[Feature Request 🔧] Enable short selling

[Raul (Ann Onymuz)]

@Raul

Shorting is not wrong per se. It’s useful. It’s the result of private investigation that can unveil fraud at the corporate level. Think Enron. Short selling is just the way those private investigators have at their disposal to achieve economic gains to pay for their efforts.

This is what short selling is all about. Or at least what it should be. Short sellers are often demonised. I disagree with the idea that the short sellers are the bad guys.

[…]

@Cameron

Bear in mind that lots of Citron’s early shorts were basically discovering cases of straight up fraud. They expended resources to research that fraud which ultimately made markets more efficient as this information was shared. So the argument that they can help with price discovery is compelling.

It’s hard to picture what a world of purely long-only funds would look like, but it feels like it would be quite problematic. Maybe shorts bring more problems than they solve, but they do still bring advantages.

@Raul

Shorting is neither bad nor good.

Committing fraud is bad.

Management that cook the books to paint a rosier picture of their accounts are bad. That is fraud. That is market manipulation.

How are we going to find fraud in the accounts? By fundamental analysis.

When someone puts time and effort in going through the books and finds fraudulent reporting how can s/he profit from it? By placing a short sell.

Short sellers play a very important role. And I appreciate it. They don’t short the companies with solid fundamentals, solid competitive advantage and solid future prospects. If those people can’t make money by finding fraud through fundamental analysis they will stop doing it. And then some managers without integrity will reign supreme and fill their pockets at the expense of shareholders even when they belong in jail for committing fraud. How would you like that?

Committing fraud is bad.

What I don’t appreciate is abusive behaviours. Both on the long and the short side.

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I hope short sellers may be understood for the good service they provide. And abusers, manipulative and/or fraudulent participants may rot in jail. After getting bankrupt

@Cameron

@Sentinelgre

I can’t think of a single reason why long only positions is in any way problematic? Why do you think otherwise?

A world with only long-only funds would have less efficient markets (in terms of liquidity and price discovery)

If the only way to be compensated was by finding good news then all research would be focused on that. If you can be compensated for finding bad news (by shorting then disclosing the information) then there is an incentive to look for bad news (beyond DD on your existing longs).

Here’s are summary article on hedge funds, on P25 it looks at short selling and price discovery and it cites a couple of papers that investigated the effects of historic bans on short selling:

pdfs.semanticscholar.org

79d42b50b8b0efcfac28883a85e1bd4a8c43.pdf

3.71 MB

Beber and Pagano (2011) examine the consequences of short-sale bans around the world during the 2007-2009 crisis. They find that bans had negative effects on liquidity, especially for small cap stocks and stocks without listed options. Moreover, they find that the bans slowed down price discovery, especially in bear markets and failed to support prices in the vast majority of markets

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1502184

Also a summary of another paper:

The authors find that, through the period of the ban, markets for financial stocks were substantially less efficient and that the role of the trading process aiding in price discovery was greatly reduced.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1645847

@oumarm

Feel free to correct me if i’m wrong, but is it not the job of auditors to see if the books are being cooked and finding fraudulent reports? If that’s the case, then surely no need for short selling?

Auditors aren’t as heavily incentivised to find fraud, it’s clear in the past they have avoided disclosing it either through negligence / bad incentives. Shorts are always incentivised to disclose fraud.

I really don’t think the evidence supports an argument to ban short selling entirely, although that doesn’t preclude further regulation.

@Cameron

@oumarm

I guess what doesn’t sit right with me, how one can sell something they don’t own.

It happens all the time, that’s what contracts are for - committing to a future obligation that you can’t immediately fulfil. Contract law gives people faith in those obligations and has enabled non-trivial transactions that are very important.

Derivatives such as futures and options involve selling something you don’t own.

Developers sell houses that they haven’t built yet.

People can pre-order a whole range of consumer products.

I don’t sell short. I lack the temperament for it. For that reason I appreciate and recognise the value short sellers can provide