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Comment by koenigdavidmj | Hacker News Reader

There was a case study of short selling on NPR's Planet Money a few weeks ago: http://www.npr.org/2015/01/30/382587945/winning-at-short-sel...

Basically, the guy discovered a Chinese test prep company (think College Board) that had recently started to be listed on American stock exchanges, and discovered that their payment system returned an error. He emailed their support address, and it bounced. He hired a guy on Craigslist to go look at their business address in China, and it was discovered to be empty. He shorted the ever living crap out of the stock, broke the news, and won big.

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Did he engage in insider trading? He traded on material, non-public information, although one could certainly argue that the non-existence of a business is public information.

Attempting and failing to buy your product is one of the most public bits of information there is.

Observing the lack of any activity at your claimed corporate headquarters is pretty public too.

If you wanted to follow in the guy's footsteps, you might want to move a jurisdiction that's more accommodating of insider trading?

You have to get the information in breach of a duty of confidentiality (and in exchange for some personal benefit) in order for it to be illegal, at least in the US. If you discover something on your own, you're free to trade on it.

Odd, it doesn't appear to be on their podcast :/

I heard the story on the podcast, so I'd think it's still available.

Pretty sure it's this one:

http://www.npr.org/blogs/money/2015/01/21/378851598/episode-...

Thanks!

> He shorted the ever living crap out of the stock, broke the news, and won big.

Wait, I thought shorting meant he effectively sold shares to some other, unfortunate, investor.

It sounds like he participated in a pump and dump scheme/scam.

The short seller did nothing wrong. Shorting simply means he borrowed the stock in order to sell it-- sell high, wait for the price to drop, then buy low in order to return the shares to the lender. The buyer on the other side of the short sale should have done more due diligence. No one forced them (be it a person or an institution) to take up that position.

The Chinese company (or some affiliate) was the one who had pumped the stock up. The short seller was just a regular market participant who was rewarded for his hard work and diligence.

If you listen to the story, he shorted the stock, knowing it was a fraud, and then exposed it.

He knowingly created more victims of the scam.

His short position added information to the market. At least in theory, other investors could have asked "Why does this person think that this company is less worth than it's current value?" and done their own research.

The short position provided incentive for him to expose the fraud publicly. It would have been nice if he'd done this research and told everyone about his findings out of the goodness of his heart, but that's a lot of work for little personal reward. The ability to short provided an additional incentive to make the information as public as possible.

> Wait, I thought shorting meant he effectively sold shares to some other, unfortunate, investor.

Why should we give a pass to investors willing to expose themselves to excessive risk from being uninformed about their investments?

Let's look further at this short selling behavior as it scales. What happens if investigative short-sellers become muckrakers noveau: sufficiently pervasive and influential that they collectively become the market "conscience" that so often seems missing?

> Let's look further at this short selling behavior as it scales.

I'm not talking about general short selling. I'm talking about this specific case.

He discovered the company was a fraud, shorted the stock, and then exposed it. That stock had to be sold, to someone else, for the short to be profitable. This means he knowingly participated in the scam.

Yup, hard not to see it this way.

How is it a scam for a guy to do research on a company and then sell the stock when he decides said company isn't worth the current price. He isn't the person that made the company a scam, he just uncovered it. The poor sap on the other end didn't do as much research. Not they sellers fault. He can't be held responsible for the due diligence of every other investor in the world. That's basically what you are stating.

Every single stock transaction involves 2 people who think the opposite thing is going to happen. The vast majority of the time 1 of those participants knows more than the other.

Everyone who sells a stock is sending a clear signal that they think the money they are getting is worth more than the stock they are selling. So, I'm hard pressed to consider it a scam when someone acts in a completely transparent manner.

Also, why does it matter that he shorted the stock? What if he had previously purchased it off of a hot tip then, upon further due diligence, had decided the company wasn't as valuable as he had previously thought? There still has to be a counterparty to that trade.

At the end of the day, this guy probably saved more investors from being taken by this scam because he exposed it early. Without the incentive to make money, he would not have hired someone to investigate their offices in China. Without that investigation, he would not have shorted the stock, sending the market a clear signal that the stock was over-priced, and written up his research. Without his signaling and research, more people would have bought the stock, creating a bigger scam, and destroying more wealth.

>It sounds like he participated in a pump and dump scheme/scam.

"Pump and dump" means touting a stock using false information, and then dumping the shares before others realize that the information is false. On the other hand, information advantages (as long as they did not come from company insiders) are completely legal. This guy had an information advantage over those who bought the shares because he invested the time to investigate the company and others didn't. You are saying that outworking others is a "scheme/scam".

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