market price. Or the short seller may be wrong, in which case they paid a fee for a loss (or at best, for nothing in return).
bedobi 5y ago
As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? Like yes there is a tiny fee to compensate but it's no where near proportional to the damage done. Only a small portion of shares of any given company are ever actually available to trade. So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. Even if the short sellers aren't successful in driving down the price, the stock is still not gaining as much as it otherwise would have due to the added selling pressure that otherwise wouldn't have been there.
- GlennS 5y ago
  > no where near proportional to the damage done Do short sellers really do that much damage? Surely they're just part of the price-discovery mechanism for a stock? If you're holding a stock for the long term, what do you care if its price is temporarily a bit low? Just wait it out.
  - AnthonyMouse 5y ago
    Companies are often in a temporarily precarious position. Suppose a tsunami destroys your factory and the insurance company weasels out of paying the claim. Now you've got an otherwise-profitable business with knowledge of the industry and an existing supply chain, but you have to raise capital to build a new factory or you're out of business. An obvious way to raise the money is to issue some new shares. But if short sellers lower the share price right at the moment you're trying to raise the money, you may not be able to raise enough to build a new factory. Then the company goes bankrupt, the long-term investors lose everything and the short sellers make a lot of money. Companies in precarious positions where the ability to raise capital to continue operating could be make or break are the sort that tend to attract heavy interest from short sellers.
    - pyuser583 5y ago
      Ok … but short selling on a company with strong fundamentals, but a short term cash flow problem is dumb. It’s a good way to lose tons of money.
      - AnthonyMouse 5y ago
        Only if the short term cash flow problem doesn't bankrupt them. Which temporarily cratering the stock price right at that moment can cause. Where this happens is under conditions of uncertainty. Your factory is gone. It will be a year before you can build another one even if you can raise the money. Will your customers still be there by then? Maybe a 50/50 chance. If you rebuild the factory and they are, you're back in business, and the returns would more than justify the cost. If they're not, you rebuild the factory and still go out of business because the customers couldn't wait that long. So once you account for the risk, the expected value of investing in the rebuild is effectively at the market rate of return. Until the short sellers lower the share price. Then the company would have to issue more shares and find more investors each willing to invest despite being more diluted. Can't raise the money, no factory, failure immediately instead of a 50% chance of success in time.
- j_tb 5y ago
  > As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? So you can buy more shares on sale, clearly.
  - pkphilip 5y ago
    That would be true IF you are the one who gets the additional shares. But that is not how it always happens
    - gruez 5y ago
      If the price is depressed, everyone benefits from it. If you can't benefit from it (eg. the price is depressed, the short seller sold it to some hedge fund, and the price returned to normal) then there's no impact. Which one is it?
      - pkphilip 5y ago
        You completely miss the fact that the company whose shares are being depressed will suffer problems raising capital if their stock prices drop
        gruez 5y ago
        >You completely miss the fact [...] Pay attention to the thread. While that might be a valid argument, it's not what's being discussed in this comment chain. That said, the "problems raising capital" argument has been argued enough elsewhere in this thread that I won't bother arguing it further.
- peterbonney 5y ago
  If I’ve understood you correctly, it isn’t the nature of the investor that is creating the conflict, but something inherent to owning stocks: if I own shares of a company I am implicitly the enemy of short sellers. Is that more or less correct? If I’ve got that right, then you’re basically saying it is irrational for stock lending to exist at all, since all stock lenders are by definition owners of the stock. Do I have that right? I.E. do you believe that stock lending is an inherently irrational economic activity?
- dilyevsky 5y ago
  > So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. This is not how shorts work. This is not how any of this works
- jandrewrogers 5y ago
  If you actually believe your investment thesis, why do you care if someone invests against it? They are paying for the privilege of telling you that you are wrong. If shorting stock could reliably move it below its fair market value then everyone would be doing it to make a quick buck. It is very difficult to short a stock into oblivion because there is an almost unlimited amount of money that will happily be the counter-party to an obviously stupid trade.
  - bedobi 5y ago
    What you're saying should be absolutely correct, but in practice incredibly naive. First, I don't disagree the market and price discovery can benefit from shorting. But here we're talking about retirement accounts that are already long the stocks in question. There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. If the shorters are right and the company is a fraud, it's STILL not in the interest of owners of stock in that company to lend their shares out. If anything, it's even MORE in their interest to NOT lend them out to be sold short, instead, they need all the help they can get to keep the price up so they can make a controlled exit themselves. Second, why, if a decrease in price is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up? Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure. This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.

I assume author means, people who invest in mutual funds/retirement accounts want the value to go up, thats why they bought shares. Author is saying that then the money from share purchase is then lent to short sellers who short the stocks included in those retirement accounts/mutual funds which works to lower the price of the value of those shares. I think when it comes to preventing money from being made available to short sellers probably wouldn't improve the financial system long-term, but i see how this could be interpreted as a frustrating facet of our current system.

chii 5y ago
> lower the price of the value of those shares short selling doesn't lower the price of a stock. Short selling is one of the actions which may reveal the true price, which may be lower than the current market price. Or the short seller may be wrong, in which case they paid a fee for a loss (or at best, for nothing in return).

bedobi 5y ago

As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? Like yes there is a tiny fee to compensate but it's no where near proportional to the damage done. Only a small portion of shares of any given company are ever actually available to trade. So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. Even if the short sellers aren't successful in driving down the price, the stock is still not gaining as much as it otherwise would have due to the added selling pressure that otherwise wouldn't have been there.

GlennS 5y ago
> no where near proportional to the damage done Do short sellers really do that much damage? Surely they're just part of the price-discovery mechanism for a stock? If you're holding a stock for the long term, what do you care if its price is temporarily a bit low? Just wait it out.
- AnthonyMouse 5y ago
  Companies are often in a temporarily precarious position. Suppose a tsunami destroys your factory and the insurance company weasels out of paying the claim. Now you've got an otherwise-profitable business with knowledge of the industry and an existing supply chain, but you have to raise capital to build a new factory or you're out of business. An obvious way to raise the money is to issue some new shares. But if short sellers lower the share price right at the moment you're trying to raise the money, you may not be able to raise enough to build a new factory. Then the company goes bankrupt, the long-term investors lose everything and the short sellers make a lot of money. Companies in precarious positions where the ability to raise capital to continue operating could be make or break are the sort that tend to attract heavy interest from short sellers.
  - pyuser583 5y ago
    Ok … but short selling on a company with strong fundamentals, but a short term cash flow problem is dumb. It’s a good way to lose tons of money.
    - AnthonyMouse 5y ago
      Only if the short term cash flow problem doesn't bankrupt them. Which temporarily cratering the stock price right at that moment can cause. Where this happens is under conditions of uncertainty. Your factory is gone. It will be a year before you can build another one even if you can raise the money. Will your customers still be there by then? Maybe a 50/50 chance. If you rebuild the factory and they are, you're back in business, and the returns would more than justify the cost. If they're not, you rebuild the factory and still go out of business because the customers couldn't wait that long. So once you account for the risk, the expected value of investing in the rebuild is effectively at the market rate of return. Until the short sellers lower the share price. Then the company would have to issue more shares and find more investors each willing to invest despite being more diluted. Can't raise the money, no factory, failure immediately instead of a 50% chance of success in time.
j_tb 5y ago
> As a holder of shares in a company for retirement, why would I want to in any way enable short sellers to artificially drive the price of those shares into the ground, or even bankrupt the company? So you can buy more shares on sale, clearly.
- pkphilip 5y ago
  That would be true IF you are the one who gets the additional shares. But that is not how it always happens
  - gruez 5y ago
    If the price is depressed, everyone benefits from it. If you can't benefit from it (eg. the price is depressed, the short seller sold it to some hedge fund, and the price returned to normal) then there's no impact. Which one is it?
    - pkphilip 5y ago
      You completely miss the fact that the company whose shares are being depressed will suffer problems raising capital if their stock prices drop
      - gruez 5y ago
        >You completely miss the fact [...] Pay attention to the thread. While that might be a valid argument, it's not what's being discussed in this comment chain. That said, the "problems raising capital" argument has been argued enough elsewhere in this thread that I won't bother arguing it further.
peterbonney 5y ago
If I’ve understood you correctly, it isn’t the nature of the investor that is creating the conflict, but something inherent to owning stocks: if I own shares of a company I am implicitly the enemy of short sellers. Is that more or less correct? If I’ve got that right, then you’re basically saying it is irrational for stock lending to exist at all, since all stock lenders are by definition owners of the stock. Do I have that right? I.E. do you believe that stock lending is an inherently irrational economic activity?
dilyevsky 5y ago
> So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for. This is not how shorts work. This is not how any of this works
jandrewrogers 5y ago
If you actually believe your investment thesis, why do you care if someone invests against it? They are paying for the privilege of telling you that you are wrong. If shorting stock could reliably move it below its fair market value then everyone would be doing it to make a quick buck. It is very difficult to short a stock into oblivion because there is an almost unlimited amount of money that will happily be the counter-party to an obviously stupid trade.
- bedobi 5y ago
  What you're saying should be absolutely correct, but in practice incredibly naive. First, I don't disagree the market and price discovery can benefit from shorting. But here we're talking about retirement accounts that are already long the stocks in question. There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. If the shorters are right and the company is a fraud, it's STILL not in the interest of owners of stock in that company to lend their shares out. If anything, it's even MORE in their interest to NOT lend them out to be sold short, instead, they need all the help they can get to keep the price up so they can make a controlled exit themselves. Second, why, if a decrease in price is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up? Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure. This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.