Short Selling Debate

[mime]

Anyone heard of this?

Does anyone do it?

[stefan]

mime,

There is another thread somewhere regarding short selling.
http://www.aussiestockforums.com/forums/showthread.php?t=276&highlight=shorting

Short selling means you are selling a stock which you don't really own, speculating that the price will go down so that you can buy it back at a cheaper price. But again, check the other thread and/or use the search function to find out more.

Happy trading

Stefan

[mime]

hmmmm

So you can't short sell on commsec?

[Mofra]

Mime,

I use commsec and they don't allow it. If you're interested, you might want to call some full-service brokers. You an also trade the bear side of the amrket using derivatives and CFDs. good luck

[Nick Radge]

I read with disdain that Kohler and his journo cohorts at Business Spectator are razzing up the public about short selling. They suggest that yesterdays plunge in ABS was as simple as hedge funds creaming the stock.

How is this for an atypical comment:



the only true position: Selling something you knowingly don't own is an ILLEGAL act; period!

And, why, pray tell, is IT condoned in a falling market?

I don't seem to remember anyone complaining when the hedge funds, private equity funds and other large money were driving prices up and well beyond their intrinsic values?

We're seeing typical reaction to a typical bubble. Its no different to what we saw in the late 90's. Crap stocks at ridiculous valuations. ABS bought a tonne of US property at the top of the property boom and geared itself so.

As my comments appear to not have made the pages of Kohler's diatribe, quite possibly because they'd spoil the media beat up, then I open discussion here.

Exactly how can these foolish journo's gain knowledge within a few hours of the ABS sell off that is was caused by Hedge funds?

I have been on the receiving end of journo's (specifically AFR) phone calls on wanting to know whats happening. I suspect these dimwits have called their "contacts" who have used broker excuse #234, "hedge funds selling".

READ IN FULL HERE (http://www.businessspectator.com.au/bs.nsf/Conversations/Short-selling-?OpenDocument)
< mod edit- Nick's comment:
Hedge funds pushed prices up, now they are pushing them down - deal with it
Nick Radge

26 Feb 2008 10:25 PM

Dear me. A stock is allowed to go above its intrinsic value due to greed but not allowed to go below because of fear? Please! The market runs on fear and greed. Always have. Always will. Todays is no different to 1999 or 1987 or 1974. Do we actually have any evidence of short sellers at work, or are we seeing suckers of the bull market getting spat out. Perhaps we're being conned by uninformed journalists whose contacts are uninformed brokers.

The hedge fund slant isn't going to cut it. You people profited handsomely from these guys. You can't change the rules when they ride the boat the other way.

Someone offer me hard evidence that hedge funds made ABS dump today. >

Disclosure: Personally, and unfortunately, I was not short ABS yesterday, although my subscribers had been that since 11 February at $4.11. They were also advised to cover short positions on the open yesterday.

[IFocus]

Reading the Australian today Groves trots out the usual excuse of blaming short selling where as some of the guys on the ABS thread had the real reasons nailed ages ago with clear warnings

The Australian has been runing this line of blaming short selling for awhile article below
http://www.theaustralian.news.com.au/story/0,25197,23281780-643,00.html

SHM looks a little deeper
http://business.smh.com.au/whos-next-for-financial-judgment-day/20080227-1v3x.html


This thread explore along the same lines http://www.aussiestockforums.com/forums/showthread.php?t=9938 of blaming short selling while carefully avoiding the real issues at hand driving our market

[ROE]

I say bring on hedge funds, it keep dodge company honest :D
If you stupid enough to leverage up and leave yourself expose to this sort of behavior than that is your problem.

I don't see hedge funds short wonderful company like FLT, WOW, WOR, CSL.
They know these are extremely well run company where they make real money for their share holders and if they short they are going to get burned :D

Enron gave the same excuse about short selling before it went belly up

[Trembling Hand]

Yes it is truly pathetic journalism. In the same league as any rubbish from the tabloid media (bank bashing in reverse)

No mention of course that they are starting to look like idiots. They have been selling themselves as experts and now costing unfortunate people who follow them money. On an interview last week I think on the 7:30 report Kohler was looking and talking like a man who has lost money recently and just coming to the realisation that it may not be coming back to him. He looked a little down and pessimistic. :D

I would expect to be hearing a whole heap more of this crap. Just wait to the Gov gets in on this :rolleyes:

By the way has anyone else thought that Kohler being on the ABC and then pimping himself giving out bull market stock news is a conflict of interest.

[Nick Radge]

Looks like the debate has been raging a long time in the US <mod edit- from http://en.wikipedia.org/wiki/Short_selling > :



Short selling has been a target of ire since at least the eighteenth century when England banned it outright. It was perceived as a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century.

The term "short" was in use from at least the mid-nineteenth century. It is commonly understood that "short" is used because the short seller is in a deficit position with his brokerage house.

Short sellers were blamed (probably erroneously) for the Wall Street Crash of 1929. Regulations governing short selling were implemented in the United States in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and was in effect until 2007. President Herbert Hoover condemned short sellers and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997). A few years later, in 1949, Alfred Winslow Jones founded a fund (that was unregulated) that bought stocks while selling other stocks short, hence hedging some of the market risk, and the hedge fund was born.[citation needed]

Some typical examples of mass short-selling activity are during "bubbles", such as the Dot-com bubble.[citation needed] At such periods, short-sellers sell hoping for a market correction. Food and Drug Administration (FDA) announcements approving a drug often cause the market to react irrationally due to media attention; short sellers use the opportunity to sell into the buying frenzy and wait for the exaggerated reaction to subside before covering their position.[citation needed] Negative news, such as litigation against a company will also entice professional traders to sell the stock short. Because both the short seller and the original long holder can sell the same shares at the same time, selling pressures can be artificially magnified during such times, causing larger price drops than would be normally justified by the negative news.

During the Dot-com bubble, shorting a start-up company could backfire since it could be taken over at a higher price than what speculators shorted. Short-sellers were forced to cover their positions at acquisition prices, while in many cases the firm often overpaid for the start-up.

[blablabla]

When money is borrowed to buy shares, whether using CFDs or using margin lending, nobody complains loudly - not even the shorters who get hurt when prices rise and not even the people who missed out on the rise because they sold their shares too early or because they didn't buy any in the first place. When shares fall sharply in price the existing shareholders scream blue murder and claim that shortsellers are murderers. The screams are the only major difference between borrowing money to buy shares and borrowing shares to sell them.

Borrowing money to buy shares is gambling/investing/trading/speculating in one direction. Borrowing shares to sell shares is gambling/investing/trading/speculating in the other direction. As far as markets are concerned there is no fundamental difference between the two activities (apart from the screams of those on the wrong side of market movements). Markets will always go up and down. Unbalanced interference in the markets is the only thing that can distort the prices of markets in the long term.

Margin calls can be painful exeriences and when shareholders are forced to sell at never-to-be-repeated low prices the pain is worse, but borrowers of money accept this risk when they borrow. Believe it or not it is exactly the same for shorters if things go the opposite way.

Short selling requires that shares be borrowed. This is morally the same as borrowing money. If shortselling ought to be banned then borrowing money also ought to be banned. Then, for example, borrowed money would no longer be able to distort the housing market. There is no doubt that in the housing market borrowed money causes substantial price distortions. Property would be substantially cheaper if borrowing money to buy houses was illegal. In share markets, the price distortions caused by borrowed money are in effect balanced in the medium to long term by the ability to shortsell.

Banning shortselling would be as fundamentally absurd as banning moneylending. What journos should be campaigning against are problems with market transparency which allow borrowers of money and borrowers of shares to manipulate the markets by concealing their activities and identities.

[cuttlefish]

I don't think for a second that short selling is the reason behind the declines in stocks - any stock worth its salt will hold up against a short selling onslaught - these stocks are going down because they are shyte and the shorting would only be a marginal contributor to the process.

But as in the other debate on this in another thread I started I still don't see a particularly functional component to short selling and believe it would be better served by a more formal instrument. Wayne has pointed out that it is an essential part of the process for market makers in the options market and I also accept that allowing a minimal component of short selling also provides objectivity in the market place and can have a positive effect on market efficiency by capping unrealistic valuations.

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.


Money is debt - that is its purpose and nothing else - all money is already backed by productivity commitments and all money that anyone has represents debt whether it be borrowed directly or obtained through earnings (via productivity or investment). Stocks on the other hand are not debt but are equity. Thus borrowing 'stock' doesn't make sense to me. It is of limited supply and its purpose is not to serve as an instrument of debt. Money is elastic and can grow as productivity grows. Equity doesn't have the same elastic characteristics and thus shorting a stock is selling something that doesn't exist. (on the other hand borrowing money is simply expanding the amount of debt that exists in the world).

I'd be interested in hearing counterpoint debate to the above paragraph though.

Shorting on a small scale to enable market makers to provide hedging products and to provide objectivity in the market place I have no great issue with but if allowed on an unrestricted scale I believe it would create structural issues in the market.

And as stated in the first sentence I don't agree with newspaper articles that blame falls in stocks on shorting - a sustained selldown with no retrace can only be achieved if the stock is significantly overvalued in the first place.

[IFocus]

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.


Money is debt - that is its purpose and nothing else - all money is already backed by productivity commitments and all money that anyone has represents debt whether it be borrowed directly or obtained through earnings (via productivity or investment). Stocks on the other hand are not debt but are equity. Thus borrowing 'stock' doesn't make sense to me. It is of limited supply and its purpose is not to serve as an instrument of debt. Money is elastic and can grow as productivity grows. Equity doesn't have the same elastic characteristics and thus shorting a stock is selling something that doesn't exist. (on the other hand borrowing money is simply expanding the amount of debt that exists in the world).

I'd be interested in hearing counterpoint debate to the above paragraph though.

An assumption I would make is that money and stocks are both assets all be it in different forms and liquidity and that both can and do change their valuations for different reasons.

Most assets are converted back to cash for ease of liquidity and every one accepts this form of asset to trade what ever, it could be gold etc,but lending stock is lending a asset lending cash is lending a asset IMHO ether way you have to repay the loan.

Shorting allows true price discovery nothing more nothing less.

In every bear market there is pain and I understand the emotion involved in losing and feel for the investors on the wrong side of a move.

I get furious when so called market professionals who know better feed off this to get a headline in to media blurring the truth rather than seriously looking at the real reasons for company's getting hammered it really sucks.

Focus

[Trembling Hand]

I get furious when so called market professionals who know better feed off this to get a headline in to media blurring the truth rather than seriously looking at the real reasons for company's getting hammered it really sucks.


At the end of Robert Gottliebsen dripple this morning,
" I must add here that I have units in at least one and possibly two managed funds which on the last statement had a holding in ABC Learning."

[blablabla]

In relation to comparing borrowing money to buy stocks vs borrowing stocks to obtain money, at this stage I don't agree with the argument that it is the same thing in reverse.

If you wish to buy a share you can only buy it by possessing money even if you have to borrow it.

If you wish to sell a share you can only sell it by possessing the share even if you have to borrow it.

It is self-evident that selling a stock is the reverse of buying a stock. Also, for every share sold there is a share bought. This is what makes a market. Nobody is forced to either buy or sell (unless they have agreed to terms such as for a margin loan which they have a free choice to accept or not accept).


Here is another reason why a prohibition on shortselling would distort the markets. If people who wished to sell a stock had to actually own the shares first then only fund managers, large shareholders and large speculators would enjoy the privilege of being able to in effect make shortselling plays. They would be able to do this by playing with the stocks at their disposal, reducing their holdings and then buying them back again as it suited. Remember that any definition of shortselling must include buying back the shares again that were previously sold. So, whatever your intentions might be, nothing would be achieved by banning shortselling. Only the rich would have the ability to short at will.The already uneven playing field of the share market would become even more hazardous for the small player. The only way to achieve what you have proposed would be to prohibit a person from buying shares that they have sold within, say for the sake of argument, the previous month. And then, of course, this could easily be worked around by getting your wife/brother/mate to buy the shares instead. What you have proposed is neither workable nor fair. By allowing everybody to borrow shares and shortsell them then we have a level playing field where everybody has the same rights and obligations, and we have a market that is more liquid and hence more efficient.

[theasxgorilla]

I don't think it takes a genius to analyse it's effect on a market just hit by bad news.

As buy orders are withdrawn and genuine selling is amplified by short selling the move down is exacerbated. This forces the hand of yet more sellers who generate volume for the short sellers or those who like to fade over-reactionary moves to cover/buy into.

Personally I think options make more sense. That would be, sense as financial instruments. They still confuse me :)

ASX.G

[2BAD4U]

By the way has anyone else thought that Kohler being on the ABC and then pimping himself giving out bull market stock news is a conflict of interest.

This has actually been raised on a couple of occasions. I think Sunday or one of those type programs did a story on this a few months back. Personally though I think his biggest problem is his Obsessive Compulsive Disorder. Ever notice how every single night we have to have a chart or graph?

[cuttlefish]

If you wish to buy a share you can only buy it by possessing money even if you have to borrow it.

If you wish to sell a share you can only sell it by possessing the share even if you have to borrow it.



The difference is when you are borrowing money it is nearly always being created. Money is elastic - the fractional reserve system as authorised by the government, effectively allows ADI's (i.e. banks etc.) to create money. Margin lending is just one example of this. If I loan you some money I can't 'create' the money I loan you, it has to come out of the money I have. But if the bank loans you money they do get to actually create new money.

On the other hand when you are borrowing a share to short it, it is never being created. The term loan is a misnomer because title is being transferred from the lender to the borrower (shorter) and from the borrower to the buyer. The registered holder of the share is the buyer of the share and neither the shorter or the lender have any entitlement to it anymore. Thus for the period of time that the short is in place the lender in fact does not own the stock and only owns a promise (effectively equivalent to currency) that the stock will be returned to them. They have in reality sold the stock to the shorter with an agreement to buy it back. It is NOT a loan. The only people authorised to create shares in a company are the directors of that company under the companies articles of association.

[cuttlefish]

To summarise the above - the lender of the stock being shorted is exposing themselves to counterparty risk - the counterparty being the shorter of the stock. There is no loan - the lender exchanges security of title for this counter party risk. Is this risk factored into the lenders pricing for providing this product? I doubt it is factored in properly and its not an efficient and regulated market. So if shorting is going to be allowed it would be better if it were an exchanged regulated derivative (some kind of floating date future?) and thus could be priced properly by the market.

[reece55]

I read with disdain that Kohler and his journo cohorts at Business Spectator are razzing up the public about short selling. They suggest that yesterdays plunge in ABS was as simple as hedge funds creaming the stock.

How is this for an atypical comment:



I don't seem to remember anyone complaining when the hedge funds, private equity funds and other large money were driving prices up and well beyond their intrinsic values?

We're seeing typical reaction to a typical bubble. Its no different to what we saw in the late 90's. Crap stocks at ridiculous valuations. ABS bought a tonne of US property at the top of the property boom and geared itself so.

As my comments appear to not have made the pages of Kohler's diatribe, quite possibly because they'd spoil the media beat up, then I open discussion here.

Exactly how can these foolish journo's gain knowledge within a few hours of the ABS sell off that is was caused by Hedge funds?

I have been on the receiving end of journo's (specifically AFR) phone calls on wanting to know whats happening. I suspect these dimwits have called their "contacts" who have used broker excuse #234, "hedge funds selling".

READ IN FULL HERE (http://www.businessspectator.com.au/bs.nsf/Conversations/Short-selling-?OpenDocument)

Disclosure: Personally, and unfortunately, I was not short ABS yesterday, although my subscribers had been that since 11 February at $4.11. They were also advised to cover short positions on the open yesterday.

Completely agree with you Nick, typical reaction however....

When asset levels were at all time high levels, Kohler was one of the jurno's citing that Aussie could run further and that we were no longer in sync with the US and indeed we lead the NYSE/NASDAQ moves...... Truly he is eating such stupid comments now.....

The reality is that short selling provides the ability to hedge out positions and provides necessary liquidity in the market. Shares are dropping because some directors and senior management of Aussie companies are committing corporate suicide - gearing the crap out themselves at low interest cover levels when debt spreads were at all time low levels. Now that it's all come home to roost, every rich bloke in town is crying foul.... perhaps think next time you leverage crappy pieces of paper (i.e. shares in Companies where the fundamentals are clearly bogus and trust me, there were signs....) - I expect the whining to continue.....

Cheers

[Trembling Hand]

the lender of the stock being shorted is exposing themselves to counterparty risk - the counterparty being the shorter of the stock. I doubt it is factored in properly and its not an efficient and regulated market.


cuttlefish you are way off. The broker is controlling the transaction. If the party that is short gets in trouble, because the price moves against him, the broker closes the position. You have to have funds in the account to cover it. Its that simple. Its not like the shorts gets to take the stock home and lose it at a casino. :sly:

[cuttlefish]

If thats the case then the counterparty risk of the lender is with the broker rather than the shorter - either way the lender is exchanging secure title/equity for counterparty risk.

[Kauri]

gee whiz... and I thought it was down to "profit-taking" ... ;)
Cheers
.........Kauri

[RichKid]

Thanks for alerting to us to recent instances of the debate Nick.

Generally, for those interested in the topic, there are a number of threads on short selling on ASF already for those looking to conduct research. Use the Search tool and search by title with 'short selling' or similar keywords or phrases.

A thread that is relevant to this thread is 'Short selling serves no market function" (http://www.aussiestockforums.com/forums/showthread.php?p=248214#post248214).

Also note the list of 'Similar Threads' at the foot of this page.

[RichKid]

gee whiz... and I thought it was down to "profit-taking" ... ;)
Cheers
.........Kauri

hehehe, nice one! I guess the journos will need a whole new collection of phrases to deal with the short side.

[blablabla]

I have noticed that many arguments put forward against shortselling are red herrings, and that attempts are constantly being made to convolute and confuse issues with irrelevance. I don't know what is the reason for this but I do know that this is a propaganda technique routinely used by governments, political parties and religious organisations.

For example, it is postulated that definitions of the items being traded are material to the act of trading. In an exchange where only two things can be traded it is irrelevant what the fundamental definitions of the two things are. In a stock exchange only stocks and money can be exchanged in a controlled manner. The existence of the exchange assumes that the users of the exchange know enough about the items they are trading to be able to trade. The definitions of the items traded and how they were created may be relevant to economies, producers and users but they are in the main irrelevant to trading. Shortselling is applicable to trading on an exchange such as the stock exchange where two types of items are traded for each other. On a stock exchange the two items are stocks and money, and as far as trading is concerned there is no factual difference between borrowing stock to trade and borrowing money to trade.

Here is an example that I hope will illuminate the issue for those who are still in doubt. If there was a demand for it there could be an exchange for any pair of items that can be traded even if one item of the pair is not money. There could be an exchange where oil and corn are exchanged. On such an exchange there would be no factual difference between borrowing oil to trade and borrowing corn to trade. In such a case, most of the arguments against shortselling can be seen to be what they are - irrelevant hogwash.

[cuttlefish]

As the person to have responded to your post prior to the one above I make the assumption that your comments above are partially directed my way.

I take a lot of offense to your post above because it implies that the people debating the 'no' case against short sellling have some kind of hidden agenda and are willing to resort to deceptive practices ("red herrings", "propoganda", "attempts to convolute and confuse") to achieve it.

I believe I've taken the time to put forward considered comments for discussion. If you are incapable of understanding or responding to well constructed argument without resorting to these sorts of implications then there is no point having a debate about it.

Labelling something "irrelevant hogwash" doesn't exactly explain your case.

[Timmy]

Cuttlefish - I wont speak for 3bla but I will say I read his comments as referring to the drivel (and it really is drivel from people who should know better and due to their position really should think a little before they open their respective mouths) produced by the media such as Kohler et al, which was the original topic of the thread. Your posts, and I think everyone would agree, are well-reasoned and raise some good questions and points; and while I don't agree with their content I will say they require thought on behalf of those who advocate short-selling as a legitimate market practice.

[cuttlefish]

Cuttlefish - I wont speak for 3bla but I will say I read his comments as referring to the drivel (and it really is drivel from people who should know better and due to their position really should think a little before they open their respective mouths) produced by the media such as Kohler et al, which was the original topic of the thread. Your posts, and I think everyone would agree, are well-reasoned and raise some good questions and points; and while I don't agree with their content I will say they require thought on behalf of those who advocate short-selling as a legitimate market practice.

Thanks for your comments Timmy - I wasn't sure from 3bla's post whether he was responding to my previous post debating the difference between stock borrowing and margin lending or just having a general dig.

That being said I think I'm coming around to the point of view that I don't really have an issue with short selling, but more an issue with the lack of transparency and regulation around it.

As long as the rules are clear and its all transparent then its just another product in the market place. The other things is that at the end of the day the only people bearing risk are the borrower and shorter, not unwitting market participants. The stock lender and stock borrower are knowingly entering into the contract that they are participating in so if it doesn't work out thats their problem and nobody elses.

As long as I know that when I purchase a stock via the ASX it is always settled with unencumbered real equity and as long as I know that same equity can never be encumbered again (i.e. lent) without my knowledge and approval then it doesn't directly affect me. (and I believe these two things to be the case).


The lack of transparency around the practise of stock lending/borrowng is probably a valid issue for all market participants though, in the same way the lack of transparency around sub-prime debt (and other forms of debt) is an issue for participants in credit markets and for those investing in participants in the credit markets.

[Trembling Hand]

Alan Kohler & Bob Gob get some sleep your starting to look dumb. :D:D

[Timmy]

The lack of transparency around the practise of stock lending/borrowng

Yes spot on, for me thats the real issue ... let's get these things transparent. One thing that irks me particularly is the delay in issuing the short-sell list ... in an electronic market such as the ASX this info could be distributed more-or-less in real time ... grrrrr.

[Timmy]

Alan Kohler & Bob Gob get some sleep your starting to look dumb. :D:D

starting?

[shaunnell]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

[shaunnell]

I have just read that to short sell yoou actually borrow the shares from institutions so my previous post may be wrong.
Are these shares held in escrow whilst the short is in effect?

[Trembling Hand]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

Nope. People long a GOOD stock should welcome short sellers. When you short sell from that instant you are now some time in the future a buyer. The short must be covered. Have a look at allco yesterday when leaders recalled their shares, up it goes.

[Timmy]

Surely short selling is changing the companies issued shares?

The market is due to supply and demand of a set quantity of issues shares. By selling something you do not have you are changing the equation.

I am no expert and look forward to correction on this.

The number of shares on issue does not change, this is a fixed number (unless the company issues more to raise capital etc. or buys shares back - but these situations are not relevant to the question at hand).

Let's say a company has 1,000 shares on issue.
A potential short seller then borrows 20 shares from a holder of the shares (let's call these holders group X), and then short-sells these shares (the potential short seller is now an actual short seller). Now, in effect, there are 1,020 shares held by group X, even though there have been no new shares issued and the actual number of shares issued remains at 1,000.

So, to my understanding, while in reality there are 1,000 shares on issue, in supply and demand terms there are 1,020. Has this, in effect, increased the supply of shares? Not in reality it hasn't, but in effect, I would argue. it has. That is, right now, there are 1,020 shares available for trading.

[chops_a_must]

Why not ban buying puts? Or writing calls for that instance!

Hell, lets just wreck liquidity at a time when liquidity is shrinking in the markets.

I bet the ASX isn't going to ban short selling of the CFD's it makes money from.

Just more rubbish from the people that only want markets to go one way.

Wouldn't look good if they ban short selling when they can't even sort out incredibly dubious director and insider transactions.

[Timmy]

Anyone read The Age this morning? There is a good article in it (link below) that raises many more questions than it answers (a pretty good sign of a journo doing his (in this case) job). Instead of Kohler and co. prating away, this guy points out some unpleasant truths.

Article (http://business.theage.com.au/whos-to-blame-for-corporate-meltdowns/20080228-1vgy.html).

[gilbo]

Whilst short-selling does add liquidity to the market and in that regard is a good thing I think that things go a wee bit far when hedge funds can circumvent disclosure rules to target a company and bring it down to the point of collapse.

Investors should be used to the fluctuations of a share price and it is part of the risk/reward equation, but few people (investors, employees, creditors etc) win from a company being forced to sell assets at a vastly discounted price and restructure a business just so a few can make a lot of money from the exercise.

Now I'm not defending over-leveraged directors who thought it was easy to make vast sums of money whilst putting their companies ultimately at risk, but surely the whole practice of being able to short a stock whilst being able to keep the entire exercise out of the gaze of investors and market regulators is not something that should be supported by the market?

[Trembling Hand]

surely the whole practice of being able to short a stock whilst being able to keep the entire exercise out of the gaze of investors and market regulators is not something that should be supported by the market?

What are you talking about????????
That is what a down trend is. More sellers than buyers. It doesnt matter if its shorters or longs exiting, they do it for the same reason. The companies are overvalued. Nothing secret about a down trend.

[gilbo]

What are you talking about????????
That is what a down trend is. More sellers than buyers. It doesnt matter if its shorters or longs exiting, they do it for the same reason. The companies are overvalued. Nothing secret about a down trend.

Trembling - sorry but I'm not talking about down trends. I'm talking about deliberately shorting a stock away from the usual disclosure rules (i.e. borrowing from institutions) and specifically targeting a company that takes it to the brink of collapse. I have no problem with short-sellers per se.

[chops_a_must]

Whilst short-selling does add liquidity to the market and in that regard is a good thing I think that things go a wee bit far when hedge funds can circumvent disclosure rules to target a company and bring it down to the point of collapse.

How does shorting shares bring a company to the point of collapse?

At the end of the day, the share price reflects the value of the underlying company. A company going belly up will collapse the share price, not the other way around.

[gilbo]

How does shorting shares bring a company to the point of collapse?

At the end of the day, the share price reflects the value of the underlying company. A company going belly up will collapse the share price, not the other way around.

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

[wayneL]

At least they're blaming someone other than day traders these days, lol.

[chops_a_must]

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

Any company that ties its lending arrangements to its share price is:

1) Incredibly stupid
2) Has no idea about volatility and risk
and 3) Deserves to go under.

[ROE]

Anyone want to short WOW and bring it to $2 .. I buy a couple of hundred thousand shares :D .. Company going down because of bad management and high level of debt and cant get their head above water because of debt commitment.

Got nothing to do with short selling what so ever...don't blame someone else for your greedy and bad judgment.

Ever seen a company go broke because they got no debt??

[ROE]

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

Hello!!! if you bring on debt to an extreme level that is the risk you got to manage like any other business investment. And if you dumb enough not to know that you not fit to be a director of a company.

try short something as small as WWA (88 Millions market Cap) and you get burned cos they got zero debt, what bank covenants are they breaking????
they just making money year in year out, and increasing too no debt involve.
now that what I call good management.

[lesm]

At least they're blaming someone other than day traders these days, lol.

or the Company Directors selling off their shares. What did/do they know that the journos failed to report or pick up on in the attack on short selling, with the 'hedge fund' excuse.

'Smoke and mirrors' or just plain and simple example of the media using the 'short selling' and 'hedge fund' angle to sell more newspapers.

It would like an attack on an unsuspecting company, taking into account that the general public doesn't really understand the mechanics of short selling.

[gfresh]

Isn't it the banks / financiers placing these covenants in place? not the companies themselves?

Lot of "everybody deserves what they get" in this thread. In that case let's give everybody a gun.. whoever wants to kill somebody else can? Not sure if it's the sort of place I want to live however.

Media is simply on the 'blame game' as they always are, no surprises there.. I think a little bit more transparency would keep some people happy, or a couple of further disclosure rules, not banning shorting altogether (which isn't going to happen anyhow).

[Nick Radge]

Remember my comments (as was the article) were made prior to the market learning about "lock it in at a lower price Eddy" selling. The media slapped around hedge funds with zero evidence except hearsay from their desperate broker contacts. Now we know the truth. Those fools should now retract their crappola. Anyone knows that to write the quantity of articles those guys do denigrates their work and their image. Unfortunately they appeal to the greater fool concept.

Qantas is a great example of the benefits of hedge funds/private equity. We just hear of that escapade as a positive (and it was never high enough - even though it was 50&#37; higher than the 4-year average) but cross the street and they're crooks. The only crook is "lock it in at a lower price Eddy" and his cronies.

[rederob]

If exchanges allow short selling, and they do, then we should learn to live with it.
If companies are exposing themselves to debt, and they do, then we should learn about it.
Companies don't determine how we trade, we do.
So if we can profit from a company's stupidity, we should.
Short selling isn't limited to equities.
It's presently driving commodity prices sharply higher.
So when covering dries up, so will the bull run (for the immediate term, at least).
I suspect any traders with half a brain can work it out, and continue to.

[Nick Radge]

rederob makes very good points. The wheel spins both ways.

That said, the current drive higher in commodities is not from a short squeeze. Its commodity and hedge funds getting long. Most (not all) follow the trends.

[Rainmaker2000]

If people want to take the risk of short selling, then good luck to them.......I think the put option and CFD is a much more efficient instrument..but what do I know......I don't do much of this stuff

I certainly don't mind if there are these funds out there knocking down perfectly good company share prices by some type of 'short selling' manipulation.......long term investers welcome low share prices....after all, I've never heard of one company say they have a lower profit because their share price went down......good management does not even refer to the share price....

You need to be concerned when management refers to share price too much....insert Enron and ABS to lessor extent

[Carol]

Under existing ASX rules (which have not be revised for 30 years) naked short selling has to be disclosed and only 10% of a companies stock can be short sold. If the percentage goes above 10% then the ASX trading platform would automatically reject the trade. These rules are in place to prevent the predatory practice of driving stocks down just to make a profit. What we are seeing at present is covered short selling - made possible by scrip lending to hedge funds. Because the short selling is covered by borrowed scrip it doesn't have to be disclosed and as such this lack of transparency makes the market open to manipulation. Believe me hedge funds are predatory and believe me they are definitely targeting the ASX at present. I am sure that the alleged collusion to drive stocks down is not only confined to hedge funds. Stocks are priced upon information. Currently information is denied the ordinary investor because of secrecy and non-disclosure and information is distorted by the purposeful creation of overreactive selling. Driving stocks down just to make a profit is not what the market is all about and it is about time that the ASX starting regulating scrip lending so that all short selling is disclosed. Until this is done, the integrity of the ASX market remains compromised and not a place for the retirement savings of Australian citizens.

[Trembling Hand]

Until this is done, the integrity of the ASX market remains compromised and not a place for the retirement savings of Australian citizens.

Yeah :rolleyes: Centro, Allco, ABC learning etc is not the place for retirement savings because of short sellers.

[Carol]

Correct these companies Centro, Allco, ABC would not be a good home for retirement savings because they all have very high levels of debt and their fundamentals were doubtful.

On the other hand, there are some very good companies like Babcock and Brown, QBE etc who represent the finest in corporate governance and good risk management and whose share prices have been savaged. Phil Green of Babcock and Brown was recently reported as saying you can't borrow BNB scrip from anyone because it had all be lent out to hedge funds. He has been a voice in trying to get more disclosure and regulation into the dubious practice of scrip lending.

[Timmy]

What we are seeing at present is covered short selling - made possible by scrip lending to hedge funds. Because the short selling is covered by borrowed scrip it doesn't have to be disclosed and as such this lack of transparency makes the market open to manipulation.

Thanks for this info Carol, good stuff to enable us to understand how this market (the ASX) is structured. Do you have any more info on this practise? I have seen it offered through a retail broker but didn't realise it by-passed the reporting requirements.

TremblingHand - you're right about the sort of companies that are going to be 'targets'. Any short-seller is going to short-sell companies that research reveals are vulnerable to a share price sell-off, like over-leveraged & over-exposed ... no point short-selling a solid company with a reasonable share price, the short-covering rally that the buyers will surely initiate is going to kill any profits made on the dodgy companies.

[Trembling Hand]

Phil Green of Babcock and Brown was recently reported as saying you can't borrow BNB scrip from anyone because it had all be lent out to hedge funds.

And there is a non biased voice. :cool:

If your "very good companies" have been "manipulation" down and all their script is out short you should be laughing. We are then on the verge of a massive short covering rally. especially BNB if "all" their script is short and their is nothing fundamently up with the company or economy or their buy, repackage and flog off strategy with debt. You have been give a HUGE opportunity. Of course that is if you aren't in denial about any fundamental problems and its not the shorts but the investors voting against you.

[Carol]

Replying to Timmy - good article on BWTS clarifying rules on short selling.

Limits on Short Selling
There are restrictions on how many shares may be sold short. A short sale of an Approved Security may not be made if the sale would have the effect of causing more than 10% of the issued number of shares to be sold short. There is one other important limitation on executing a short sale. That is the ASX requirement that a short sale not be made at a price lower than the price at which the last sale took place. This is designed to prevent short sellers driving the price down.

Procedures and Requirements for Short Selling

The broker has the responsibility to ensure that the sale is flagged to the market as a short sale with the parameter “S”. It is also shown on the contract note as a short sale.

Note the above rules do not apply to covered short sales (from borrowed scrip). As such the ASX recently admitted that it had no idea as to the extent of covered short sales because there was no requirement to report them. Incredible!!! As such the ASX can't monitor collusion or market manipulation.

I'm not against short selling. I am strongly against the lack of transparency and secrecy that exists on the ASX. Scrip lending is regulated in the UK and US but not here and the hedge funds are using this loophole.

[IFocus]

Believe me hedge funds are predatory and believe me they are definitely targeting the ASX at present.

Hi Carol you raise some good points but as I think Nick Radge pointed out and you state Hedge funds are predatory and if one can see a stock over sold they will quite happily crush who ever is short for a profit and they do.

I think people are forming assumptions on what a company's price should be in the market environment that applied last year and thinking that should apply now.

Current market conditions are about risk, rising interest rates, rising inflation, and global financial chaos and more, buyers are simply not prepare to accept the risk of those stocks trending down in these conditions hence bear market.

The media beat up has the general population focused on short selling and not on the real issues.

PS I am no funder-mentalist but hasn't BNB have some serious size loans / gearing

[Carol]

Reply to IFocus

Re BNB. No it is not leveraged to debt and it has a totally different business than companies such as Allco, Centro etc. It is apparent that there is confusion about what BNB does.

BNB is a global investment bank involved in real estate, leasing, structured finance and infrastructure investing. It has a positive equity/debt ratio. You will need to check its fundamentals yourself though - don't take my word.

[IFocus]

BNB is a global investment bank involved in real estate, leasing, structured finance and infrastructure investing. It has a positive equity/debt ratio. You will need to check its fundamentals yourself though - don't take my word.

Carol given the rising costs / liquidity of finance wouldn't this effect BNB's bottom line?

[Carol]

Reply to IFocus

No company is immune from down turns in the economy it just depends how well their risk is managed. That is something you need to research yourself.

I have a very low risk profile when it comes to trading and even when the technical signals point to a trade, I alway check out the company's fundamentals before proceeding. As I limit my trading to only a few stocks, I do get to know these quite well so it's not too time consuming updating my knowledge.

[Nick Radge]

...believe me they are definitely targeting the ASX at present...

Care to elaborate on exactly how we know this?

[dhukka]

Reply to IFocus

Re BNB. No it is not leveraged to debt and it has a totally different business than companies such as Allco, Centro etc. It is apparent that there is confusion about what BNB does.

BNB is a global investment bank involved in real estate, leasing, structured finance and infrastructure investing. It has a positive equity/debt ratio. You will need to check its fundamentals yourself though - don't take my word.

On the contrary, I'd say these guys are geared to the teeth

From the latest BNB balance Sheet

Interest Bearing Liabilities 11,357,567
Shareholders Equity 2,513,604

That's a debt to Equity ratio of over 450&#37;! Add in cash 2,551,158 and Net Debt to Equity is still at 224%

A lot of the debt is secured against various assets but considering some $3.5 billion of is is secured against residential real estate, that hardly instills confidence, obviously the market is dubious. Below is another extract from the latest annual report.



NORTH AMERICAN RETAIL AND RESIDENTIAL PLATFORMS

RESIDENTIAL
In March 2007, Babcock & Brown completed the acquisition of all of the common stock of BNP Residential Properties Inc (BNP) in a transaction valued at approximately US$833 million (approximately A$1,041 million). Following completion of the BNP acquisition, Babcock & Brown’s multi-family property portfolio comprises in excess of 28,000 units across nine states in North America with a more diversified and strengthened presence in the south east and a maintained focus in the high employment growth Sunbelt states. The BNP asset management platform, now rebranded Babcock & Brown Residential, is progressively assuming asset management responsibilities for the Alliance portfolio of multi-family dwellings which were acquired in 2006. The financing for the portfolio is ten years interest only fixed rate debt. The portfolio is performing well,benefiting from the current turmoil in the home mortgage market in North America. Two of the properties from the original Alliance portfolio were recently sold at a cap rate of 5.43% based on an in-place trailing 12 months NOI, compared to the cap rate the BNP portfolio is valued at in the Babcock & Brown books of approximately 5.75%.

WTF? Let me get this straight, they bought into US residential real estate in March 2007 and the portfolio is performing well?


RETAIL
During the 2007 year, Babcock & Brown acquired Gregory Greenfield & Associates, Ltd. (GG&A), a US-based regional mall owner and operator, as well as a portfolio of eight regional malls currently managed and controlled by G&A. Included in the acquisition was the asset management role for six additional malls currently owned by third party investors. The transaction was completed on 10 August 2007, with the GPT joint venture acquiring a 51.1% stake in the retail portfolio and subsequently, Oxford Properties Group (Oxford) acquiring 48.9%. Babcock & Brown has retained the asset management platform acquired as part of the GG&A acquisition and will continue to manage the GG&A property portfolio on behalf of the Joint Venture and Oxford. The management of the other retail properties owned by the GPT joint venture have been transferred across to the GG&A platform.

Jaysus, these guys have got some bad timing, buying up malls across the US when retailers are shutting down stores left, right and center.

These guys have been playing the same leverage up, ponzi scheme that half the US financial sector has been playing, which is all well and good when prices are going in one direction but look out when they go the opposite way.

[reece55]

On the contrary, I'd say these guys are geared to the teeth

From the latest BNB balance Sheet

Interest Bearing Liabilities 11,357,567
Shareholders Equity 2,513,604

That's a debt to Equity ratio of over 450%! Add in cash 2,551,158 and Net Debt to Equity is still at 224%

A lot of the debt is secured against various assets but considering some $3.5 billion of is is secured against residential real estate, that hardly instills confidence, obviously the market is dubious. Below is another extract from the latest annual report.




WTF? Let me get this straight, they bought into US residential real estate in March 2007 and the portfolio is performing well?



Jaysus, these guys have got some bad timing, buying up malls across the US when retailers are shutting down stores left, right and center.

These guys have been playing the same leverage up, ponzi scheme that half the US financial sector has been playing, which is all well and good when prices are going in one direction but look out when they go the opposite way.

Dhukka
If you read the details about the malls, they are no longer shelved on BNB's balance sheet, they reside with with GPT JV (which GPT invests in and BNB provides management skill to) and another investor holds the rest. All they do is assist with the management (i.e. earn a nice management fee for advising).

The US residential assets they hold on balance sheet have been discussed in the BNB thread directly. Whilst I'm not really impressed with the revaluation, the yields seem resonable and the rentals are in decent areas in America. I'm not saying they are not going to experience a downturn in capital values, but BNB do quote that a section of the portfolio was sold post the credit crunch at a capitalised lease rate of 5.46% and their valuation is at 5.75%, so once again it adds credibility. I'm by no means saying everything is rosy here, but it seems like BNB had half a brain in acquiring the portfolio in sensible areas at a sensible valuation.

As for their debt, yes they are geared up, but isn't every investment bank and even every bank? Unlike AFG, there is no cross collateral and a lot of it is non recourse tied to assets at very favourable interest rates and long maturity dates. I am a little concerned about the 2.5 Bil that is to be refinanced shortly, but per their teleconference a week ago, sounds like Phil Green is confident of being able to re-negotiate their facilties going forward.

I'm not saying that BNB isn't being hit in the credit crunch - clearly it is and has. I only trade the entity on bounces at present. However, I don't think they are in the same league as say AFG for instance, they have real infrastrcture and leasing expertise. When everything blows over, I suspect they will be left standing and will make a killing come 3- 5 years time...

Just my opnion though and I am normally very conservative with these things..... But BNB looks to have the quality to get through IMO.

Cheers
Reece

[dhukka]

Reece,

Point taken on GPT JV. I wouldn't lump these guys in with AFG either, I'd say they're more akin to MQG. Still, US residential prices continue to tumble, according to the Case-Shiller index, prices fell 5% in the 4th quarter of 2007 alone (post credit crunch). By conservative estimates prices have at least 10% more to fall but I suspect probably more.


As for their debt, yes they are geared up, but isn't every investment bank and even every bank?

Kind of like saying in US a few years ago, "yes prices are going up but isn't everybody buying a house? Afterall prices only go up don't they?"

Anyway, should probably take this over to the BNB thread.

[cordelia]

Looks like the debate has been raging a long time in the US <mod edit- from http://en.wikipedia.org/wiki/Short_selling > :

Because both the short seller and the original long holder can sell the same shares at the same time, selling pressures can be artificially magnified during such times, causing larger price drops than would be normally justified by the negative news.

I don't know much about short selling but the above has made me wonder about the following:

if a person borrows some shares and sells them and at the same time the institution who has lent him the shares wants to sell them too..what happens? Doesn't this mean that two parcels of the same shares ( just for simplicity) are being sold on the market when in actuality half of them don't exist.

It was previously mentioned that people borrow money to do things with however as opposed to borrowing shares, that money is no longer available to the lender....only the fee that he gets paid for lending the money is at his disposal...

Someone correct me if I am wrong but surely shorting must imbalance the market unfairly in favour of those who short.....

waiting for many hot and firey responses:)

[wayneL]

Because both the short seller and the original long holder can sell the same shares at the same time, selling pressures can be artificially magnified during such times, causing larger price drops than would be normally justified by the negative news.

I don't know much about short selling but the above has made me wonder about the following:

if a person borrows some shares and sells them and at the same time the institution who has lent him the shares wants to sell them too..what happens? Doesn't this mean that two parcels of the same shares ( just for simplicity) are being sold on the market when in actuality half of them don't exist.

It was previously mentioned that people borrow money to do things with however as opposed to borrowing shares, that money is no longer available to the lender....only the fee that he gets paid for lending the money is at his disposal...

Someone correct me if I am wrong but surely shorting must imbalance the market unfairly in favour of those who short.....

waiting for many hot and firey responses:)

The statement in red is a nonsense. If the share are lent out to a short seller. they cannot be sold. The institution would have to claim them back from the shorter in order to sell them.

[cordelia]

There is one other important limitation on executing a short sale. That is the ASX requirement that a short sale not be made at a price lower than the price at which the last sale took place. This is designed to prevent short sellers driving the price down.



wouldn't it be possible for a trader to buy a small parcel of shares at the last lowest price and then offer them back into the market at a lower price in an effort to drive the market down lower to close out his short position which was above the price he purchased his small parcel of shares at. Hope that makes sense....

I am sure I saw that happen today when I was watching the afg market activity...

From my limited understanding and fro what I have read in this thread there is a need for more transparency. It seems to be an unfair playing field...

[Kauri]

What is wrong with short selling.... I can't follow any of the reasons put up... forget the ethics of super funds et al loaning out shares for shorting, that is another subject...
If you want to buy... surely someone must want to sell to enable a transaction???
Why can't I back a company to go down??
If I, in my blissfull ignorance, back Collingwood to beat the Dockers, am I not shorting the Dockers??
If I work out a dutch book and back several runners to take out the favourite in a neddy race, am I not shorting the favourite??..
If I go long the skippy am I not shorting the greenback??
If I buy IVC am I not shorting peoples lives??.. ;)
Selling today at todays price what you think will be worth less tomorrow is good astute business, it happens everyday in many different forms... why should the financial markets be special????
or is it just a convenient monkey valve to let off steam when you were caught ... umm.. long... :)
Confused
................Kauri :alcohol:
PS... home made Baileys does it for me...

[Trembling Hand]

wouldn't it be possible for a trader to buy a small parcel of shares at the last lowest price and then offer them back into the market at a lower price in an effort to drive the market down lower to close out his short position which was above the price he purchased his small parcel of shares at. Hope that makes sense....


Oh my good :eek7:. No wonder its so easy to whip up a SH!t storm about shorts when thats the logic of the punters out there.

[blablabla]

if a person borrows some shares and sells them and at the same time the institution who has lent him the shares wants to sell them too..what happens? Doesn't this mean that two parcels of the same shares ( just for simplicity) are being sold on the market when in actuality half of them don't exist.

Have read some of your other posts and they have all been interesting and well-informed, so I hope this one is simply due to too much time spent reading bad journalism recently. WayneL is correct in mentioning the word "nonsense". Doesn't happen.

Trades are made on the ASX via brokers. If a broker failed to deliver at settlement time then the broker would no longer be permitted to trade on the ASX. End of life for broker, so brokers make darn sure it doesn't happen. May have nearly happened to Tricom recently.

In theory a counterparty could fail to settle for quite a variety of reasons, most of which have nothing to do with shortselling.

[cordelia]

Oh my good :eek7:. No wonder its so easy to whip up a SH!t storm about shorts when thats the logic of the punters out there.

Actually as I stated earlier I know little if next to nothing about shorting a stock...I am trying to understand the "logic" behind it..condescending responses such as yours fortunately don't deter an inquiring mind such as mine:-) and I am assuming you meant to say "oh my god" not "oh my good"


BTW the text in red in my previous post I cut from an earlier post in this thread....

[Trembling Hand]

wouldn't it be possible for a trader to buy a small parcel of shares at the last lowest price and then offer them back into the market at a lower price in an effort to drive the market down lower to close out his short position which was above the price he purchased his small parcel of shares at. Hope that makes sense....

I am sure I saw that happen today when I was watching the afg market activity...... How can you be sure. Did a share transaction come through on the ticker saying I just bought theses 2 cents higher??

If your example works next time you want to get long buy a "small parcel of shares at the last lowest price and then offer them back into the market at a lower price in an effort to drive the market down lower" so you can open a new long position. (They are you words!!)

That is the same thing. How successful is that going to be for you?

[cordelia]

How can you be sure. Did a share transaction come through on the ticker saying I just bought theses 2 cents higher??

If your example works next time you want to get long buy a "small parcel of shares at the last lowest price and then offer them back into the market at a lower price in an effort to drive the market down lower" so you can open a new long position. (They are you words!!)

That is the same thing. How successful is that going to be for you?

If you read my post again you will see that it wasn't a statement it was a query...maybe I should have said "is it possible"

I am not sure that's what happened I am just pondering a situation..I am no expert which I am happy to admit.....

It makes it very difficult for people (such as myself) who are trying to understand something when they get responses like yours...I bet there are a lot of lurkers out there wanting to post something but are too afraid to in case they will look stupid...

[reece55]

Anyone read the Australian today.......

Every page of our financial press seems to talking about this topic, but I think it is Terry McCrann who has summed it up best (extract per below...)

"Properly understood, short selling is unambiguously a plus for the market. And, in a fundamental sense, unstoppable..."

He takes a subtle swing at the uninformed articles so far written on the topic. I must admit, the more I read the Australian, the more respect i have for their financial writers..... The AFR these days is just complete junk - I prefer quality not quantity.....

Cheers

[IFocus]

Hi Reece

The Australian has been trotting out some shocker articles on short selling over the last few weeks (haven't seen the TMc article yet) the only Jurno thats really summed it up well IMHO is Andrew West from SMH following article gets to the bottom of some of the real issues.

http://business.smh.com.au/crossing-off-the-rubicons/20080303-1wek.html

[Trembling Hand]

http://business.smh.com.au/crossing-off-the-rubicons/20080303-1wek.html

Yeah I would have to agree with you IFocus, Andrew West stuff on dodgy companies recently has been a welcome bit of journalism in a sea of bull market rubbish.

[Kauri]

one of the possibly important facts that most "experts" in the Press seem to miss in the shorting debate is that the companies involved were basket cases in the current credit situation...
Cheers
.........Kauri

[blablabla]

Contrary to what some influential players are preaching, shortselling does not negatively impact on the value of good quality stocks in the long term. On a weekend TV program it was questioned why large funds would lend their shareholdings to be shortsold, which might reduce the value of the holdings.

Firstly, super funds and other large funds tend to select stocks with good prospects with the intention of holding for the long term. The market prices of such quality stocks are not affected by shortselling in the long term because any fall below reasonable perceived value does not persist for very long. The funds always collect fees for lending their shares to shortsellers, and hence lending their shares for shortselling actually adds to their revenue.

Another reason may sometimes come into play. If a fund wishes to accumulate a stock that it likes then lending its shares to shortsellers is a good way to temporarily depress the SP of the stock, thus allowing the fund to buy at a price that is more favourable. Of course, when a fund eventually wishes to dispose of its holding of a stock it obviously must cease to lend its shares in the stock, which will tend to put upward pressure on the SP thus creating a temporary favourable selling opportunity.

[IFocus]

one of the possibly important facts that most "experts" in the Press seem to miss in the shorting debate is that the companies involved were basket cases in the current credit situation...
Cheers
.........Kauri

Minor detail :D:D

[wayneL]

Minor detail :D:D

Haha! Never let the facts get in the way of a good story, eh?

[Trojax]

After reading this thread I feel more informed about hedge funds and the part they play, thanks for all the posts, I too was negative.. well still struggle with the ideal of it but I can see its usefulness in practice. Correct me if I'm wrong, but in a simple analogy wise they are like maggots on rotting meat, while they can feed off the corporates dead meat they will until reach good flesh, then the body lives and the maggots die off. Or if the meats rotten to the core they'll finish it off, lol gruesome analogy but creates by nature an amplified time frame in terms of companies failings, focusing on those in distress for one reason or another. Effectively making the pain sharper\quicker in short term losses, though inevitable in outcome overall. That's provided their not manipulating the SP despite fundementals and creating negative sentiment deliberately.

What I'm interested in though is the fees charged by the prime brokers and so forth on lending target stocks out, eg if it's my stock holdings their offsetting against, where's my slice of the action. I own them, if they are loaning them out by default, assuming a fall, surely since based on my holdings I should get some of that fee generated kicked back to me :D

[blablabla]

On "Inside Business" at the weekend Alan Kohler said that "The ASX likes stock lending because it increases the volume of trading, and ASIC (Australian Securities and Investments Commission) probably didn't know about it." More nonsense - it is extremely unlikely that ASIC was not aware of stock lending practices, so perhaps the reality is that Alan Kohler is only now learning the facts about shortselling. At least he now seems to be coming round to the view that transparency, or the lack of it, may be the problem.

Trojax, nobody replied to your post which at least did exhibit commendably high levels of imagination and literacy. Have you ever tried to lodge a sell order with your broker but received a message something like "Sorry, we lent your shares to somebody else, please try again tomorrow"? No? Well, if this did happen then you could take action against your broker because your broker cannot lend your shares to somebody else without your permission.

[doctorj]

On "Inside Business" at the weekend Alan Kohler said that "The ASX likes stock lending because it increases the volume of trading, and ASIC (Australian Securities and Investments Commission) probably didn't know about it."
Right - he's clearly after a headline grabber. In his game it's much better to get Joe Public to pay attention to you than to be right.

I haven't read much in this thread beyond Nick's first post, but I can't see short selling as a bad thing.

A quick brainstorm of the positives of short selling:
- A more efficient market
- Provides a profit motive for the discovery of 'negative' information, instead of people only investigating the positives
- Encourages company transparancy (see above)
- Increased market liquidity makes larger position sizes possible
- Reduces transaction costs (slippage)

[tigerboi]

I was informed today that the asx in conjunction with asic have announced a royal commission into hedge funds short selling,i managed to obtain a cv & profile of the presiding justice.the terms of reference will be "are those long shorts or short longs"???lol...:D:)

[Justthinkin]

This is an interesting thread and I guess there are a thousands 'fors' and 'against'. I trade forex and by its nature I must be shorting a currency. In this context I can't be too bitter and twisted.

But,if a share price is defined by the weight of money rather than the fundamentals of a market or company, then irrespective of what underwrites that source of short selling, it is wrong.

For example, to use short selling as a means of building a superfunds portfolio at a less than fair value is short sighted. Broad participation in markets is fundamental to its efficiency. If a large number of participants (small investors) are to be slammed by a few large investors (superfunds), then small investors will go away. Simple as that. Liquidity will thin.

Possibly the most important facet is that a lot of short selling is not transparent. In an otherwise illiquid ASX stock who knows when a substantial sell order represents a director closing out on inside information; a major shareholder just cashing out or by default, that the market is being intentionally led to believe there is something fundamentally wrong with the company? Or is it a superfund or hedge fund just shorting the market? The weight of money is an inequitable blunt instrument!

In short (excuse the pun), I'm ok with transparent short selling in a liquid market (eg 2.4 trillion / day forex mrkt) but I have a lot of trouble with short selling in a very small market such as the ASX.

A simple answer. If someone wants to short the market, irrespective of how the transaction is underwritten, declare the sell order as a shorting order. I would be interested to see how many declared short orders would be placed. A lot less I expect! But a short is a short... I don't agree that by borrowing stock under even an option arrangement makes it any different to a cash underwritten or otherwise naked short.

[Joe Blow]

I was informed today that the asx in conjunction with asic have announced a royal commission into hedge funds short selling,i managed to obtain a cv & profile of the presiding justice.the terms of reference will be "are those long shorts or short longs"???lol...:D:)

Tigerboi - I have made that monkey your avatar so now you don't have to attach it to every single one of your posts. :sly:

[tigerboi]

yeah i just sent you a pm i love it as i have it elsewhere makes me laugh heaps everytime i see it,i been wondering when you would approve of a new avatar,as i had him elsewhere i was unsure if i should also give him a fulltime run here...lol..cheers tb:D:D:D

[tigerboi]

Look out joe blow kennas will get you for spelling & proper grammatical usage regarding my mate here,he hates it if you call him a monkey he'll go bananas!!
hes a lowland ape from gulargambone...:):D:)

[hangseng]

Interesting read regarding shorting on Bendigo.

1:56 PM Mar 12, 2008 Robert Gottliebsen
Bendigo shafts the shorters

The big rally in the overall market has given the shorters a huge kick in the teeth. But nowhere have they been hit harder than at Bendigo Bank which was earmarked by the shorters as a potential major killing.

As revealed by Alan Kohler (Who's on the short list, March 10) the shorters had borrowed an incredible 14.5 per cent of Bendigo stock from the superannuation and index funds ready for a massive bear raid on the stock. In their usual pattern, to unsettle the market the shorters had started to spread false rumours about the stock – a repeat of what had happened in more prominent situations.

http://www.businessspectator.com.au/bs.nsf/Article/Bendigo-shafts-the-shorters-CN56X?OpenDocument

[Trembling Hand]

1:56 PM Mar 12, 2008 Robert Gottliebsen
Bendigo shafts the shorters

The big rally in the overall market has given the shorters a huge kick in the teeth. But nowhere have they been hit harder than at Bendigo Bank which was earmarked by the shorters as a potential major killing.



Hardly!!

Its not like any smart short would wait till a stock goes from $17 to $9 to short something :rolleyes:

[prawn_86]

Ok, so with the media attention I too have been trying to get my head around shorting.

Im fairly certain i understand the basic premise.

The way I see it is that going short affects the market no more or less than going long. One cannot drive the price down (significantly) by going short, just like one cannot raise a price by going long. (Obviously this is for smallish volume transactions).

So the media saying that short selling drives down price is a crock. Am i correct with this?

What should really be looked into is if hedge funds are colluding in order to short stock off of each other, then dispose and repeat. This would drive the price down, but is much more to do with collusion than shorting.

Please let me know if I am right or wrong with any of my assumptions... :confused::)

[hangseng]

Hardly!!

Its not like any smart short would wait till a stock goes from $17 to $9 to short something :rolleyes:


You have misunderstood.

The shorters had already been at their game and then BEN rallied hard, catching them off guard (the implication of the article) i.e. they were in there boots and all.

The shorters didn't wait until $9 as you imply.

[wayneL]

There is much cognitive bias regarding shorting.

Look at the different language used when there is an upwards retracement in a downtrend, to when there is a downwards retracement in an uptrend. :rolleyes::rolleyes::rolleyes:

[Kauri]

interesting read.....

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/21/nhedgie121.xml

Cheers
...........Kauri

[hangseng]

Now they should be forced to evidence how this practice provides benefits/returns to the super fund (and not to the fund managers).

Can we 'TRUST' the 'TRUSTEES'? I think not.

Super fund ceases share lending

Adele Ferguson, March 24, 2008
http://www.theaustralian.news.com.au/story/0,25197,23420454-643,00.html

"ONE of Australia's big pension funds, Equipsuper, has publicly withdrawn from share lending, in what is expected to be the start of a mass exit for stock lenders until market integrity is restored."

[refined silver]

One recent article quoted someone as saying up to approx 20% of the ASX could be currently sold short through stock lending - which doesn't require records.

If as the article above states there is a mass exit from share lending, shorters will be forced to cover, and if 20% was accurate, some stocks could be in for great and violent short-covering rallies. :)

[hangseng]

One recent article quoted someone as saying up to approx 20% of the ASX could be currently sold short through stock lending - which doesn't require records.

If as the article above states there is a mass exit from share lending, shorters will be forced to cover, and if 20% was accurate, some stocks could be in for great and violent short-covering rallies. :)

I agree, there could be a significant knock on effect from this.

The saga continues:D

[ROE]

So people like madness and Irrational Exuberance to drive stock up but doesn't like it when people discover the stock is a pile of sh*t and short it?

These short seller are not some junkies who just punk their money..these are the clue guys of financial world, they look through your book and see your weakness and attack it.. It make the market efficient and highlight the stock weakness to the public so you can either stay away or join the Irrational Exuberance.

Without hackers computer will not be as secure, these guys discover weakness and make vendor take notice... Same goes with the short seller they high light company weakness and so directors of these company take notice and dont put themselves in the spot light.

Beside short selling cannot be stopped, that article just high light until there is transparency some institution wont lend stock... Transparency is the only thing they can do and I welcome transparency.

Weak company still be under the spot light and they will bring these company down....They done it to Enron, ABS and the like and they will do it to many more in the future. Your only defense is to invest in a well run company with good balance sheet and don't treat cheap debt as some kind of magical weapon to get rich quick.

[refined silver]

So people like madness and Irrational Exuberance to drive stock up but doesn't like it when people discover the stock is a pile of sh*t and short it?

These short seller are not some junkies who just punk their money..these are the clue guys of financial world, they look through your book and see your weakness and attack it.. It make the market efficient and highlight the stock weakness to the public so you can either stay away or join the Irrational Exuberance.

Without hackers computer will not be as secure, these guys discover weakness and make vendor take notice... Same goes with the short seller they high light company weakness and so directors of these company take notice and dont put themselves in the spot light.

Beside short selling cannot be stopped, that article just high light until there is transparency some institution wont lend stock... Transparency is the only thing they can do and I welcome transparency.

Weak company still be under the spot light and they will bring these company down....They done it to Enron, ABS and the like and they will do it to many more in the future. Your only defense is to invest in a well run company with good balance sheet and don't treat cheap debt as some kind of magical weapon to get rich quick.

I've no problem with shorting either. One issue is transparency, and the other is manipulation. Jim Cramer a few months ago shocked his host by not only openly admitting stock manipulation from when he was a hedge fund manager, but actually how do it! Anything that gets rid of this is good.

[Trembling Hand]

I've no problem with shorting either. One issue is transparency, and the other is manipulation. Jim Cramer a few months ago shocked his host by not only openly admitting stock manipulation from when he was a hedge fund manager, but actually how do it! Anything that gets rid of this is good.

And of course you would be equally wanting to get rid of the momentum that hedge funds create when they are long as well. :cool:

[bergers_n_fries]

i have tried time and time again to 'get it'

how on earth does it work???

embaressing question i know...

cheers

[jaeyon]

i have tried time and time again to 'get it'

how on earth does it work???

embaressing question i know...

cheers
its like your borrowing stocks.
say you think CBA shares will fall during the day, however you dont own CBA. you can call up your broker and say you wish to short sell $10 000 worth of CBA stocks. your broker will then lend these stocks to you (i.e they'll lend you either their own stocks, or clients stocks). you then have the obligation to buy back the number of shares you have sold at a later point in time.

the difference between the sale price and purchase price is your profit less any brokerage.

also be wary because brokers can ask you to buy the stocks back (even if the price is higher then what you sold them for)

[metric]

should be outlawed and guilty traders hung by the gonads.

[nomore4s]

should be outlawed and guilty traders hung by the gonads.

Why?

[metric]

If people want to play the downside use options by buying puts or selling calls.

Allowing someone or br firm or any entity to sell shares they didn't previously buy to own is pure market manipulation and is used by the large players and hedge funds to shake out shares so they can buy them at manipulated low prices...or destroy capital formation and starve companies trying to survive, but that would make the market a more balanced and fair game and that's something the big players will fight to their last breath because they are the ones that are profiting the most.

The bottom line is you should not be allowed to sell shares into a market if you didn't take the risk to go long in the first place. That's not a fair marketplace and undermines what the markets are designed to do which is the creation of capital. imo

[chops_a_must]

The bottom line is you should not be allowed to sell shares into a market if you didn't take the risk to go long in the first place. That's not a fair marketplace and undermines what the markets are designed to do which is the creation of capital. imo

Ahahahahahahahahahahahhhahahahahahahahahahhaahahha ahhahahahahahaahahahahahahaha!

Life's not fair kiddo, get used to it!

Seriously, markets aren't a source of creation of capital, the economy is. Markets are just a reflection of that.

Without shorting, there is no efficient market place. Assets stay artificially high. There would be no point in writing or buying puts if people weren't allowed to sell.

No-one would write calls if people weren't allowed to sell, because there would be no risk.

And what do you get if you add up all these proposed changes? Illiquidity. The options and futures are already bad enough here. They don't need to be made worse...

[Trembling Hand]

If people want to play the downside use options by buying puts or selling calls.

Allowing someone or br firm or any entity to sell shares they didn't previously buy to own is pure market manipulation and is used by the large players and hedge funds to shake out shares so they can buy them at manipulated low prices...or destroy capital formation and starve companies trying to survive, but that would make the market a more balanced and fair game and that's something the big players will fight to their last breath because they are the ones that are profiting the most.

The bottom line is you should not be allowed to sell shares into a market if you didn't take the risk to go long in the first place. That's not a fair marketplace and undermines what the markets are designed to do which is the creation of capital. imo



i bought in originally @60c. traded in and out as the price fluctuated and actually made a small profit. then i bought some silver(ish) shares mmn, mgo, mar, and aim (which isnt silver). CNP went down to 31c, so i sold all my others and bought back into cnp.
i like silver mines. i'll buy back in later.

What you did with the above silver trades have ABSOLUTLY nothing to do with creation of capital. What a lovely little bit of hypocrisy. :cool:

[metric]

What you did with the above silver trades have ABSOLUTLY nothing to do with creation of capital. What a lovely little bit of hypocrisy. :cool:

i will be a hypocrit in my own house if i want to!!:D

[tayser]

Short Uncle Sam's Peso and you won't be hung by your gonads :D

[wayneL]

If people want to play the downside use options by buying puts or selling calls.

Allowing someone or br firm or any entity to sell shares they didn't previously buy to own is pure market manipulation and is used by the large players and hedge funds to shake out shares so they can buy them at manipulated low prices...or destroy capital formation and starve companies trying to survive, but that would make the market a more balanced and fair game and that's something the big players will fight to their last breath because they are the ones that are profiting the most.

The bottom line is you should not be allowed to sell shares into a market if you didn't take the risk to go long in the first place. That's not a fair marketplace and undermines what the markets are designed to do which is the creation of capital. imo

There would be no options market without short selling. BABOOM

[It's Snake Pliskin]

should be outlawed and guilty traders hung by the gonads.

Dogma is not always a good thing.

[cordelia]

firstly,can i please preface this post with a statement that I do not know much , probably little, about short selling. However, after observing what has unfolded over the last few weeks I have formed an opinion, and I must stress that it is only an opinion, regarding short selling.

Its about balance..more buyers price goes up
more sellers price goes does

presure, presure, presure

I think people have to really observe what is goimg om instead of relying on here say

look at the charts they might have the answer (opinion of course)

[lusk]

If people want to play the downside use options by buying puts or selling calls.

Allowing someone or br firm or any entity to sell shares they didn't previously buy to own is pure market manipulation and is used by the large players and hedge funds to shake out shares so they can buy them at manipulated low prices...or destroy capital formation and starve companies trying to survive, but that would make the market a more balanced and fair game and that's something the big players will fight to their last breath because they are the ones that are profiting the most.

The bottom line is you should not be allowed to sell shares into a market if you didn't take the risk to go long in the first place. That's not a fair marketplace and undermines what the markets are designed to do which is the creation of capital. imo


Short selling is not "selling shares" and so the share price is pushed down. It is not Sell first then Buy later at a cheaper price. What you are doing is locking in a selling price, if the share goes down you can then Buy the shares and then Sell the shares at your locked in selling price.

[chops_a_must]

So who thinks short selling is worse/ more unethical than what ANZ are doing with their indiscriminate dumping of shares that may legally belong to others?

And what is ASIC/ ASX doing about this as compared to whinging about short selling?

[blablabla]

So who thinks short selling is worse/ more unethical than what ANZ are doing with their indiscriminate dumping of shares that may legally belong to others?

And what is ASIC/ ASX doing about this as compared to whinging about short selling?

Very good point, chops.

As an interesting aside, this is the way markets work. Selling is selling nomatter who is doing it or why. A considerable volume of forced selling (or evil shorters) will always result in an oversold situation. The result is happy hour for those quick enough to grab the bargains. From the information released so far it would appear that the best bargains resulting from the ANZ selloff will be on offer today and perhaps tomorrow.

[cuttlefish]

I think what has been highlighted by the Opes prime situation is the inaccuracy of the 'lend/borrow' terminology and also the lack of transparency in relation to stock lending.

When a stock is loaned it is not really loaned it is transferred to the borrower.
It is a stock transfer with an agreement to return equivalent stock at a later date. In the interim the 'lender' is effectively an unsecured creditor of the borrower as far as I can tell, with their only recourse any cash margin that was lodged for the borrow which would be woefully inadequate in the situation that the lender went into bankruptcy. If Australian superannuation funds are taking the risk of lending stock in this way they are behaving very irresponsibly.

Or does an Australian Master Securities Lending Agreement provide additional protection to the stock lender in the case of the borrower going bankrupt that I'm unaware of? (I doubt it).

Consider this:

If I loan somebody my car I don't let them sell it - they can't sell it because its not their car - try going to Hertz and borrowing a car and then selling it - you'll be up on criminal charges. So thats myth number one about stock lending - it isn't stock lending its in fact a stock transfer with an agreement that equivalent stock will be returned at a later date.

To give an example of what stock lending is:

Lets say I own a car worth a nominal $30k. I give the car to someone else to sell (yes the title is transferred to them) in exchange for a legally binding commitment by them to give me back an equivalent car whenever I request it. They pay me $2k fees for the priviledge and they also lodge a $5k cash deposit with me to protect for any downside. The guy I give the car to then sells it for $30k.

So where am I. I had a $30k car. I now have $5k cash and a promise from some guy that doesn't own a car to give me back an equivalent car at some point later on.

So what if he decides to spend the $30k he got for selling the car on booze instead of buying me back another car and goes bankrupt. What is there that I can claim back, where is the security. The car is sold. There is NO security.

So really I've lent the guy $25k unsecured as far as I can tell. Thats a good recipe for disaster - you wouldn't find many banks lending that way. (ANZ certainly didn't - thats why they are the ones left holding the stock when the proverbial hit the fan).

The only sensible way to lend stock would be to have a full cash cover matching the current market price - no more, no less - because there is NO security on the debt created once the stock has been transferred to the borrower/shorter.

This is different to a margin loan to purchase additional stock, where the margin lender has security over hard assets - stock - that is more valuable than the loan.

I don't have a problem with short selling but I have a massive problem with the lack of regulation around stock lending and the risks being taken by institutions that loan stock.

[Trembling Hand]

When a stock is loaned it is not really loaned it is transferred to the borrower.
It is a stock transfer with an agreement to return equivalent stock at a later date. In the interim the 'lender' is effectively an unsecured creditor of the borrower as far as I can tell, with their only recourse any cash margin that was lodged for the borrow which would be woefully inadequate in the situation that the lender went into bankruptcy. If Australian superannuation funds are taking the risk of lending stock in this way they are behaving very irresponsibly..

Nah Nah Nah. cash of 110% is held in trust against that loan!!!


If I loan somebody my car I don't let them sell it - they can't sell it because its not their car - try going to Hertz and borrowing a car and then selling it - you'll be up on criminal charges. So thats myth number one about stock lending - it isn't stock lending its in fact a stock transfer with an agreement that equivalent stock will be returned at a later date. ..
Poor example..:rolleyes:



Lets say I own a car worth a nominal $30k. I give the car to someone else to sell (yes the title is transferred to them) in exchange for a legally binding commitment by them to give me back an equivalent car whenever I request it. They pay me $2k fees for the priviledge and they also lodge a $5k cash deposit with me to protect for any downside. The guy I give the car to then sells it for $30k.

So where am I. I had a $30k car. I now have $5k cash and a promise from some guy that doesn't own a car to give me back an equivalent car at some point later on.

So what if he decides to spend the $30k he got for selling the car on booze instead of buying me back another car and goes bankrupt. What is there that I can claim back, where is the security. The car is sold. There is NO security.

So really I've lent the guy $25k unsecured as far as I can tell. Thats a good recipe for disaster - you wouldn't find many banks lending that way. (ANZ certainly didn't - thats why they are the ones left holding the stock when the proverbial hit the fan).

The only sensible way to lend stock would be to have a full cash cover matching the current market price - no more, no less - because there is NO security on the debt created once the stock has been transferred to the borrower/shorter.

This is different to a margin loan to purchase additional stock, where the margin lender has security over hard assets - stock - that is more valuable than the loan.

I don't have a problem with short selling but I have a massive problem with the lack of regulation around stock lending and the risks being taken by institutions that loan stock.


Nah. Nah. Nah. Shorts sells are margin loans. Monitored in real-time every day against margin. not enough margin. position gets liquidated. Not hard to buy back stock. Your beating this up into something its not.

The risk come from a broker going bust and not able to settle. And if that happens as 90%(??guess) of transactions are longs its the integrity of the system you have to worry about not stock lending secured against margin.

[nomore4s]

Cuttlefish

I think the car is a poor example.

With short selling, the margin loan mechanics are the same as going long, at least with my broker, my account goes outside a certain range and I have to either put more money in, or sell/buy more stock depending if I'm long or short. So there is just as much security over the loan if I go short or long.

With shorting stocks all the broker has to do is buy back stock to close out a clients position, and as we all know the broker can do this at anytime. It's not like the car example where you can't just go and repo the car, there is always stock for sale.

[cuttlefish]

cheers for the responses fellas (TH and nomore4s). I'm on my way out for so haven't got time to reply in full but looking forward to discussing it further - there's some things I'd like to clarify on both sides of the argument. TH I didn't realise about the 110% lodgement - is this for naked shorts or shorts covered by stock lending? I'm specifically talking about stock lending here and not naked shorts. (And not CFD's either, wouldn't got near CFD's with a bargepole myself I think there's counterparty risk all over the place there). If the cash from the sale of the borrowed securities is held in trust directly linked to the short position then that does nullify my example.


Just to be clear I'm talking about direct shorting of fully paid shares (not via CFD's) using stock loaned via an Australian Master Securities Lending Agreement (whatever that is - sounds official - hadn't heard of it before the Opes debarcle). I'm not talking about the naked short selling that the ASX allows either.

[Pronto]

The key to this fiasco seems to be in the use of the Australian Master Securities Lending Agreement (AMSLA). This is the Aust equivalent of the UK OSLA.
The local version was provided by the legal firm Mallesons in 1997, commissioned by the Aust Securities Lending Association (ASLA). There have been several revisions subsequently, but other than what seems to be an agreement between 'the chaps', there is no mention of any official status, authority, permissions or sanctioning .
The Opes website states that using the AMSLA is not short selling within the meaning of the Corporations Act or ASX Market Rules, but doesn't enlarge on that.
Looks like 'the authorities' - whoever they are - have been caught napping (again).
I would have thought also that this had significant taxation implications to it and that the ATO might have been on to it before now. :cool:

[wayneL]

Here's another angle:

If we ignore the borrowing stock angle for the moment; because it is only stocks that have this isuue, futures, options etc don't have to be borrowed; But much of ordinary every day commerce utilizes what is technically "short selling" all the time.

Let's suppose I'm a high street retail shop that sells widgets.

A customer walks into my shop and asks for the price on the X765-BHU Super Widget. I say $150.00, but I don't have one in stock so I'll have to order it. Customer say fine, an invoice drawn up, a deposit taken, a sale agreed at a fixed price.

I ring up the widget supplier and buy it at the wholesale price $100, delivery next week.

If we agree that short selling is the actof selling first, and buying at a later point in time, what has just happened is a short sale.

Cheers

[Birdster]

Here's another angle:

If we ignore the borrowing stock angle for the moment; because it is only stocks that have this isuue, futures, options etc don't have to be borrowed; But much of ordinary every day commerce utilizes what is technically "short selling" all the time.

Let's suppose I'm a high street retail shop that sells widgets.

A customer walks into my shop and asks for the price on the X765-BHU Super Widget. I say $150.00, but I don't have one in stock so I'll have to order it. Customer say fine, an invoice drawn up, a deposit taken, a sale agreed at a fixed price.

I ring up the widget supplier and buy it at the wholesale price $100, delivery next week.

If we agree that short selling is the actof selling first, and buying at a later point in time, what has just happened is a short sale.

Cheers

But that analogy is just simple commerce, isn't it? Regardless if the store owner has it in stock or not, the price is $150. His price to cover wages, rent, etc... and the rest a profit.

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.

BTW, where can I get one of these X765-BHU Super Widgets. They sound great. :rolleyes:

[wayneL]

But that analogy is just simple commerce, isn't it? Regardless if the store owner has it in stock or not, the price is $150. His price to cover wages, rent, etc... and the rest a profit.

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.

BTW, where can I get one of these X765-BHU Super Widgets. They sound great. :rolleyes:

I have some in stock, but the new price is $160.00 (inflation you see) :p:

Yes thats my point, short selling is just a part of normal commerce.

On the borrowing point. I just remembered we used to do it from time to time in manufacturing.

We'd get and order, but can't get the raw material in the time frame required, so we'd borrow some raw material from another manufacturer, to complete the order, and replace it when we recieved supply. But by then we'd made the item and shipped it off.

Short selling happens all the time, it's just a part of business.

[Trembling Hand]

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.


No. If you walked down the road and smashed a shop window to get your widget thats stealing. If you get it from a wholesaler thats commerce.

[Birdster]

...
Yes thats my point, short selling is just a part of normal commerce.

On the borrowing point. I just remembered we used to do it from time to time in manufacturing.

We'd get and order, but can't get the raw material in the time frame required, so we'd borrow some raw material from another manufacturer, to complete the order, and replace it when we recieved supply. But by then we'd made the item and shipped it off.

Short selling happens all the time, it's just a part of business.

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say? :eek:

[Trembling Hand]

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say?

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????? ???????????????????

:banghead::banghead::banghead::banghead::banghead:

[RichKid]

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????? ???????????????????

:banghead::banghead::banghead::banghead::banghead:

yep, doesn't just happen at wholesale level, either, just good business to help out someone, you never know when you might need a hand yourself....the big oil co's and commodities houses do this too between themselves- of course they sometime add extra profit margins in emergencies but it's better than nothing. Just think of the local pharmacy- if they don't have a drug you want they sometimes call a rival nearby and have it brought over or direct you there. The second pharmacy may not transfer the item to the first pharmacy at cost but it'll probably give it a discount. Anyway, just fleshing out the reality of business here.

[Birdster]

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????? ???????????????????

:banghead:

Quite stressfull with the Q marks TH. :confused:

Supplying a rival business in wholesale is different than "lending" material. I supply my equipment to companies when they are short. But, it is at a premium, and I don't want it back! No lending, no favours, just pure business. By the time "they" sell it, I hope the profit is minimal, if any, to them.

Next time the customer might go somewhere else waiting for the product from a company that has do the ring around?

How do you do business is your business. Just like anyone else doing thier business.

I'm only debating as the thread suggests OK?

[wayneL]

Quite stressfull with the Q marks TH. :confused:

Supplying a rival business in wholesale is different than "lending" material. I supply my equipment to companies when they are short. But, it is at a premium, and I don't want it back! No lending, no favours, just pure business. By the time "they" sell it, I hope the profit is minimal, if any, to them.

Next time the customer might go somewhere else waiting for the product from a company that has do the ring around?

How do you do business is your business. Just like anyone else doing thier business.

I'm only debating as the thread suggests OK?

My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

[nomore4s]

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say? :eek:


My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

Run a showerscreen & robe business, and am always lending/borrowing stock from the main opposition, no big deal imo, they help us out, we help them out, plenty of work around for everyone :2twocents

[Birdster]

My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

So off topic now, are we not?

Cut throat "war" mongering business I'm in then. Maybe why I didn't see your context of the anology you posted before. My business is non "demographic" dependant. So I must do what I do.

I guess I can't see the similars of short selling and the type commerce I deal with. Its' not the end of the Earth, nor reason to stress. Enjoyed the chat. :)

[wayneL]

So off topic now, are we not?

Cut throat "war" mongering business I'm in then. Maybe why I didn't see your context of the anology you posted before. My business is non "demographic" dependant. So I must do what I do.

I guess I can't see the similars of short selling and the type commerce I deal with. Its' not the end of the Earth, nor reason to stress. Enjoyed the chat. :)
It's at a tangent, but not off topic. The analogy is that there are lots of folks who believe short selling is only practiced by the devil's spawn, but what is technically "short selling" is just a part of everyday commerce in the real economy, and couldn't function as well without it.

It only comes up as a topic when the market is down... a convenient aspect to blame, rather than credit problems, declining earnings, etc.

It's a red herring "they" use to deflect attention.

[IFocus]

So who thinks short selling is worse/ more unethical than what ANZ are doing with their indiscriminate dumping of shares that may legally belong to others?

And what is ASIC/ ASX doing about this as compared to whinging about short selling?

I thought this was totally ethical........for a bank:D:D

[blablabla]

Consider the purely hypothetical situation where aggrieved Opes clients won some sort of court case and forced ANZ etc to return all the seized shares they have sold. This would turn the current fire sale of shares into one of the biggest shortselling fiascos in history. The fire sale has driven down the prices of many stocks. Buying the shares back again onmarket would effectively transform the current selling into shortselling. Buying the shares back onmarket could only be done at higher prices and would be rather expensive for ANZ shareholders.

Of course, this possible fiasco is totally hypothetical. The reality is that an astute bank lent Opes a large sum of money, against shares as security. It is normal banking practice to require some form of security. The loan went bad, the bank took possession of the shares and proceeded to sell them off with the aim of recovering the debt. Banks do not care about getting maximum value for assets they have seized. Their business imperative is simply to recover the debt. Any surplus is distributed to other creditors. Banks act for themselves and not for the other creditors. Same thing happens when property is foreclosed because mortgagors defaulted.

The point I am making here is that sometimes shortselling occurs through circumstance rather than through design. Shortselling is a fact of life. If there is a market then there will be shortselling, sometimes in many different ways.

[CFD]

Same thing happens when property is foreclosed because mortgagors defaulted.


Things must have changed a lot then. When I had to organise that we had to get 3 registered valuers to provide full written valuations just to set the reserve. Then the auction had to be advertised for X number of weeks in X number of papers including the City and Country press.

[CFD]

Here's another angle:
~~
what has just happened is a short sale.
~~
Cheers

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.

Bye the way of course the argument only comes up when the market is down and falling. Why would you short when it's up and rising?

[Trembling Hand]

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.


I think its is the same. You make a sale then a purchase to cover that sale. Aint that far off a short sale. That is selling something you don't own. Sure its not the same but its kinda the same(:rolleyes:)

[wayneL]

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.

Bye the way of course the argument only comes up when the market is down and falling. Why would you short when it's up and rising?

Well a matter of opinion I suppose, but technically no different, IMNSHO.

Buuuut, shorting occurs every single day in the market whether the "broad" market is down or not. In fact, in the index futures, for every long contract, there MUST be a short contract, otherwise the long cannot exist.

The reason it only comes up when the broad market is down, is that "they" are looking for someone to blame. It can't be over-valuation, credit, bubbles, declining earnings prospects, or any fault of those in gu'mint or the institutions. It's just gotta be them evil short sellers. Incredibly, there is even a group of supposedly intelligent commentators who blame short selling for Bear Stearns demise. Not sub-prime, not toxic valueless derivatives, not greed, no no no, it's those evil un-American short sellers.

In the US there is a concerted campaign by the likes of Jim "The Village Idiot" Cramer, to blame the removal of the uptick rule as the reason the market is down. It's rubbish to deflect attention away from his appalling calls lately. (Institutions have always been able to get around it anyway)

Anyhooz, I just realized I've probably started ranting will leave off there. :o

[CFD]

I've always valued the opinions of TH and wayneL, so I guess I should leave off there to.

[stoxclimber]

If one looks at the stock market as a mechanism of delivering capital to businesses for investment as part of the circular flow, there's nothing wrong with short selling per se. It adds liquidity and (at least in theory, although it doesnt play out that well in practice) can help correct price signals to ensure efficient flow of money.

Where there is a problem with short selling is when it's used to manipulate stock prices to trigger large sales of stock (i.e. for margin calls) - this distorts price signals - or where it encourages the spread of false or misleading information (i.e. 'rumourtrage' although I hate the phrase). The latter can be applicable to going long as well, however. Although its obviously more profitable on the downside if done effectively - up by the stairs and down by the elevator and all.

[Trembling Hand]

this distorts price signals - or where it encourages the spread of false or misleading information (i.e. 'rumourtrage' although I hate the phrase). The latter can be applicable to going long as well, however. Although its obviously more profitable on the downside if done effectively - up by the stairs and down by the elevator and all.


That whats I find absolutely dumbfounding. Everyone's happy to jump on the party bus becoming bull market experts and when the tide turns its all manipulation. The same 'manipulators' spend most of there time LONG. How can everyone in all honesty say that shorts are bad when they play the same games 80% of the time LONG. Classic example recently was commodities. They, funds, ran them up big time and everyone falls in love with Gold. It was GOLD, GOLD, GOLD everyone is on the bandwagon telling you how good it is. Then the funds slip out the back door and its manipulation.

Give me a break!!

[metric]

interesting article on naked short selling.


The naked truth

Every day Australian stockbrokers are phoned by the ASX around 11am and asked if they wouldn’t mind, please, just withdrawing that buy order they made three days ago, because it’s not going to settle today and the CHESS system has to balance at midday each day.

Under the T+3 settlement system, sellers have three days to provide stock to the buyer (and the buyer has three days to cough up the cash).

Brokers believe the reason there are failures to settle virtually every day is that hedge funds are gaming the ASX fines with “naked short selling”.

That is, they are selling short, but not borrowing the stock in time to meet settlement in three days as required.

That’s because the fine for failing to settle is 0.1 per cent of the amount outstanding, with a floor of $50 and a maximum of $2,000.

With almost every trade it is much cheaper to pay the fine than to borrow the stock from a securities lender, so naturally hedge funds just pay the fines. There are no other consequences: it is, for them, just a cost of doing business.

For the buying broker it is more than irritating. If a broker buys shares on behalf of a client but does not deliver the scrip in three days, it must give the client’s money back. There is no choice in this and it comes off the broker’s capital. One day a small broker will go to the wall because a big order did not settle.
to continue..http://www.businessspectator.com.au/bs.nsf/Article/The-naked-truth-DFRYP?OpenDocument

[wayneL]

Herb Greenberg dispels the notion that short-sellers short circuited Bear Stearns.

http://blogs.marketwatch.com/greenberg/2008/04/bear-blowup-why-it-wasnt-a-short-conspiracy/?mod=MWBlog

[dotocom]

The thing I don't understand about short selling is the fact it seems so easy to make millions of profit if all you have to do is speculate that ie-ANZ's share price will go down due to subprime, which in this example, seems very predictable.

For example, if you decided to start off at the beginning of this yr (jan 08), ANZ was around $27. Given it was fairly predictable upon reading newspapers, etc, that the financial sector is and will struggle for another 6+months, why didn't everybody in the world decide to borrow the share at $27 and short sell it now at $19 making a return of around 42%?

I'm sorry in advance because I'm a newbie, I'm still very naive about shares. But if it seems that predictable, I can't see why the risk would be that high and I can't see why not to invest. Are there any limitations to the ANZ example above? Thanks

[Timmy]

The thing I don't understand about short selling is the fact it seems so easy to make millions of profit if all you have to do is speculate that ie-ANZ's share price will go down due to subprime, which in this example, seems very predictable.

For example, if you decided to start off at the beginning of this yr (jan 08), ANZ was around $27. Given it was fairly predictable upon reading newspapers, etc, that the financial sector is and will struggle for another 6+months, why didn't everybody in the world decide to borrow the share at $27 and short sell it now at $19 making a return of around 42%?

I'm sorry in advance because I'm a newbie, I'm still very naive about shares. But if it seems that predictable, I can't see why the risk would be that high and I can't see why not to invest. Are there any limitations to the ANZ example above? Thanks

Hi dotocom - Short selling is a fairly simple process, can be done with the physical shares or through CFDs.
So what you say makes sense. The only thing I have an issue with is where you say " why didn't everybody in the world decide ...". Basically, if you have done your work and decide a share is a short-sell candidate don't concern yourself with what everybody else in the world is doing or not doing.

It does all look very predictable, especially 6 months after the fact, but if you have a view going forward, then go for it. Just make sure you have done the research and know the ins and outs of risk management etc.

[dotocom]

Thanks for the kind reply Timmy.

I just wanted to ask 2 more questions:

1. Given as I said it is predictable, is it difficult to acquire the shares at the ask price? ie - if ANZ current market price at $27, would it be hard to borrow that share for short selling purposes at $27, would they normally charge a lot more?

2. Would YOU be able to decide when/whether to short sell the shares when the share price goes down ie - ANZ goes down to $20? Or do you have to specify the period? (I think im confused with futures and options but all short selling are options am i right?)
-i only ask because i read that sometimes, the brokers ask you to buy back the shares at a random time.

[Timmy]

1. When shorting shares you either want to get set by selling at the ask (someone is going to have to deal at your offer/ask) or by you selling at the bid price (you hit the bid, so no waiting for anyone else to deal at your price).

The number of shares you can sell if you are sitting on the ask is going to be dependent on how many are bought from you, whereas the number of shares you sell at the bid price is going to be dependent on the number of shares on the bid at the time.

So if the current market price on the share is, for example, bid at $27.00 and offered at $27.05 then you could sell immediately at $27.00 (up to the amount of shares on the bid) or you could place an offer in the market anywhere from $27.01 to $27.05 and wait for someone to hit your ask price, hopefully for the amount you want to deal in. Obviously there is risk of not getting set on your position by placing an offer, and the higher the offer the more risk of not getting set you will have (i.e. more likely to attract a buyer at $27.01 than at $27.02).

2. No, short selling is not the same as options. For more general short sell info on the ASX, found here (http://www.asx.com.au/resources/education/basics/short_sales.htm). This is the sort of stuff you will need to familiarise yourself with before starting to trade from the short side. Options can be used to get set into a short share position, but this is different to short selling.

[MichaelD]

Given as I said it is predictable

Newbie error #1.

Share price movements are not predictable in advance. You will go broke very quickly if you trade based on prediction. In hindsight it seems so easy, but when you're trading the hard right edge of the chart it ain't so.

Newbie error #2.

Newspapers, tip sheets and mates are not a profitable source of information. They are, however, great at projecting the past onto the future.


Profitable traders will form a view of what a share price might do and will then act accordingly. This means quickly conceding when they are incorrect in their view and making the most of the situation when they are correct in their view.

[brianwh]

I get the gist of the arguments in favour of allowing covered short selling - but what is in it for the lender of the stock? Surely the small payment for the use of the stock will not be compensation for the loss in value. And sometimes this loss in value is total as for example in the case of ABC Learning. I have seen the suggestion that the lenders can trade on this "insider" knowledge but apart from the dubious legal nature of such dealings, this explanation seems a bit too cynical.

Can anyone enlighten me?

[Trembling Hand]

Can anyone enlighten me?

Probably not but I will try.

What makes you think just because a stock is sold short its going to go down?

Its more than likely to go up.

[cutz]

but what is in it for the lender of the stock?
Can anyone enlighten me?

One example i can think of is if you want to buy on margin you need to agree that you will lend out your stock (depending on your broker), therefore it's a win win situation for both parties.

EDIT>> Also agree with TH, stocks can get trashed even with the ban in place/rally hard with no ban, just check out MQG's history, ban was in place, stock got hammered from the start of the ban into mid November and again Jan to March.

[brianwh]

Probably not but I will try.

What makes you think just because a stock is sold short its going to go down?

Its more than likely to go up.

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it. But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

[alphaman]

Surely the small payment for the use of the stock will not be compensation for the loss in value. And sometimes this loss in value is total as for example in the case of ABC Learning.
You've got price and value mixed up. By now, with the benefit of hindsight, it's pretty clear that ABC Learning never had much value. It was overpriced. The short sellers made the right call.

If you take a longer term, bigger picture view, the short sellers actually prevented* futher erosion of value by preventing naive investors from wasting more $ in the crap company.

[Trembling Hand]

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it. But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

Tell us were are all this companies that are getting "trashed" by short sellers?

Where are the companies that are getting Large % of market cap sold short :confused:

[Timmy]

TH - I know that shorters get burnt from time to time but it must work very well often enough or they wouldn't do it.

It is the same argument for stock lending to short sellers by stock owners - it must work very well well often enough or they wouldn't do it.

Also, ever heard of a short squeeze?



But this is beside the point. My question is what is the benefit to the lender in enabling short sellers to trash a share price?

Ummmm, someone short selling a share is NOT the same as 'trashing' the share price. Someone has mentioned ABC, was the share price trashed by short sellers or by longs trying to get the hell out when they realised how that 'business' was being run?

[Largesse]

It is the same argument for stock lending to short sellers by stock owners - it must work very well well often enough or they wouldn't do it.

Also, ever heard of a short squeeze?




Ummmm, someone short selling a share is NOT the same as 'trashing' the share price. Someone has mentioned ABC, was the share price trashed by short sellers or by longs trying to get the hell out when they realised how that 'business' was being run?


I think ABC Learning is an extreme example to use. Was a spooge company run by a C grade financial engineer

Lehmann's didn't deserve the treatment they recieved. That was blatant abusive short selling to hit stops and trigger a collapse.

but i agree on the whole that short selling is a non-issue

[Trembling Hand]

Also, ever heard of a short squeeze?


The really frustrating thing about this argument is 2 things,

1 If 0.5% of market cap can have a significant long term effect on prices what the hell are the other 99.5% of market cap doing?? Its just a joke!!

and 2 It would be a safe bet that most institutional shorts are arbitrage not straight directional shorts.

[Timmy]

I think ABC Learning is an extreme example to use. Was a spooge company run by a C grade financial engineer

I think saying that shorting a share is 'trashing' it is extreme too.:)

ABC might have been a 'spooge' company (not familiar with that term) but the short sellers did a whole heap of people a favour, stopping idiot buyers from pouring more money into it and the share price.

Whoops, alphaman said it more eloquently than me, and first!:

If you take a longer term, bigger picture view, the short sellers actually prevented* futher erosion of value by preventing naive investors from wasting more $ in the crap company.

[Aussiest]

but what is in it for the lender of the stock?

I don't really care if my long stock is lent to somebody selling short. Afterall, i enjoy the benefits of short selling. It's a win-win situation for everybody.

[Wheep0]

My old broker asked me if I was interested in lending my stocks for this purpose.

I changed to a new broker the next day.:D

100% against my belief. I am an investor though on a mid to long strategy.
I actually think when done in context with a healthy market, its beneficial.

The problem being of course that being in such a vicious downtrend that we have seen, the serial shorters, have been in the midst of their own personal bull markets, never been easier to short stocks over the last months from what I can see. It was a no brainer seeing the patterns that we were seeing. This has led to some fundementally decent companies being in a position where they should not have been. May be thats healthy as well, dont really know. Survival of the fittest and all that..

No matter if its a right or wrong view you have, one thing is for sure, the serial shorters are all a little edgy.. not so much a given all of a sudden.

wheep0

[Largesse]

I think saying that shorting a share is 'trashing' it is extreme too.:)

ABC might have been a 'spooge' company (not familiar with that term) but the short sellers did a whole heap of people a favour, stopping idiot buyers from pouring more money into it and the share price.

I agree entirely with you on ABC. Short sellers saved alot of future inevstors money in that case, but I stuggle to justify the 'trashing' (i will use that term in this case) and eventual destruction of Lehmann's.

I am all for short selling in general but what happened there was abbhorrent behaviour, clearly manipulative and targetted. Lehmann's were in no worse position then most of the brokers at the that moment in time, excluding JPM and GS. My belief is that Citi is STILL in worse shape then Lehmann's was.

[cutz]

Who was your old broker Wheep0 ?

[cutz]

I am all for short selling in general but what happened there was abbhorrent behaviour, clearly manipulative and targetted. Lehmann's were in no worse position then most of the brokers at the that moment in time, excluding JPM and GS. My belief is that Citi is STILL in worse shape then Lehmann's was.

If Lehmann's were no worse why the rush for the exits, what i'm getting at is if a company is profitable, a huge reduction in share price should have no bearing on profitablity unless of course a capital raising is required.

Any thoughts?

EDIT>> On second thoughts Lehmanns may have not been worse off but a decision was made to cut them loose, in other words allowed to fail and they failed not due to short selling but toxic waste on their books.

[Timmy]

I think those that don't like short selling and short sellers are just rehashing the
old "doesn't play well with others" criticism. Short sellers should be banned
because they wreck the game for everyone else (meaning they sell before I have had
the chance to take my profit by selling). If only the short sellers were banned
then the ponzi scheme could continue indefinitely and we would all be happy (well, at
least I would because I could sell before the price reaches a silly high). How
dare short sellers expose me as being stupid!

Short seller = not a team player.

LOL

[Largesse]

I think those that don't like short selling and short sellers are just rehashing the
old "doesn't play well with others" criticism. Short sellers should be banned
because they wreck the game for everyone else (meaning they sell before I have had
the chance to take my profit by selling). If only the short sellers were banned
then the ponzi scheme could continue indefinitely and we would all be happy (well, at
least I would because I could sell before the price reaches a silly high). How
dare short sellers expose me as being stupid!

Short seller = not a team player.

LOL

short selling to expose an unrealistic shareprice is one thing.
short selling a company into recievership, ala Lehmann's has much further reaching consequences than just a few billion in lost equity.

[Trembling Hand]

short selling a company into recievership,

So it wasn't that no one was willing to do business with them because they had wrecked their own balance sheet with toxic debt in playing their own ponzi scheme?

[nunthewiser]

lol unreal

short sellers did not send anyone into recievership

[brianwh]

But I still don't think my original question has been answered. Why would the owner of a stock lend it to someone whose intention is to drive the value of the stock down. And I'm not talking about the day-traders with their relatively small scale involvement but many of these players are very big operators with the ability to move markets (sometimes with a little rumourtrage thrown in maybe). I can see that the market may be improved but that is of questionable value to the owner of the stock.

[cutz]

But I still don't think my original question has been answered. Why would the owner of a stock lend it to someone whose intention is to drive the value of the stock down. And I'm not talking about the day-traders with their relatively small scale involvement but many of these players are very big operators with the ability to move markets (sometimes with a little rumourtrage thrown in maybe). I can see that the market may be improved but that is of questionable value to the owner of the stock.


Refer to post #153.

I think you are being a little misguided, pick up a copy of the fin review and see for yourself the amount issued stock on the short side, as TH has already pointed out some of this may be market maker hedging, not directional bets.

Who are these big players you're talking about ???

Here you go, you don't even have to go out to get the paper. http://www.asx.com.au/data/shortsell.txt

[brianwh]

"Who are these big players you're talking about"?

Short of doing detailed research/analysis, off the top of my head I think you'll find that LEH was shorted out of existence by a hedge fund run by a person named Einhorn.

[nunthewiser]

"Who are these big players you're talking about"?

Short of doing detailed research/analysis, off the top of my head I think you'll find that LEH was shorted out of existence by a hedge fund run by a person named Einhorn.


lol

i thin k you will find that lehmans demise was purely from financial mismanagement and toxic debt .absolutely nothing to do with shorting the stock ...... yes they may have proofited greatly but gotta let u in on a lil secret here ......... no good shorting a stock UNLESS you get to cover your position also .....

anyways been through this evils of naughty shorters countless times and it seems that unless ppl actually know how it works it seems a lot easier to blame shorters for everything from recievership to cracked boiled eggs

ask twiggy , he,ll tells ya

[sails]

As I understand it - if a stock is fundamentally sound, being shorted to low levels will bring the buyers out in droves. Short sellers usually pick the ones that are fundamentally shaky to begin with and then seek to profit from it's anticipated demise.

[Timmy]

hedge fund run by a person named Einhorn.


Bless him!

[Timmy]

But I still don't think my original question has been answered. Why would the owner of a stock lend it to someone whose intention is to drive the value of the stock down. And I'm not talking about the day-traders with their relatively small scale involvement but many of these players are very big operators with the ability to move markets (sometimes with a little rumourtrage thrown in maybe). I can see that the market may be improved but that is of questionable value to the owner of the stock.

Brian - you ask a good question.

Lending your stock for short selling is not compulsory, and if you have lent it you can 'call it back' at any time. I don't know how a lender of stock would answer your question - perhaps they own put options/warrants or are short cfds and are either fully hedged or are net short themselves ... there are a few different scenarios that could be applicable. Or perhaps it is the case that they are not aware of the uses to which an aggressive short seller can put these borrowed shares (not everyone in the market educate themselves very well).

[Trembling Hand]

But I still don't think my original question has been answered. Why would the owner of a stock lend it to someone whose intention is to drive the value of the stock down. And I'm not talking about the day-traders with their relatively small scale involvement but many of these players are very big operators with the ability to move markets (sometimes with a little rumourtrage thrown in maybe). I can see that the market may be improved but that is of questionable value to the owner of the stock.

Brian they get interest payment above cash rates plus the divs etc. They still control the shares. And they know that lending a tiny percentage of market cap out to a fundamentally sound company will do NOTHING to the share price long term.

What SOUND companies are you trying to say are "trashed" by this big operators :confused:

[beamstas]

Shorting a company does no harm, as the shares have to be bought back eventually

The harm is done when holders of LONG positions sell

[nulla nulla]

lol unreal

short sellers did not send anyone into recievership

How do you know? :-)

Scenario:

Big hedge fund decides company xyz is over geared with debt to current asset values;
Big hedge fund scouts arround and borrows a substantlal amount of stock from the superanuation funds and Banks for an upfront fee and flexibilty on when it has to return the stock, covered by ongoing monthly fees;
Big hedge fund commences a progressive attack shorting the stock;
The first short drives the stock down causing the margin loan holders to cover their shortfal or sell into the falling share price driving the market down further;
The big hedge funds can either close out their shorts, at the margin called reduced price or see if they can push it further;
They decide to push it further and attack again;
More margin calls, with the margin lenders having to sell into the falling market beacause their clients have run out of capital to prop up their portfolio's or the client calls time to sell as the share has fallen so far and could fall further;
the hedge fund can close out the short or wait and see what happens next;
oops, the banks are now concerned, as the share price has fallen below their comfort levels for their loans to company xyz. They want greater security and higher interest rates or their money back;
oops, xyz can't refinance with any other banks, lines of credit etc and calls in an administrator; and
the banks say "no you don't, we will put a Receiver & Manager in to look after our interests. And guess what, it was an arm of the bank that lent the shares out in the first place to the hedge funds so that the hedge fund could short the market. Cunning beggars, they get their fees no matter what.

[cutz]

Wow nulla nulla,

That sounds pretty far out,

Got any examples of companies that have been pounced on by the vicious hedge funds. :eek:

[skyQuake]

Big hedge fund decides company xyz is over geared with debt to current asset values;

Well then company xyz is overgeared in the first place. Good short.
The fund would obviously do a fair bit of research into company xyz, and they know that if they put too much capital into the short operation, they could get busted easily. A big squeeze by players who know of their short could really screw them over.


The first short drives the stock down causing the margin loan holders to cover their shortfal or sell into the falling share price driving the market down further;

They decide to push it further and attack again;
More margin calls, with the margin lenders having to sell into the falling market beacause their clients have run out of capital to prop up their portfolio's or the client calls time to sell as the share has fallen so far and could fall further;

Margin calls will only flush out so much. I doubt that a significant portion of the company's market cap is held by players who bought them on margin.



And guess what, it was an arm of the bank that lent the shares out in the first place to the hedge funds so that the hedge fund could short the market. Cunning beggars, they get their fees no matter what.

Probably not, conflict of interest. Chinese walls would be an insufficient excuse when push comes to shove.

[beamstas]

How do you know? :-)

Scenario:

Big hedge fund decides company xyz is over geared with debt to current asset values;
Big hedge fund scouts arround and borrows a substantlal amount of stock from the superanuation funds and Banks for an upfront fee and flexibilty on when it has to return the stock, covered by ongoing monthly fees;
Big hedge fund commences a progressive attack shorting the stock;
The first short drives the stock down causing the margin loan holders to cover their shortfal or sell into the falling share price driving the market down further;
The big hedge funds can either close out their shorts, at the margin called reduced price or see if they can push it further;
They decide to push it further and attack again;
More margin calls, with the margin lenders having to sell into the falling market beacause their clients have run out of capital to prop up their portfolio's or the client calls time to sell as the share has fallen so far and could fall further;
the hedge fund can close out the short or wait and see what happens next;
oops, the banks are now concerned, as the share price has fallen below their comfort levels for their loans to company xyz. They want greater security and higher interest rates or their money back;
oops, xyz can't refinance with any other banks, lines of credit etc and calls in an administrator; and
the banks say "no you don't, we will put a Receiver & Manager in to look after our interests. And guess what, it was an arm of the bank that lent the shares out in the first place to the hedge funds so that the hedge fund could short the market. Cunning beggars, they get their fees no matter what.

I don't think you know what you are talking about

[brianwh]

Perhaps my somewhat superficial understanding of of the arcane workings of the market has lead me to ask a question that reflected this lack of insight. It was my understanding that funds with large hodings in a particular equity would make them available for loan to large hedge fund type companies who would use them to drive the market price down. This downward sentiment in the stock would unsettle other investors leading to further selling. I get the arguments as to why short selling may be positive for the market but simply wondered about this one aspect - why let someone borrow from you to force the price of what you have lent them, down?

[Trembling Hand]

- why let someone borrow from you to force the price of what you have lent them, down?

Brian excluding the naked short selling games which is now banned tell us which companies have LARGE positions short?

http://www.asx.com.au/data/Shortsell.txt

This scenario is only happening in yours and nullas head not in the real world.

Any hedge fund trying this game would be eaten alive by the 1000s of other long funds.

[cutz]

I think you're going roung in circles Brian a few guys have already explained things. If it's ABC that you are referring to, a large fund would not have had a big enough interest to do such damage by lending out stock, the damage was done by a CEO that had controlling interest via a huge margin loan, we all know what happened next.

[gav]

why let someone borrow from you to force the price of what you have lent them, down?

How does it force the price down? They are merely selling in anticipation of buying back cheaper. It does not necessarily mean they will be able to buy back cheaper. It's actually not that different from somebody who owns shares in the same company you do, then sells them hoping to buy them back cheaper later. So why aren't you complaining about those people too?

Or it would be like me saying "How dare you buy shares in XYZ company when I am shorting them!" :rolleyes:

[brianwh]

I'm convinced. Probably wouldn't have asked the question if I'd had greater insight into the market.

Thanks for your replies

[Timmy]

Article in Today's Australian:

Canberra tightens rein on short selling (http://www.theaustralian.news.com.au/business/story/0,28124,26157542-643,00.html)

From the article, these are basically the new proposals:

Under draft regulations released yesterday by Chris Bowen, the recently appointed Minister for Financial Services, Superannuation and Corporate Law, the government wants two streams of short-selling disclosure: "transactional" and "positional".

Transactional disclosure will require covered short selling to be reported to market operators for public release the following day.

For positional reporting, short sellers will need to report their positions to ASIC, which in turn will publicly release the data four days after the positions are taken, beginning on April 1 next year.

I can't see how this is much of a change from the current short sold list? Have a look at what is apparently the problem with the current system (again, from the article):

The current widely derided short-selling reporting system in Australia is based on what is called transactional reporting, whereby ASIC and ASX produce a daily list of which shares have been short sold, and it is published the following day.

Many investors say those numbers are extremely hard to interpret or rely on because they may include short sales that have already been closed out. (my underlining)

I don't get it, currently short positions are reported daily, so with these proposals, by making them report 4 days later (in 'positional' circumstances) it gets around the objection that the positions may already have been closed out? Isn't 4 days later a lot more time to close a position than the current arrangements? What am I missing?

:confused:

[Aussiejeff]

Here they go again....

More jittery BULL$hite... keep blowing those balloons, boyz....


Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.

http://www.bloomberg.com/apps/news?pid=20603037&sid=aMWQn8mCXZxM

Mmmm. Shares aren't supposed to plunge, are they. It just ain't natural! :angry:

[satanoperca]

Govnuts should leave capital markets to themselves and stop interfering and get on with the job of governing. Building better infra structure, education systems, getting rid of the queen, providing decent health care and the like.

They should keep their dirty hands out of the RE industry and stop propping up the banks.

Short selling short not be band, it is all just part of the process.

If I can borrow money from the bank to buy a IP for speculation of CG, I should be able to borrow shares to short sell.

Cheers

[Aussiejeff]

Here they go again....

More jittery BULL$hite... keep blowing those balloons, boyz....



http://www.bloomberg.com/apps/news?pid=20603037&sid=aMWQn8mCXZxM

Mmmm. Shares aren't supposed to plunge, are they. It just ain't natural! :angry:

Ha!

The cowardly Yanks went and done it. Anything to save their precious Wall St wallies. Desperate to "pump up" some bubbles somewhere... anywhere!


Federal regulators on Wednesday imposed new curbs on the practice of short-selling, hoping to prevent spiralling sales sprees in a stock that can stoke market turmoil.

The Securities and Exchange Commission, divided along party lines, voted 3-2 at a public meeting to adopt new rules.

The rules put in a so-called circuit breaker for stock prices, restricting for the rest of a trading session and the next one any short-selling of a stock that has dropped 10 per cent or more. http://www.thebull.com.au/articles_detail.php?id=9696

Pathetic.

:cool:

[joeyr46]

Ha!

The cowardly Yanks went and done it. Anything to save their precious Wall St wallies. Desperate to "pump up" some bubbles somewhere... anywhere!

http://www.thebull.com.au/articles_detail.php?id=9696

Pathetic.

:cool:

always thought you had to sell on an uptick anyway all there going to achieve is no liquidity and complete collapse IMO but the timing is interesting

[Aussiejeff]

always thought you had to sell on an uptick anyway all there going to achieve is no liquidity and complete collapse IMO but the timing is interesting

Maybe this will also encourage big US institutional & private equity "shorters" to become more active in as yet like-for-like unregulated overseas share markets. Like OZ perhaps?

[Happy]

For some reason I suspect that regulators are getting ready for another massive drop in US share prices.

After all everybody suspects that US economy has to collapse, in the end it might and if it happens in 2012 nobody will complain.

[Trembling Hand]

Maybe this will also encourage big US institutional & private equity "shorters" to become more active in as yet like-for-like unregulated overseas share markets. Like OZ perhaps?

Ha! bit too late for the might bit.