There seems to be a lot of confusion regarding traditional short selling and NAKED short selling. I know I am a little confused. Eureka properly defined NAKED short selling. Viceroy defined traditional short selling. Here are my questions: Isn’t NAKED short selling illegal already in the US? If so, how will a ban on naked short sales change anything? Is the counterparty to a short sale aware that he/she is not buying from a “true” owner? If naked short sellers still have to cover their positions by buying in the future, will they not eventually place UPWARD pressure on the share price?
The stupidity of what is being posted in this thread is why I don’t bother with this forum much anymore.
Sure, people sell things that don’t exist all of the time. However, you either don’t pay for it up-front and only on delivery, or you take their credit risk. Delivery is a contractual obligation upheld by UCC law, if they go BK you’re an unsecured creditor in that case and you have recourse for recoupment of your investment. So that’s now the preferred methodology for the stock markets? Allow naked short sellers that may not be able to deliver the stock to incorporate corporate credit risk of actual investors into the stock markets? Wow, ok, so now I have to underwrite them if I want to determine the actual credit risk with respect to investing in the market? What a preposterous argument. As far as short-selling in general, while stocks are homogenous, which lends to the ability to be shorted, does that mean it should be undertaken en masse? “Just a question: assuming that securities prices will climb where the short ban is effective, how are these securities protected by the ban going to remain competitive for an international investor ? Aren’t they going to become comparatively very expensive compared with similar securities you can short ?” Again, people assume that price discovery, liquidity, and efficiency is ONLY determined by short-selling volume and that without one’s motivation to sell short, no asks can be accurate. Again, the opposite of buying is selling, nor not buying. If a seller wants to sell and no buyer exists at the price they want to sell, they will either hold or lower the price. That is price discovery. Short selling does nothing but add volume in the downward side by borrowing somebody else’s “hold” to sell it. This, in effect, doesn’t equate to price discovery, but equates to additional, and artificial, downward pressure. How do prices remain efficient in any other market in the world? Houses, cars, food, candy? Not because you can sell those items short, but because the economics of supply and demand and the price discovery at intersection of supply and demand. In addition, many claim that HFT helps with price discovery. For whom? Naturally for financial institutions to sub-penny retail traders (same with short selling). I would love to see studies that actually prove that without short trading the markets would be far less efficient, with hard data. Otherwise any claims of… Reggie Wrote: ------------------------------------------------------- > “All forms of short selling should be banned”, > that’s a little extreme spierce, and by a little > extreme I mean that is completely nuts Is complete bullspit. It’s only nuts because people want it to be, mainly because monetary gains and momentum, not because it’s logical or provides actual benefits to the markets and society as a whole.
In response Greece banned all naked short Germans from their mediterranean beaches.
To further my post above. Take for example DNDN, a popular stock to discuss both naked short selling and regular shorting. It was under vicious naked short selling attacks for many years and more recently had ~17% short interest. Now, as it got FDA approval for Provenge, it popped up to 57 then slammed back down to almost pre-approval prices. Was it efficient pricing through shorting that kept the stock down, was it efficient pricing through short-covering that brought the price up, and is now the price of the stock accurate to the intrinsic value of the company? Is the abilty to roll out Provenge and other drugs in the pipeline reflecting probability through the discounting of future cashflows, or is it simply the remaining 10% short-interest discounting? Is the view of the shorts the correct one? There’s all sorts of financial gimmickry going on that supposedly provides massive insight and efficiency into the financial markets but does nothing but increase risk. One only has to look at the stupidity of CDOs and CDS to know that.
spierce Wrote: ------------------------------------------------------- > Beyond “price discovery” or profits there isn’t a > single benefit to short selling and profit is the > only one that can be definitely proven to benefit > anybody. Lol. First of all, there is no evidence that short selling is detrimental to the markets. None. The onus is on you to make a compelling case why shorts are bad; a claim of “no benefit” is not an interesting argument. Second, there are many market benefits to short selling. Liquidity is one. Price discovery is another. Shorts tend to be a much more effective disinfectant than longs; there is a long history of fraud / insolvency being discovered and publicized by shorts. All of this is swell, but by far the most positive market benefit of short selling is to rein in bubbles. Part of the reason that the housing market got so out of control is there was no effective way to bet against it. The whole GS-Paulson-ACA deal came about because Paulson sauntered up to GS and said, “So, we would like to bet against the housing market. How can we make that happen?”
^^^ Spierce, CDOs and CDS are stupid now ? I think you are a little bit agitated. How are Credit Default Swaps stupid for a start? Are insurance policies also stupid ?
Spierce you need to spend some time with ssrn.com and take a look the empirical literature on this subject. You have a long way to go, but I have faith you can be cured.
Viceroy Wrote: ------------------------------------------------------- > ^^^ > Spierce, CDOs and CDS are stupid now ? > > I think you are a little bit agitated. > > How are Credit Default Swaps stupid for a start? > Are insurance policies also stupid ? Please, equating CDS to simple insurance policies is a ridiculous and disingenuous comparison that smacks of ignorance of both. It’s no surprise you’re making this statement while making your previous statement of naked short selling. I suggest you quit while you’re behind. Regular insurance policies are regulated, properly underwritten, and cannot be placed upon property you don’t own. But hey, State Farm usually allows me to bet that you’re house will burn down then sells that “bet” into a securitization vehicle to produce the other side of the transaction, laying off the risk on their own books.
justin88 Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > Beyond “price discovery” or profits there isn’t > a > > single benefit to short selling and profit is > the > > only one that can be definitely proven to > benefit > > anybody. > > Lol. > > First of all, there is no evidence that short > selling is detrimental to the markets. None. The > onus is on you to make a compelling case why > shorts are bad; a claim of “no benefit” is not an > interesting argument. > > Second, there are many market benefits to short > selling. Liquidity is one. Price discovery is > another. Shorts tend to be a much more effective > disinfectant than longs; there is a long history > of fraud / insolvency being discovered and > publicized by shorts. > > All of this is swell, but by far the most positive > market benefit of short selling is to rein in > bubbles. Part of the reason that the housing > market got so out of control is there was no > effective way to bet against it. The whole > GS-Paulson-ACA deal came about because Paulson > sauntered up to GS and said, “So, we would like to > bet against the housing market. How can we make > that happen?” There isn’t any great evidence they benefit the markets either. I personally think the onus is on the people trying to prevent banning of short-selling to justify their actions. We know many markets are efficient without short selling, so why is it needed in the stock market? No, the housing problem came into existence because tha rampant usage of securitization vehicles to offload risk, as well as the allowance for non-deposit institutions to over-leverage. Combine this with psychological insanity and herd-mentality, you get the bubble. To simply claim that bubbles occur because they can’t be shorted against is ridiculous, if that’s true then how do any stock bubbles occur if there is short-selling? There’s also a long history of the opposite in shorts, they short companies that are perfectly viable. Paulson was a johnnie-come-lately.
Short selling happens everyday in nearly every product market. I go to say an autoparts store and purchase a muffler for my car, they dont have the muffler in stock but sell it to me anyway with the intention of locating it from a muffler manufacturer and have it delivered to my house 10 days later. Didn’t they effectively sell a muffler short, then cover their short with the purchase from the manufacturer?
As I explained above, that isn’t equivalent and even if it were, it also highlights why you don’t want it in the system. First off, if the product cannot be delivered many states have a law that you cannot charge until the item has shipped from the distributor to the customer. You see this often in online shopping, you buy something but aren’t charged if it is out of stock. Also, now you’re talking about phsycial items, not pieces of paper. if you are charged then you are taking the suppliers credit risk. This credit risk is covered in a couple ways under the UCC. One can be that you become a creditor of the company, two if the product isn’t delivered you can call your CC company and claim fraud (which is exactly what it is for failure to deliver). Now, if there is fraud and the product can’t be delivered, that introduces credit risk into the equation, credit risk not of the product (stock), but of the trader. Do we want to introduce that type of credit risk into the system? Absolutely not. Rydex Wrote: ------------------------------------------------------- > Short selling happens everyday in nearly every > product market. I go to say an autoparts store > and purchase a muffler for my car, they dont have > the muffler in stock but sell it to me anyway with > the intention of locating it from a muffler > manufacturer and have it delivered to my house 10 > days later. Didn’t they effectively sell a > muffler short, then cover their short with the > purchase from the manufacturer?
spierce Wrote: ------------------------------------------------------- > Viceroy Wrote: > -------------------------------------------------- > ----- > > ^^^ > > Spierce, CDOs and CDS are stupid now ? > > > > I think you are a little bit agitated. > > > > How are Credit Default Swaps stupid for a > start? > > Are insurance policies also stupid ? > > Please, equating CDS to simple insurance policies > is a ridiculous and disingenuous comparison that > smacks of ignorance of both. It’s no surprise > you’re making this statement while making your > previous statement of naked short selling. I > suggest you quit while you’re behind. > > Regular insurance policies are regulated, properly > underwritten, and cannot be placed upon property > you don’t own. But hey, State Farm usually allows > me to bet that you’re house will burn down then > sells that “bet” into a securitization vehicle to > produce the other side of the transaction, laying > off the risk on their own books. Just relax. I was not being aggressive, just discussing. You are dismissing CDS as a whole, not taking into consideration that they do serve in essence as insurance policies. How does the fact that you don’t need to own the underlying asset and that they are tradable make them not insurance policies ? These facts are irrelevant to the fact that you can use them to insure.
spierce Wrote: ------------------------------------------------------- > There isn’t any great evidence they benefit the > markets either. I personally think the onus is on > the people trying to prevent banning of > short-selling to justify their actions. We know > many markets are efficient without short selling, > so why is it needed in the stock market? The markets are not perfectly efficient. At least, if you say that, I hope you work on the sell side… > No, the housing problem came into existence > because tha rampant usage of securitization > vehicles to offload risk, as well as the allowance > for non-deposit institutions to over-leverage. > Combine this with psychological insanity and > herd-mentality, you get the bubble. To simply > claim that bubbles occur because they can’t be > shorted against is ridiculous, if that’s true then > how do any stock bubbles occur if there is > short-selling? Agree on the leverage part, disagree on the securitization part. Securitization has been around for decades and is in general a good idea, but I can see how a reasonable person thinks it got out of hand. Bubbles are natural. I never claimed shorting solved the “problem” of bubbles or that lack of shorting creates bubbles. My claim is that shorting mollifies the exuberance of the euphoric phase. > There’s also a long history of the opposite in > shorts, they short companies that are perfectly > viable. Sure, of course… nobody said shorting was a foolproof way to profit. What’s your point? > Paulson was a johnnie-come-lately. My point had nothing to do with Paulson in particular; my point was the housing market was not easily shortable.
Spierce, you argue your point well and I actually enjoy reading your rebuttals because they make sense and are pertinent. However, there are no rules saying that the market has to be fair to everyone in it. Remember, for everyone who shorts a stock, there is someone who WILLINGLY lent the stock to be shorted. This means they WILLINGLY took the opposity side of the bet. This DOES NOT, however, address naked shorting or HFT.
spierce Wrote: ------------------------------------------------------- > Personally I think all forms of short selling > should be banned. I also think there needs to be > a clamp down on a huge portion of the electronic > trading going on. There’s way too much > computer-computer trading with little to no value > except for bilking the average investor and > increasing risk in the market (as we saw last > week). > > haha Agree, actually we should ban any type of selling. Short or not.
Viceroy Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > Viceroy Wrote: > > > -------------------------------------------------- > > > ----- > > > ^^^ > > > Spierce, CDOs and CDS are stupid now ? > > > > > > I think you are a little bit agitated. > > > > > > How are Credit Default Swaps stupid for a > > start? > > > Are insurance policies also stupid ? > > > > Please, equating CDS to simple insurance > policies > > is a ridiculous and disingenuous comparison > that > > smacks of ignorance of both. It’s no surprise > > you’re making this statement while making your > > previous statement of naked short selling. I > > suggest you quit while you’re behind. > > > > Regular insurance policies are regulated, > properly > > underwritten, and cannot be placed upon > property > > you don’t own. But hey, State Farm usually > allows > > me to bet that you’re house will burn down then > > sells that “bet” into a securitization vehicle > to > > produce the other side of the transaction, > laying > > off the risk on their own books. > > Just relax. I was not being aggressive, just > discussing. > > You are dismissing CDS as a whole, not taking into > consideration that they do serve in essence as > insurance policies. How does the fact that you > don’t need to own the underlying asset and that > they are tradable make them not insurance policies > ? > These facts are irrelevant to the fact that you > can use them to insure. Yes, I am dismissing CDS in its current form in whole. There’s a reason why insurance is regulated, to prevent abuse. CDS is fraught with abuse and is poorly understood by most purchasers. The casino of the financial markets needs to be somewhat reigned in. Why? Because all of the crossing of the derivatives only increases the risk of the market as a whole, interlinking all players. This was seen in the CDS fiasco at AIG, then later other insurance companies, and finally through synthetic CDOs. The risks of the derivatives aren’t even borne by the bulk of the risk-takers as the common person suffers for the casino mentality. Bailouts and/or credit crisis caused by financial innovation leads to an asymetrical distribution of risk/returns within the economy. The very idea you can buy insurance on something you have no major interest in is silly, it isn’t insurance, it is a gamble.
mo34 Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > Personally I think all forms of short selling > > should be banned. I also think there needs to > be > > a clamp down on a huge portion of the > electronic > > trading going on. There’s way too much > > computer-computer trading with little to no > value > > except for bilking the average investor and > > increasing risk in the market (as we saw last > > week). > > > > > > haha Agree, actually we should ban any type of > selling. Short or not. Yeah, that’s exactly what I’m saying. Strawman much? You’re another one of these guys who think that short-selling is the opposite of buying, right? So how does any other market set prices if they can’t short-sell? I guess the stock market is the only market to set prices accurately, since short-selling is practically allowed in all forms, it must be perfectly efficient and not prone to any bubbles. Right?
@ justin While securitization has been around for decades, it significantly increased risk through complete off-BS treatment through FAS140, increasing the likelihood of OFF-BS through the usage of gain on sale. I source, structure, close, and oversee ABCP securitization positions. The blatant abuse of the ABCP market by using SIVs to hide CDOs was rampant, it hid massive amounts of leverage and passed on risk to the ABCP markets, which did nothing but hurt the entire CP market. The “pass the trash” mentality of RMBS issuers, which never retained any interest through CDO leverage, made the situation horribly risky. Shorting interest is nothing compared to long interest and can’t be entered into by “normal” people. This only adds to the asymetrical profitability towards the banks while putting the asymetrical risk towards common investors and taxpayers. My point was that while shorting may have discovered fraud, was the fraud discovered because shorting or in spite of it? Was the discovery inevitable? Correlation is not causation. The housing market was shortable, many did it, but it didn’t do anything. Standing on the sidelines was equiv to shorting. However, the problem isn’t shorting, it is the psychology of the bubble which will occur no matter how much shorting occurs.
to clear this up, anyone who says that short selling is not the opposite of buying has lost their marbles. in the MLA fashion: AAPL goes up 10% 2 scearios: you can buy and make 10% or can sell short and lose 10%. show me how not buying loses you 10%? opportunity cost? OC is in hindsight, only shorting will provide a pre-trade return expectation which is perfectly negatively correlated to buying.