Short Selling - the truth

xt40

Lets say we have a development of 10 holiday homes

All are sold by the developer for 100000 euro on day 1 to genuine investors (the longs) who hope
They will be worth a bit more in the future.

After a year lets say the going rate is 150000
The keys are left with a management company(broker) to look after (nominee account)
One day a bunch of crooks(hedge funds) turn up (the shorts) and borrow all the keys. The broker hands them
Over (for a small consideration) and doesnt tell any of the owners.
Up goes a sign in someones garden for sale - 130000.
At this bargain price, its quickly snapped up.
Next appears another one for sale at 120000.
Again its snapped up
This continues and pretty soon word gets around that that development is in trouble and pricess
Are falling like a rock.
A few bits of doom and gloom strategically published by your friendly newspaper help greatly at
This point.
Genuine owners (suckers) panic and scramble to get whatever they can from their investment. After
A while the management co needs the keys back so shorty buys whatever houses are available from
Panicked sellers for a fraction of what he sold them for eg 50k(covers his short). He passes the
Keys over to the management co to give to the new owners (130k) and heads off into the sunset
With 80k in his back pocket leaving behind 2 ruined investors and a house now worth 50k.
In addition, for a while 2 genuine buyers actually owned the same house.






Naked shorty works almost the same way.
The main difference is that he doesnt borrow the keys, just turns up and sells.sells,sells.
Sell it down to zero and noone will bother looking for a key and you can pocket all the money.
The ultimate win.

Until last year the us had a rule called the uptick rule that meant you could only short if the
Previous sale had been a price rise
Price rises, short it down, price rises, short it down etc etc this kept the shorts in check and
Accoring to some allowed them to serve a positive role by preventing bubbles.







The wise folks at the sec abolished this rule (and wont reinstate it) which was in place since
Just after the 1929 crash
So now
It goes short it down,short it down,short it down,short it down and suddenly you have a crash
Without the participation of any of the actual owners.
This works best in extended hours trading where most retail owners cant trade.

Up until recently if shorts could drive a stock out of business, they not only could keep all the
Money but legally did not have to pay tax on it in the us.
Just like ordering and receiving a bunch of stuff from a company without paying cos you burned
Down their offices before they could bill you , only legal.



Lots of times the shares sold short are never delivered
They have a nice name for this - "fail to deliver"
In june alone there were these many counterfeit shares sold in the us markets


22,492,758,,461 counterfeit shares with a value of usd 86,223,410,734.38 were sold

Thats 22 billion shares worth 86 billion usd in 1 month


[url]Http://www.sec.gov/foia/docs/failsdata.htm[/url]

What do the brokers do? Nothing. Everyones accounts reflect what they think they have bought and the problem is ignored
20 houses and 100 owners . No prob . Just cut a few more keys.



If you or your family members feel that this does not affect you, then think again.
Chances are that you will probably die of a disease for which there is no cure/effective
Treatment bacause apart from financials, shortys favourite pastime is killing startup biotec/drug
Companies trying to develop cancer drugs etc.

pjproby

That is a terrific post and i appreciate the explanation of short selling etc. If people on these boards who are contemplating buying shares realised the implications of short selling they might prefer to give their money to Paddy Power.

OfflerCrocGod

Naked short selling is wrong but normal short selling I'm not convinced is so evil. The fundamental position of the major investment banks are weak they are too highly leveraged and will require a depositor bank to allow them to continue once the expected regulation comes in. That's why the market shorted them so brutally, aren't GS lucky to have such a close pall in Henry Paulson who could come to their rescue on more then one occasion (a few days before rescuing Freddy and Fannie GS bougth 10$ BIL+ of junior debt in them).

As Goldman Sacks where facing the harsh reality that they might need to start looking for a large depositor bank to buy them Paulson steps in and puts the US taxpayer in massive debt. I think it's possible that GS will not be independent by the end of this year.

pocketdooz

xt40 wrote: »

Lets say we have a development of 10 holiday homes

All are sold by the developer for 100000 euro on day 1 to genuine investors (the longs) who hope
They will be worth a bit more in the future.

After a year lets say the going rate is 150000
The keys are left with a management company(broker) to look after (nominee account)
One day a bunch of crooks(hedge funds) turn up (the shorts) and borrow all the keys. The broker hands them
Over (for a small consideration) and doesnt tell any of the owners.
Up goes a sign in someones garden for sale - 130000.
At this bargain price, its quickly snapped up.
Next appears another one for sale at 120000.
Again its snapped up
This continues and pretty soon word gets around that that development is in trouble and pricess
Are falling like a rock.
A few bits of doom and gloom strategically published by your friendly newspaper help greatly at
This point.
Genuine owners (suckers) panic and scramble to get whatever they can from their investment. After
A while the management co needs the keys back so shorty buys whatever houses are available from
Panicked sellers for a fraction of what he sold them for eg 50k(covers his short). He passes the
Keys over to the management co to give to the new owners (130k) and heads off into the sunset
With 80k in his back pocket leaving behind 2 ruined investors and a house now worth 50k.
In addition, for a while 2 genuine buyers actually owned the same house.






Naked shorty works almost the same way.
The main difference is that he doesnt borrow the keys, just turns up and sells.sells,sells.
Sell it down to zero and noone will bother looking for a key and you can pocket all the money.
The ultimate win.

Until last year the us had a rule called the uptick rule that meant you could only short if the
Previous sale had been a price rise
Price rises, short it down, price rises, short it down etc etc this kept the shorts in check and
Accoring to some allowed them to serve a positive role by preventing bubbles.







The wise folks at the sec abolished this rule (and wont reinstate it) which was in place since
Just after the 1929 crash
So now
It goes short it down,short it down,short it down,short it down and suddenly you have a crash
Without the participation of any of the actual owners.
This works best in extended hours trading where most retail owners cant trade.

Up until recently if shorts could drive a stock out of business, they not only could keep all the
Money but legally did not have to pay tax on it in the us.
Just like ordering and receiving a bunch of stuff from a company without paying cos you burned
Down their offices before they could bill you , only legal.



Lots of times the shares sold short are never delivered
They have a nice name for this - "fail to deliver"
In june alone there were these many counterfeit shares sold in the us markets


22,492,758,,461 counterfeit shares with a value of usd 86,223,410,734.38 were sold

Thats 22 billion shares worth 86 billion usd in 1 month


[URL]Http://www.sec.gov/foia/docs/failsdata.htm[/URL]

What do the brokers do? Nothing. Everyones accounts reflect what they think they have bought and the problem is ignored
20 houses and 100 owners . No prob . Just cut a few more keys.



If you or your family members feel that this does not affect you, then think again.
Chances are that you will probably die of a disease for which there is no cure/effective
Treatment bacause apart from financials, shortys favourite pastime is killing startup biotec/drug
Companies trying to develop cancer drugs etc.

Very good post

Thanks

Although I do think short selling is a necessity to hedge long positions in different areas - naked short selling does cause problems and the uptick rule should be reinstated permanently.

bosra

XT40, I think your post doesn't reflect the realities of the present climate. In the example you provided with your properties, surely the savvy who know the true worth of the development would enter the market and scoop up the apts at what would be 'rock bottom' prices. Unfortunately this isn't an adequate analogy of today's conditions. Traders are 'shorting' or betting the market and in particular banks will fall because they are up to their eyes in toxic assets. The banks across the globe would like you to believe that there are no problems with their balance sheets and this is a problem created by short sellers. But even the dogs on the street know this is a fallacy. Basically, the banks share prices didn't reflect the reality of their balance sheets. So my first point would be this : If through detailed analysis, you come to the conclusion that an asset is undervalued you buy it or alternatively if you feel it is overvalued, you sell it..This is the one of the most basic principles of any free market and allows the market find an equilibrium state. The ban on short selling dictates that it is 'capitalism on the way up and socialism on the way down'. Just as importantly, traders shorting the market provide alot of liquidity to help transactions get done. In turn this boosts the profits of brokerages and equity bourses to mention just a few. The ban on short selling is a protectionist measure to give the banks and other sectors 'breathing space' to get their houses in order. In the absense of this policy, the hand of the free market would simply of put an axe through them and some more would have gone the same way as Lehmans. This policy measure is just an extension of the bail out package that is necessary to save the world economy from collapse.

Diarmuid

xt40 wrote: »

One day a bunch of crooks(hedge funds)

I stopped reading here

Idu

Good posts on both sides here but i think bosra made the most appropriate point with the "capitalism on the way up and socialism on the way down". This is Anne and Barry economics where the governments have decided if you dont have anything good to say you cant say anything. Either way the market has a habit of finding its true level regardless of what measures are put in place to make everything seem rosy

daveirl

This post has been deleted.

pjproby

can you explain, who in Ireland is short selling, and how do you short sell in this country?

daveirl

This post has been deleted.

pjproby

Thanks for the reply.
with spread betting anybody can participate whereas short selling seems to be a reserved function for the chosen few. While there is a good argument to be made about the overinflated share prices of Irish banks, this hardly justifies the rumour mongering used to drive down prices of some stocks. Just read the forums on Google finance to find evidence of attempts to artificially depress share prices.
As I understand it, a broker might sell BOI shares today and short sell BOI tomorrow. If this is the case then the stock market is a casino and investors should steer clear.

daveirl

This post has been deleted.

pjproby

In march or April of this year there was a sustained attempt to drive down the share prices of Google and Apple waged on the Google finance forums. So sustained was it that one individual was reported to the SEC.
People invest in stocks and shares not only to make gains but also to provide for their future needs or pension. If people cannot have confidence in the workings of the market why should they buy shares?
I have no problem buying shares in Apple and then finding that the price has dropped because of their bad management or general economic conditions. I do have problems with share ownership if other factors are allowed to determine the share price.
If short selling is to be permitted, at the very least the amount of shorted shares should be publicly available. If I read the RTE website I can see how many share transactions take place each day, I cannot tell how many are being shorted.

daveirl

This post has been deleted.

pjproby

i have'nt got the energy to go looking for a link-life is too short-but i have the scars and the losses to prove it. Whether they moved markets I don't know but it was a sustained campaign that lasted for a few weeks. At one stage Apple fell to $120, mind you it flirted with that price last week before the great Friday rally.
The real losers in short selling are retail investors who are unable to discern the workings of the real market-the market short sellers are fishing in.

daveirl

This post has been deleted.

Mikel

What a load of nonsense, unfortunately too many people are uneducated and get their information from sensationalist sources.
Yeah short sellers are evil and to blame for everything, give me a break.
Anglo who complain about shorts went to 10 as the positions were covered, and closed where, 5 and a half or so?
So it obviously wasn't short sellers causing the low price then.

Where do people get the idea that shorting a stock is a one way market?
I sell a share short and voila the market goes down? Oh if only!

All this proves is that the regulators don't have a clue.
You can't trade options on these stocks now, all of those positions will have to be liquidated too. What effect will that have?

Time Magazine

I was gonna lock this thread but thought it'd be too heavy-handed.

Options markets are just another game of supply and demand, folks. Banning short-selling is similar to imposinging price caps: sounds alright to the average punter but is really, really stupid.

If you think that shorting lowers the price of stocks below their true value, then feckin' buy more!

pjproby

david mcwilliams-you are taking the p-short selling is all about running a market that is restricted to the chosen few and encouraging fools to engage in it.
lock away
there is nothing to fear except fear itself but i welcome your renewed interest.
prior post referred to the uneducated (me?) and the suggestion that retail investors should not play individual stocks (me?)-we should all sign up with davy's -just ask the credit unions-(me again).
whats it all about alfie?
just to add to the dialogue-stupid and average punter-who are they?

Time Magazine

pjproby wrote: »

david mcwilliams-you are taking the p-short selling is all about running a market that is restricted to the chosen few and encouraging fools to engage in it.

No it's not. I think the market is going down/up. You're sure it's going up/down. I pay you a fee for the right to buy/sell in a week. It turns out you're right, you take your fee, I lose my gamble. If it turns out the other way, you lose the gamble. Nobody forced you to agree.

It's a very important mechanism for hedging. Imagine what fares would be like if airlines never hedged (read bought options) against a rise in the price of oil.

lock away

Thanks for the permission.

there is nothing to fear except fear itself but i welcome your renewed interest.

So what's the problem with options?

prior post referred to the uneducated (me?) and the suggestion that retail investors should not play individual stocks (me?)-we should all sign up with davy's -just ask the credit unions-(me again).
whats it all about alfie?

The Credit Unions lost money in an investment advised by Davy's, ergo there's no value to stock-brokers. Right.

Personally I've no problem with the "uneducated" buying stocks as they like. They enter into something that's risky and they know this. It's not a very smart thing to do, though. I would never advise my sister to buy heavy into any particular share unless I knew an awful lot about it. I tell her to spread the risk over at least ten firms (ideally many more over several markets) though. It doesn't take someone on Dawson Street to spread your risk like this.

pjproby wrote:

just to add to the dialogue-stupid and average punter-who are they?

The average punter is my sister. The stupid punter is my sister if she put all her eggs in too few baskets.

woodseb

pjproby wrote: »

In march or April of this year there was a sustained attempt to drive down the share prices of Google and Apple waged on the Google finance forums. So sustained was it that one individual was reported to the SEC.
People invest in stocks and shares not only to make gains but also to provide for their future needs or pension. If people cannot have confidence in the workings of the market why should they buy shares?
I have no problem buying shares in Apple and then finding that the price has dropped because of their bad management or general economic conditions. I do have problems with share ownership if other factors are allowed to determine the share price.
If short selling is to be permitted, at the very least the amount of shorted shares should be publicly available. If I read the RTE website I can see how many share transactions take place each day, I cannot tell how many are being shorted.

you are deluded if you think the powerful hedge funds are using google forums to drive down share prices, the average joe in any internet forum does not have the power to move the market by buying or selling shares...

there are also many legitimate reasons to short shares ie market making, hedging derivatives so knowing the short interest won't necessarily tell you the whole story

don't read the rte website for your financial news btw, it's a quick way to the poorhouse

Mikel

pjproby wrote: »

david mcwilliams-you are taking the p-short selling is all about running a market that is restricted to the chosen few and encouraging fools to engage in it.

It's not restricted to the chosen few.
Open an account with Delta, PPower, probably even betfair.
Go and short something and see if it's a sure thing.

Where are Anglo now that all the evil short sellers are gone?
Right where they started, smoke and mirrors.

Bluetonic

Diarmuid wrote: »

I stopped reading here

Well said. Post was written by someone who is obviously talking out of their pockets.

cerebus

I don't know how effective the short selling rules are going to be. It may stop individual investors, but all the market movers will find ways around it.

I can think of one way around it - short an index, then go long everything in that index but the stock that you want to short. Effectively you are now shorting the stock you believe to be overvalued, unless I'm missing something. Shouldn't take hedge funds and the like too long to figure out other ways around the new rules.

Poncherello

So the evil short sellers were out in force yesterday to drive the ISEQ down 7% at one stage.
I wonder how they are doing it ....

Ironic isnt it that if there had been shorts in play in yesterdays market the bounce would have been much better than 1%.
Bottom line without shorts the market is more prione to downward moves especially in current envt.

Mikel

cerebus wrote: »

I can think of one way around it - short an index, then go long everything in that index but the stock that you want to short. Effectively you are now shorting the stock you believe to be overvalued, unless I'm missing something. Shouldn't take hedge funds and the like too long to figure out other ways around the new rules.

Nope, that's against the rules too.

For example, a short sale of a index that does not have a predominance of UK financial sector companies within it, which creates a new or increased net short position in one or more UK financial sector companies, on its own would be permitted. But, where a market participant goes short of an index and offsets positions in that index, by going long in its constituents other than one or more UK financial sector companies, he is not permitted to obtain a new or increased net short position in one or more UK financial sector companies. This would apply to trading in any derivatives products relating to an index.

http://www.fsa.gov.uk/pubs/other/short_selling_faqs2.pdf

cerebus

Mikel wrote: »

Nope, that's against the rules too.


http://www.fsa.gov.uk/pubs/other/short_selling_faqs2.pdf

Thanks for that - I hadn't seen the details.