Can you explain the conflict of interest?
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.
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).
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.
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.
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.
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.
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.
No doubt you can identify an example of this happening? Even once?
Can you list some companies?
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/...
Others have managed to stay alive by the skin of their teeth: https://marker.medium.com/i-run-a-public-company-5b6347fc0b1...
Short sellers didnt drive them to bankruptcy, they did it all by themselves.
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.
It’s a good way to lose tons of money.
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.
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.
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.
But then how does the short-seller make money? They short a ton of stock of a company that still might not go out of business.
See how it works both ways?
As for everything else, I don’t know what to tell you - there is no basis in reality for your extremely narrow hypothetical construction, so there is nothing to argue with. As someone with some expertise in finance and investing I am telling you that you don’t understand what you are talking about, and I don’t mean that in an insulting way - this is complicated stuff. You can choose to ignore me as an a-hole on the internet, or you can choose to take the feedback and accept that there is more for you to learn on this subject before you offer opinions. It’s entirely your call.
This is not how shorts work. This is not how any of this works
So you can buy more shares on sale, clearly.
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.
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?