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Comment by refurb | Hacker News Reader

Shorts drive the price down

Not on their own they don't. You can go and short Facebook right now and it won't move the price at all.

Not individually, but if enough people short it, then that becomes a signal to other investors that maybe there's something they don't know about, which will push the price down.

And other investors see that short interest piling into an otherwise healthy (hypothetical) stock and they buy in anticipation of a short squeeze. And when the stock pops due to good news, those shorts become rocket fuel for the stock going up.

No single action in the stock market happens in a vacuum, and longs will absolutely react to what the shorts are doing. And a high short interest is often viewed as a contrarian indicator that dumb short money has piled into the stock and that its actually due for a pop. You often see that at bottoms in the stock.

Sure it does short 20% of FB float it will sure move

I'm not so sure. What direction will it "sure move" if you short 20% of FB float? You have to borrow a stock to short it from someone, so the stock that you short is not actually sold just lent.

It's lent but you just artificially increased the volume because otherwise someone would have to sell actual shares.

The price would definitely move down if you sold 20% of facebook's float. The market doesn't care that you borrowed and are the one selling (as opposed to the party you borrowed it from selling them), all that matters is that 20% of the shares are being sold.

Hedge funds, which can turn huge sums into market swings often use this technique to drop the price, creating additional drops from panic sell offs, allowing them to make a margin on it from the bottom.

Is that legal?

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