5 ms·

The purpose of stock markets is to find the "correct" price for a stock. To that end, it needs to be possible to express both bullish and bearish views. However

The purpose of stock markets is to find the "correct" price for a stock. To that end, it needs to be possible to express both bullish and bearish views. However, doing the latter is already more difficult because in order to short the stock, you need to borrow it first, and you need to pay for those borrowed shares for as long as you keep holding them. Furthermore, those borrows can be pulled at any time, forcing you to cover at the most inopportune of times. There are also things like Reg SHO Rule 201(b) ("Uptick rule") that further complicate shorting a stock. Regulators have even been known to ban short sales in certain names outright like they they did for financial stocks during the 2008 financial crisis. If anything, selling short needs to be made easier as it represents an essential corrective. And this ultimately serves the greater good too as it ensures that the price of a stock is correct and investors don't overpay, which will inevitably lead to losses for them. A good recent example of what happens otherwise is Wirecard. In 2019 the German BaFin enacted a ban on short sales in the stock of the company after reports had been published that were essentially accusing them of fraud. In the end, those reports turned out to be true, and the company collapsed less than 18 months later. The stock fell from over EUR 150 to virtually zero and investors lost pretty much everything. They should have listened to the short sellers rather than fight them. There are also no "easy profits" in short selling. They only make money if they are right. There are people who have been calling for the immediate collapse of Tesla for the last decade or so. Others have been trying to short Amazon, Google, Apple, Microsoft, because they think that these companies are completely overvalues. Most of these people are probably bankrupt by now. But GME isn't any of those companies. They are a failing brick and mortar retailer that is boxed in by Steam on one side and Amazon on the other. They have repeatedly attempted to transform the company over the last decade without success. The fact that their plan is to launch some NFT market place, a field in which they have no experience and that is already crowded by established players like OpenSea, demonstrates how much their management is completely out of ideas. And if the shorts make money from the GME stock, it just means they were right.

netcan 5y ago
>> The purpose of stock markets is to find the "correct" price for a stock. Is it? Who's purpose? The main purpose of an IPO is (was?) financing. IE, raising money for the company operations... like a bank loan, VC investment, etc. In practice, many of today's IPOs are companies that don't need to raise money (anymore). For those companies, their main purpose when doing an IPO is usually liquidity. IE, letting founders, investors and such cash their shares... or continue owning them with the added benefit of market prices to validate the value of their wealth. Your argument is quite mainstream, but I can't see how anyone would make it except to justify short selling. It seems to me there's a lot of "you sure about that?" in the whole thing. Are you sure "finding the correct price" is an actual need? Who needs this, and why? Are you sure short selling makes for better prices? Liquidity is a similar argument made in favour of derivative HFT and such. I also think its (probably/usually) quite bogus. Do stock markets even have liquidity problems? Stocks are insanely liquid. That's what they're for.
- xab32 5y ago
  > Who needs this, and why? Investors (as opposed to speculators) and anyone interested in general economic efficiency. After the IPO, a stock ultimately represents a claim on a future revenue stream, and as such the "proper value" would be the (proportional) NPV of the company's future income. To the extent the market price doesn't reflect this, it represents inefficient allocation of investment resources. Unlike bonds, an equity's future income is very hard to predict, so providing that pricing information, along with liquidity, is what ostensibly distinguishes Wall Street from a casino. Personally, I don't care about short selling. I trace the root of the problem to the fact that dividends are taxed much more harshly than capital gains because capital gains don't incur taxes until sale, so they compound better. This incentivizes mature companies to retain earnings and grow through M&A (including of competitors), leading to this glorious present of megaconglomerates and oligopolies we are now living in. My prescription would be to incentivize dividends and discourage retained earnings so that some connection to reality is re-established in the market. Another of the many problems with megaconglomerates, aside from them being anticompetitive, is that it is much harder to accurately predict the combined future income of 100 aggregated businesses than just one, so their very existence distorts prices all the more.
  - candiddevmike 5y ago
    Is it crazy to think dividends should be a requirement for companies after so many years or face delisting? Along with flipping the taxes of capital gains vs dividends.
    - xab32 5y ago
      I don't think it would be quite as simple as that, but that would be better than nothing, definitely. Loosely, I think corporations should have a progressive income tax based on net income (defined in such a way as to prevent Hollywood-style games) or maybe market cap, to disincentivize getting huge and to encourage divestment. Dividends, I believe, usually already have a nominally lower tax rate than capital gains, but the fundamental problem is related to compounding. I therefore think the capital gains rate should be much, much higher and the dividends rate probably somewhat lower.
marcus_holmes 5y ago
You don't need short selling for a stock's price to drop. Markets for everything else use the normal mechanism of "if no-one is going to buy this at this price, I need to drop my price if I want to sell it". For example: you can't go to the bakery, borrow a loaf of bread, sell it to a passing punter, and then pay the baker at 5pm when they drop the price to get rid of their stock before it goes stale. The rest of the economy manages to find the "correct" price for things without shorts. So could the stock market.
- WJW 5y ago
  You could absolutely do that bread trade (if you could convince a baker to lend you a loaf of bread), but then a smart baker wouldn't drop their prices at the end of day because they know a short seller needs to buy a bread to cover their position. The example is also wrong because stocks don't go off like bread does. For commodities that keep better like frozen orange juice or steel you can definitely borrow (for a price) a few hundred tons of most commodities if you want to short it. For some reason people think borrowing a stock and selling it is some super nefarious plot to kill companies, but apart from some special circumstances like secondary offerings or employee equity compensation there is really no reason a company should worry overly much about their stock price. If the company keeps making a profit, no amount of short selling can make it go bankrupt.
  - gulikoza 5y ago
    But one of the GME points was (is?) that stock is sold without being borrowed first. Or being borrowed without permission and multiple times... If you sell empty bags on the street, promising the buyers there is bread inside, only to collect those empty bags back when the buyers throw the (supposed) bread away because it became worthless, is not good business. You're the only one profiting, both the bakers and the buyers are loosing money.
    - WJW 5y ago
      I don't understand why you seem to be so sure that there is indeed "no bread inside"? If an investor buys a share of GME on the stock market, it does not matter at all if they buy it from a shorter, a retail investor or even from GME itself. A share is a share, there are no "empty bags" being sold. Shares also don't go off like bread, so if you get your share back at the end it is like nothing happened: you still own one share and it is of exactly the same quality as before. Unless you are a VERY large investor, having your broker lend out shares also has zero impact on being able to sell it at any time. A short seller making a bet that a stock goes down by selling the stock is simply the same (but in reverse) as someone betting the stock will go up by buying a stock. The underlying business is not affected at all.
raxxorrax 5y ago
> If anything, selling short needs to be made easier as it represents an essential corrective I disagree since that would give people decision making capabilities who are the least qualified to do so. > And this ultimately serves the greater good too You can believe that but you also don't have to. We don't have to lie to ourselves. Stocks are highly emotional and investors regularly overpay when they buy into hype. I am not against short selling, it is a trade like any other. But let's keep things honest.
- NovemberWhiskey 5y ago
  >I disagree since that would give people decision making capabilities who are the least qualified to do so. It's unclear why investing in the belief something is overvalued demands a different or larger set of decision making capabilities than the belief is it undervalued.
  - ascagnel_ 5y ago
    Selling short carries much, much more risk than a simple purchase-and-sale. Put simply: if I buy a stock, the most money I can lose is the principal I put in (a stock can’t drop past zero), and any losses I take don’t damage others. In the case of a short sale, my potential losses are limitless (while a stock can’t drop past zero, there’s no potential ceiling), and the party lending their stock may lose out if I’m unable to cover a call.

netcan 5y ago

>> The purpose of stock markets is to find the "correct" price for a stock. Is it? Who's purpose? The main purpose of an IPO is (was?) financing. IE, raising money for the company operations... like a bank loan, VC investment, etc. In practice, many of today's IPOs are companies that don't need to raise money (anymore). For those companies, their main purpose when doing an IPO is usually liquidity. IE, letting founders, investors and such cash their shares... or continue owning them with the added benefit of market prices to validate the value of their wealth. Your argument is quite mainstream, but I can't see how anyone would make it except to justify short selling. It seems to me there's a lot of "you sure about that?" in the whole thing. Are you sure "finding the correct price" is an actual need? Who needs this, and why? Are you sure short selling makes for better prices? Liquidity is a similar argument made in favour of derivative HFT and such. I also think its (probably/usually) quite bogus. Do stock markets even have liquidity problems? Stocks are insanely liquid. That's what they're for.

xab32 5y ago
> Who needs this, and why? Investors (as opposed to speculators) and anyone interested in general economic efficiency. After the IPO, a stock ultimately represents a claim on a future revenue stream, and as such the "proper value" would be the (proportional) NPV of the company's future income. To the extent the market price doesn't reflect this, it represents inefficient allocation of investment resources. Unlike bonds, an equity's future income is very hard to predict, so providing that pricing information, along with liquidity, is what ostensibly distinguishes Wall Street from a casino. Personally, I don't care about short selling. I trace the root of the problem to the fact that dividends are taxed much more harshly than capital gains because capital gains don't incur taxes until sale, so they compound better. This incentivizes mature companies to retain earnings and grow through M&A (including of competitors), leading to this glorious present of megaconglomerates and oligopolies we are now living in. My prescription would be to incentivize dividends and discourage retained earnings so that some connection to reality is re-established in the market. Another of the many problems with megaconglomerates, aside from them being anticompetitive, is that it is much harder to accurately predict the combined future income of 100 aggregated businesses than just one, so their very existence distorts prices all the more.
- candiddevmike 5y ago
  Is it crazy to think dividends should be a requirement for companies after so many years or face delisting? Along with flipping the taxes of capital gains vs dividends.
  - xab32 5y ago
    I don't think it would be quite as simple as that, but that would be better than nothing, definitely. Loosely, I think corporations should have a progressive income tax based on net income (defined in such a way as to prevent Hollywood-style games) or maybe market cap, to disincentivize getting huge and to encourage divestment. Dividends, I believe, usually already have a nominally lower tax rate than capital gains, but the fundamental problem is related to compounding. I therefore think the capital gains rate should be much, much higher and the dividends rate probably somewhat lower.

marcus_holmes 5y ago

You don't need short selling for a stock's price to drop. Markets for everything else use the normal mechanism of "if no-one is going to buy this at this price, I need to drop my price if I want to sell it". For example: you can't go to the bakery, borrow a loaf of bread, sell it to a passing punter, and then pay the baker at 5pm when they drop the price to get rid of their stock before it goes stale. The rest of the economy manages to find the "correct" price for things without shorts. So could the stock market.

WJW 5y ago
You could absolutely do that bread trade (if you could convince a baker to lend you a loaf of bread), but then a smart baker wouldn't drop their prices at the end of day because they know a short seller needs to buy a bread to cover their position. The example is also wrong because stocks don't go off like bread does. For commodities that keep better like frozen orange juice or steel you can definitely borrow (for a price) a few hundred tons of most commodities if you want to short it. For some reason people think borrowing a stock and selling it is some super nefarious plot to kill companies, but apart from some special circumstances like secondary offerings or employee equity compensation there is really no reason a company should worry overly much about their stock price. If the company keeps making a profit, no amount of short selling can make it go bankrupt.
- gulikoza 5y ago
  But one of the GME points was (is?) that stock is sold without being borrowed first. Or being borrowed without permission and multiple times... If you sell empty bags on the street, promising the buyers there is bread inside, only to collect those empty bags back when the buyers throw the (supposed) bread away because it became worthless, is not good business. You're the only one profiting, both the bakers and the buyers are loosing money.
  - WJW 5y ago
    I don't understand why you seem to be so sure that there is indeed "no bread inside"? If an investor buys a share of GME on the stock market, it does not matter at all if they buy it from a shorter, a retail investor or even from GME itself. A share is a share, there are no "empty bags" being sold. Shares also don't go off like bread, so if you get your share back at the end it is like nothing happened: you still own one share and it is of exactly the same quality as before. Unless you are a VERY large investor, having your broker lend out shares also has zero impact on being able to sell it at any time. A short seller making a bet that a stock goes down by selling the stock is simply the same (but in reverse) as someone betting the stock will go up by buying a stock. The underlying business is not affected at all.

raxxorrax 5y ago

> If anything, selling short needs to be made easier as it represents an essential corrective I disagree since that would give people decision making capabilities who are the least qualified to do so. > And this ultimately serves the greater good too You can believe that but you also don't have to. We don't have to lie to ourselves. Stocks are highly emotional and investors regularly overpay when they buy into hype. I am not against short selling, it is a trade like any other. But let's keep things honest.

NovemberWhiskey 5y ago
>I disagree since that would give people decision making capabilities who are the least qualified to do so. It's unclear why investing in the belief something is overvalued demands a different or larger set of decision making capabilities than the belief is it undervalued.
- ascagnel_ 5y ago
  Selling short carries much, much more risk than a simple purchase-and-sale. Put simply: if I buy a stock, the most money I can lose is the principal I put in (a stock can’t drop past zero), and any losses I take don’t damage others. In the case of a short sale, my potential losses are limitless (while a stock can’t drop past zero, there’s no potential ceiling), and the party lending their stock may lose out if I’m unable to cover a call.