4 ms·

> 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 st

by 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.
    - peterbonney 5y ago
      Hi, former hedge fund portfolio manager here (for 13 years). First, companies with strong fundamentals and short term liquidity issues rarely go bankrupt, because there are plenty of entities willing to lend them money to smooth out their cash demands. This is basically the entire reason that commercial lines of credit exist. Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they owe $1 today but will receive $2 tomorrow. Third, attempting to actively drive down a stock’s price with short sales is a pretty bad strategy. First of all, the Downtick Rule is a thing that exists. Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump). Finally, the discussion around short selling almost always focuses on a few high profile speculators and never acknowledges that the vast majority of shorting is for passive hedging (e.g. of options trades) where the “desired outcome” of the short seller probably isn’t for the price to fall. E.g. if you buy a call option and hedge the delta by shorting stock, you are indifferent to whether the stock goes up or down - you are betting on volatility, not price movement. Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers. We don’t, because short sellers don’t have the power people think they do and also aren’t (mostly) interested in seeing prices fall.
      - AnthonyMouse 5y ago
        > First, companies with strong fundamentals and short term liquidity issues rarely go bankrupt, because there are plenty of entities willing to lend them money to smooth out their cash demands. This is basically the entire reason that commercial lines of credit exist. A company in a precarious position has trouble finding new creditors. Not many banks will give you a loan if there is only a 50% chance you'll be able to pay it back. > Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they are short $1 today but will receive $2 tomorrow. Failure to raise capital can make a company worthless when it wouldn't be otherwise. You have customers willing to buy products but no equipment to make products, so without capital the customer demand can't be turned into money. But customer demand can't be sold to a competitor in bankruptcy court. > Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump). But then how does the buyer make money? They buy a ton of stock of a company that still might go out of business. It's less likely to go out of business that way, but you don't get to find that out for another year, and it's not so much less likely that this strategy would have the same level of profit as short selling a company that then goes to zero right away because they couldn't raise the capital immediately required to continue operations. > Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers. You can't just go short Apple and expect it to drive them out of business. It only works for a company which is already at risk, to push them over the precipice. And it's a high risk strategy. If you fail to drive them out of business you could lose a lot of money. But if you succeed, you make a lot of money at the expense of the people who lose it to you.
bedobi 5y ago
> Do short sellers really do that much damage? Surely they're just part of the price-discovery mechanism for a stock? Imagine a small or midcap company that is a solid, profitable business, just hanging out on the market, doing it's thing, not seeing that much trading activity, with only a tiny fraction of shares actually trading hands any given day. Then, one day, there is a concerted attack by multiple parties who borrow and sell short far more stocks than is ever traded in a single day. The added selling pressure overwhelms the market and the price tanks. This catches the eye of media, who start publishing articles asking what's going on. Some articles are even paid for by the short sellers themselves. Prominent people start pulling opinions out of their ass about how the business has no future, the board and executives are incompetent etc etc. It's a vicious cycle and down the stock goes. Now, why, if this 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.
- Lazare 5y ago
  Fascinating story. Of course, it doesn't make a lot of sense on its face, and many people would say that it's impossible. No doubt you can identify an example of this happening? Even once?
pkphilip 5y ago
There is history of short sellers driving businesses to bankruptcy and so yes, they do damage.
- gruez 5y ago
  >There is history of short sellers driving businesses to bankruptcy and so yes Can you list some companies?
  - peterbonney 5y ago
    Heck, can he list even one company?
    - pkphilip 5y ago
      Viragen which was working on the anti-cancer Multiferon treatment which was showing a lot of promise? https://www.biospace.com/article/releases/viragen-inc-multiferon-r-shows-potent-activity-in-preventing-the-progression-of-malignant-melanoma-study-to-be-published-/ https://www.biospace.com/article/releases/viragen-inc-multif... They were forced to shutdown by short sellers: https://www.bizjournals.com/southflorida/stories/2002/04/08/story1.html https://www.bizjournals.com/southflorida/stories/2002/04/08/... Others have managed to stay alive by the skin of their teeth: https://marker.medium.com/i-run-a-public-company-5b6347fc0b1f https://marker.medium.com/i-run-a-public-company-5b6347fc0b1...
      - djbebs 5y ago
        A company with no revenue, no profits and no cash reserves or way to borrow them? Short sellers didnt drive them to bankruptcy, they did it all by themselves.

by GlennS 5y ago

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.
  - peterbonney 5y ago
    Hi, former hedge fund portfolio manager here (for 13 years). First, companies with strong fundamentals and short term liquidity issues rarely go bankrupt, because there are plenty of entities willing to lend them money to smooth out their cash demands. This is basically the entire reason that commercial lines of credit exist. Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they owe $1 today but will receive $2 tomorrow. Third, attempting to actively drive down a stock’s price with short sales is a pretty bad strategy. First of all, the Downtick Rule is a thing that exists. Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump). Finally, the discussion around short selling almost always focuses on a few high profile speculators and never acknowledges that the vast majority of shorting is for passive hedging (e.g. of options trades) where the “desired outcome” of the short seller probably isn’t for the price to fall. E.g. if you buy a call option and hedge the delta by shorting stock, you are indifferent to whether the stock goes up or down - you are betting on volatility, not price movement. Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers. We don’t, because short sellers don’t have the power people think they do and also aren’t (mostly) interested in seeing prices fall.
    - AnthonyMouse 5y ago
      > First, companies with strong fundamentals and short term liquidity issues rarely go bankrupt, because there are plenty of entities willing to lend them money to smooth out their cash demands. This is basically the entire reason that commercial lines of credit exist. A company in a precarious position has trouble finding new creditors. Not many banks will give you a loan if there is only a 50% chance you'll be able to pay it back. > Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they are short $1 today but will receive $2 tomorrow. Failure to raise capital can make a company worthless when it wouldn't be otherwise. You have customers willing to buy products but no equipment to make products, so without capital the customer demand can't be turned into money. But customer demand can't be sold to a competitor in bankruptcy court. > Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump). But then how does the buyer make money? They buy a ton of stock of a company that still might go out of business. It's less likely to go out of business that way, but you don't get to find that out for another year, and it's not so much less likely that this strategy would have the same level of profit as short selling a company that then goes to zero right away because they couldn't raise the capital immediately required to continue operations. > Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers. You can't just go short Apple and expect it to drive them out of business. It only works for a company which is already at risk, to push them over the precipice. And it's a high risk strategy. If you fail to drive them out of business you could lose a lot of money. But if you succeed, you make a lot of money at the expense of the people who lose it to you.

bedobi 5y ago

> Do short sellers really do that much damage? Surely they're just part of the price-discovery mechanism for a stock? Imagine a small or midcap company that is a solid, profitable business, just hanging out on the market, doing it's thing, not seeing that much trading activity, with only a tiny fraction of shares actually trading hands any given day. Then, one day, there is a concerted attack by multiple parties who borrow and sell short far more stocks than is ever traded in a single day. The added selling pressure overwhelms the market and the price tanks. This catches the eye of media, who start publishing articles asking what's going on. Some articles are even paid for by the short sellers themselves. Prominent people start pulling opinions out of their ass about how the business has no future, the board and executives are incompetent etc etc. It's a vicious cycle and down the stock goes. Now, why, if this 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.

Lazare 5y ago
Fascinating story. Of course, it doesn't make a lot of sense on its face, and many people would say that it's impossible. No doubt you can identify an example of this happening? Even once?

pkphilip 5y ago

There is history of short sellers driving businesses to bankruptcy and so yes, they do damage.

gruez 5y ago
>There is history of short sellers driving businesses to bankruptcy and so yes Can you list some companies?
- peterbonney 5y ago
  Heck, can he list even one company?
  - pkphilip 5y ago
    Viragen which was working on the anti-cancer Multiferon treatment which was showing a lot of promise? https://www.biospace.com/article/releases/viragen-inc-multiferon-r-shows-potent-activity-in-preventing-the-progression-of-malignant-melanoma-study-to-be-published-/ https://www.biospace.com/article/releases/viragen-inc-multif... They were forced to shutdown by short sellers: https://www.bizjournals.com/southflorida/stories/2002/04/08/story1.html https://www.bizjournals.com/southflorida/stories/2002/04/08/... Others have managed to stay alive by the skin of their teeth: https://marker.medium.com/i-run-a-public-company-5b6347fc0b1f https://marker.medium.com/i-run-a-public-company-5b6347fc0b1...
    - djbebs 5y ago
      A company with no revenue, no profits and no cash reserves or way to borrow them? Short sellers didnt drive them to bankruptcy, they did it all by themselves.