Hacker News Reader

Comment by kasey_junk | Hacker News Reader

I had an interesting conversation with someone who took the view that all short positions were ursary. They had well thought out & logically reasoned from their premises arguments to back that up. I was really glad to hear their position.

It filled me with dread because it would destroy our current agricultural industry. And as much as I recognize the problems with it, “a large percentage of the population starving rapidly” was not an outcome Id endorse because of injunctions from pre-industrial wisrmen.

View on HN

> who took the view that all short positions were ursary

It's more than usury. There is usury involved because "lending" the stock is done with interest. However, the problems don't stop there.

Stock shorters, as you point out, actively bet against a company or industry or economic structure in general, it's their benefit to see a company collapse or not do well. This isn't how a stable society should be set up.

Furthermore, stock shorting exposes three parties to risk: the original owner, the shorter, and the new owner. There is risk being created in the market that does not justify the value that comes out of it. Let alone the fact that it's possible to short more than 100% of the total stocks, on what planet is this even acceptable? In a normal stock trade, risk is transferred from one party to another equally.

The conclusion is that shorting is a heavily immoral, predatory, and dangerous practice. It's quite ironic that when ** hits the fan, the government has to step in to limit certain trades or practices that we've known all along to be dangerous (e.g. they lower interest or ban shorting).

This simply doesn't make sense. When nobody is incentivized to correct stock prices downwards, you just get injustices in the opposite direction. You can look at the private markets to see what this looks like: Theranos.

The law of supply and demand doesn't require shorting in order to "correct" prices downward. The counterpoint to your Theranos example is the fact that Enron existed too. Both of them were fraudulent. Both collapsed after some number of years. One privately held, one publicly-traded and shortable. Same outcome, no?

I can't (directly) short the price of strawberries at my farmer's market, or the cost of rent in my small town, or the prices of artwork at an auction house. Price discovery seems to work reasonably well in all these venues. What is with this canard that shorting is necessary for price discovery to occur? There is no such requirement in the law of supply and demand.

Short and long positions are important for things that a) have a future value of money component and b) have risk that can be mitigated in a cost effective way.

Artists would take advantage of this in the form of working on commission. Large enough commissions do in fact allow shorting in the form of insurance. The same is true of strawberry farmers & landlords at various places on the size distribution.

One of the complaints my farmers market strawberry vendors have is that they don’t have access to the same finance agreements that large producers have. Part of that is because it’s not cost effective enough to short them.

This is a fallicious argument. Just because we don't allow people to engage in predatory practices, does not automatically mean that everything else is being run correctly. We don't correct one injustice with another.

For those injustices in the opposite, we need to set proper rules and hold people accountable. I mentioned several times in this thread that the current financial system is fundamentally broken, big part of which is because it heavily relies on interest, which pushes people to commit even more injustices like the example you mention.

I responded to your comment because I follow Kasey's comments; I didn't notice your comment upthread suggesting that you believe the entire concept of debt needs to be eliminated. I apologize for replying to you, because I don't think there's any productive conversation we can have.

> Stock shorters, as you point out, actively bet against a company or industry or economic structure in general, it's their benefit to see a company collapse or not do well.

Companies that have inefficiently deployed capital or have problems like a Theranos or Enron should collapse. People keep acting like shorts show up to a company like Apple and take it down. That's not at all what happens. Shorts are a lot like vultures. We may not like to see what they do, but they provide a service by cleaning up dead carcasses.

If you want to argue that shorters spread (dis)information in a company and should be more closely looked at, I might agree. My immediate counter though would be that I see way more positive information spread in general, and people rarely seem to check that until it so blatantly false things collapse.

Theranos collapsed without any shorting involved. Isn't this a counterpoint to the argument that shorting is required for "price discovery" and the unmasking of fraud?

It took 10 years. Might have been faster and wasted less capital if had been publicly traded and therefore possible to short it.

Not everyone is interested in going public (e.g. see Valve), and correcting one wrong with another is not a valid approach.

The shorts don’t take money from the company, they take money from people unfortunate enough to invest in a failing company. In some cases that money could have helped the company land, in others it was going towards something doomed and possibly fraudulent, but either way it doesn’t come from the companies coffers directly unless the company does a buyback from the shorts. The people losing money are other investors.

What if smart money had to bet on a competitor or growing some other investment instead?

That’s a fine position to take so long as you recognize the vast majority of long money also doesn’t go to the companies coffers unless the do another offering.

Your argument isn’t a moral one.

Much long money is absolutely used by the company indirectly; they can use their stock like a currency to raise funds with debt, pay employees, acquire companies with stock, etc. Thats hopefully a virtuous cycle where people do more stuff that creates value.

I don’t mean to make a moral argument, just question the need for short positions. If the company is truly bad their shares should deflate as demand deflates, no short seller position necessary. I think, from the perspective of the needs of society, punishing bad investors who fail shouldn’t be as rewarding as finding the right investments to grow.

That debt, acquisition and paying of employees is fraud. You are just pushing the risk onto those other entities with poor price discovery.

Am I correct in reading that you think stock based acquisitions or employee compensation is all fraud?

If it exists in a market with illegalized downside pressure.

The sentiment that shorting isn’t necessary is particularly pernicious in the places where companies trade cash compensation for stock.

Employee long positions derived from stock grants are already boosts to the optimistic view of a company.

If there is no short position to determine fair pricing companies can use their already outsized advantage to take advantage of workers.

Imagine letting companies like Nikola and Valeant Pharma continue to rip off investors.

If investors believe shares of these companies are a ripoff, they can sell any holdings and / or abstain from buying. Just like they can do in nearly every other type of market.

If a used car salesman is trying to rip me off, I walk away from the deal. I don't need to be able to short his inventory! And the supply / demand dynamics of the used car market will trend toward equilibrium without any such shorting.

ok, but what incentives does anyone have to actually look at potentially fraudulent situations, especially if the stock is ripping, as in the case of Valeant Pharmaceuticals? In fact the incentives are so perverse that it pays _not_ to state your research on why the company is not worth what it is. Even the time value spent on research is non trivial.

Your example would make more sense if the car they were selling a what may seem as a perfectly fine Lambo, but in actuality it was a lemon. And the only way to find out if it was a lemon or not is to tear it apart piece by piece.

The incentive already exists in the form of long investors doing their due diligence.

How does that make any sense? If the stock was growing 15% year over year without any indication that there are any issue, why would any investor want to provide any information or do any research on why that isn't the case? If an investor knew that there was fraud going on they would probably keep it to themselves and simply invest in the company anyways, because the financial incentive is there.

In your hypothetical example, a stock is going up and up, and I suspect it might be fraudulent, and you believe I have no incentive to pull my money out before the house of cards collapses?

Getting my money out is all the incentive I need! I bet plenty of Theranos investors would've loved to do exactly that. And there was no shorting involved in that company.

The question they are asking is if it’s going up & up what will ever cause it to go down?

The standard answer is the government. Which is fine but reduces a moral position to an operational one.

Sorry, but fixing one wrong with another is not the way. Are you honestly saying that stock shorting is the only incentive someone has to look at fraud? I don't buy that one bit.

What incentive would an investor have to claim that a company is fraudulent if there is no financial upside to it? Altruism? That's just naive.

Sure, you could point towards regulators but we know that the advantage will always be with the regulated.

You answered it, fix regulators, and heavily punish fraud, don't let people get away with a slap on the wrist. This is literally the job of the justice system. You may as well say what benefits do police or FBI have for catching criminals. The reward is a stable and just society, on top of their salaries.

On a side note, this is one aspect that religion addresses. Ripping people off is not going to end up well when facing God.

> I don't need to be able to short his inventory

that's because it wouldn't do you any good. if, however, the used car salesman is engaging in fraud and selling expensive cars way under their market value while buying inventory at inflated prices, you could expose this by borrowing a friends mercedes, selling it for USD 100000 (then buying it back at USD 1000, so you can return it to your friend) making a nice profit along the way.

> This isn't how a stable society should be set up

and why not? antifragile systems gain stability as they endure shocks. why not cyclically generate then destroy business? makes it easier to funnel resources to the top, because only the biggest - i.e., the most moneyed, hence the most liquid, hence best reactive to risk, hence most stable - firms can survive.

you may not like it morally, but two centuries of corporate history leave little to gainsay empirically about this notion.

Because we already have systems that are already superior and much more stable, we don't have to endure any artificial shocks due to inherent instabilities in the system (caused in large due to interest and other immoral practices).

The 2008 crash was just one manifestation of what happens when the system is taken to its logical conclusion, it all comes crumbling down eventually because it is not sustainable. We saw it these past two weeks with GME, however, the big players stepped in to put a stop to it because they can't allow the market to play by their own rules (because they're unstable).

I have no issues with businesses going under because they can't compete, that's how a free market operates. I have issues with lending money with interest and other predatory practices, such as shorting, because they destroy economies and/or exploit one class, causing the lender to gain an unfair and immoral advantage simply because he has money.

Gain wealth, but do it morally and without exploiting others. I'm all for that.

I also don’t think short selling as it is currently practiced is a net social good, but I don’t know anything about it’s importance in the agricultural sector. What does short selling provide there?

From what I understood from his comment, he was worried about how shorting would cause the collapse of the agricultural sector, so agreeing with you that it's a bad and dangerous practice.

No the opposite. I believe that modern agriculture would collapse without short positions.

I concede this is largely an act of faith on my part.

How so? Shorters push stock down, so how does it benefit the agriculture industry?

I answered in a sibling comment but don’t know the HN software enough to link.

https://news.ycombinator.com/item?id=26009042

You want insurance in case your crop fails, who do you think is taking the other side of that bet for you?

Two very different things. Insurance is to protect the consumer (if applied correctly), whereas shorters want and benefit off of the misery of others.

All futures contracts contain a “short” position. In its most basic a producer of the commodity agrees to sell in the future at a certain price now. This locks in their profit but is only useful to them if they are trying to hedge the price being worse in the future. They are borrowing a future position to make it tenable to produce now.

Without it most agriculture would be too risky to engage in (without a governmental entity stepping in and doing the same activity as the futures market).

I am not an expert but this seems different from the short selling we're talking about. In short selling of a stock, the stock is borrowed and sold immediately for profit. There is no productive action the short seller engages in to recover the stock, they just rebuy it on the open market, or not at all if the company has gone bankrupt.

If you are really stretching it, they can produce research that shows the stock should be worth less in this time, without committing any crime- which means it is based entirely on public information the market already has. Bashing a company could be considered a productive activity we are incentivizing from a certain point of view. But their incentives are all towards tearing down the underlying security.

In the agricultural example, the person selling the futures to their goods has to actually produce the goods. While someone might be borrowing the stock to resell it, ultimately the end farmer has to produce new value to deliver on their future contract. Otherwise, they would just sell futures to their crops, and then take their money to do nothing! But this is exactly what someone who short sells a stock does. They take the money, and they just sit around waiting for the stock to drop, no doubt resisting the urge to make it drop themselves through legally gray methods to increase their profits.

If I’m a farmer that has corn crops to sell, I receive immediate renumeration for production in the future (in the simplest contracts) if I don’t produce anything at all, I literally take the money and run, it what happens? What about if hail destroys my entire crop? What if it destroys half my crop but I claim it destroys all of it?

There are definite moral differences between those cases but in operational terms it’s better for everyone if I just payout everything as efficiently as possible. Presuming it’s all equal anytime I spend holding real claims because fraud might happen is a net bad. Now expand that to more complicated valuations of future value of money? Should I impede farmer John’s payouts to Farmer Bill because the rain was ever so slightly different on his acres than the other? What if farmer John is willing to forego that expedience for future consideration on his plot?

Multiply this by a billion. We have a complicated market where producers and consumers need to a) set a first price and then b) change their price as both the market conditions change _and also my own as an investor, decisions change_.

It is dramatically more efficient for everyone to just take positions in the market even if some of them are pessimistic.

The same thing is true of any product that had future value and also it’s efficient to make risk management easy. Stocks clear both hurdles trivially.

> I literally take the money and run, it what happens?

That can happen regardless, there are many scammers who did this with or without shorting. Shorting is not required to keep things in check, that's the job of law enforcement.

Taking a step back it's really quite simple. Shorting is literally a bet that provides no value other than that some people will profit at the misery of others. This is unethical and immoral. Furthermore, done at a large enough scale, it will cause harm to specific companies or firms. You bring up scammers that will take the money and run, yet don't discuss what happened with GME where the shorters piled on it like sharks to drive it down, it's literally a scam in the opposite direction. We shouldn't fix one wrong with another.

I accept that you and I have different moral positions. Mine is that a market without shorting is a fallacy.

That said, you are required to explain crop insurance in your world view. It is a fundamental part of modern agriculture. One I think of as existential. It’s a short position. If your religion doesn’t allow it I won’t argue. Similarly I won’t argue with Shakers who don’t believe in procreation.

Reply on news.ycombinator.com