citron i like some of the research theyre net positive for the financial community. their GME call was unfortunate
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 desagree with the idea that the short sellers are the bad guys.
There are however abusive behaviours amongst short sellers. The GME over-short is just an example of it. They placed a risky bet by over-short and got caught with their pants down. And now they will go under. And the whole system is at risk. But instead of addressing the root of the problem, they focus on managing it, which may mean that overshorting may happen again…
(To be continued)
Disagree: If you don’t like a company, you don’t invest. Simples. Put your money in competing companies.
What exactly do you disagree with?
I think shorting is bad: it is actively hoping for a company to fail. I don’t think that is a right mindset.
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.
Not on the warpath here but find that assertion interesting, precisely because I can’t think of a single reason why long only positions is in any way problematic? Why do you think otherwise?
I thought the anger at Citron was basically that he set his shorts, announced his report that a company was overvalued, then profited on the dip caused by his report.
Same with Hindenburg doing that expose of Nikola’s fraud (gravity powered truck), it was great to expose it but it felt a bit dirty that they went short before releasing it (and its gone back up now ).
Shorts are fine in principle but if you’re causing the dip its morally ambiguous.
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.
And if we have abusive behaviours on the long side, by means of fraudulent accounting practices, we can also find abusive behaviours on the short side. GME is just an eloquent example of it.
In the very specific case of the GME short sell, short sellers placed shorts of close to 140% of shares floating in the stock exchange.
They did it to create a downward spiral of the stock price with the goal of causing the bankruptcy of the company and pocket the profit. With the company bankrupt they wouldn’t even have to buy the stock because it would be worth zero.
But they got caught while doing it. They got caught by someone who did fundamental analysis and saw that the numbers didn’t add up, and saw an opportunity to make money. This person then shares the information and along came people who also see an opportunity to make money by squeezing the shorts. And also came along people who saw an opportunity to stick the free market’s invisible hand up Wall Street’s sfincter.
I think these particular short sellers, and I can’t emphasize enough these specific short sellers, tried to manipulate the market by means of overshorting and got caught in the process. I think this is fraud.
And now people with different motivations are together trying to either profit from it or teach them a lesson. I bet there’s even Hedge Funds betting along side the squeezers.
I’m in it for the money, but most of all to contribute to the end of overshorting. I hope a situation like this never happens again.
Market makers and other financial institutions are now trying to avoid getting caught up in the middle of the cross fire. The bill will show up eventually and someone will have to pay it.
Many retail investors will loose money if the squeeze is over and the price of the stock goes back to its fundamental value. And that will be sad. It might be insane to enter into a long position in GME at the current price.
But maybe the squeeze is just in the beginning. And I’m not saying that it is. That scenario may bring an abundance of bankruptcies in the financial sector. I feel no sympathy for them. But the price may reach levels that could cause a crash of the overall market. And that could cause many retail investors to panic sell everything, while creating yet more buying opportunities.
It might be insane to enter into a short position in GME at this price level. Who knows?!
I don’t think this will end well. And all because overshorting was in place. And found.
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
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 thats the case, then surely no need for short selling?
Wasn’t Enron audited?
Wasn’t Bernie Madoff audited?
Edit: time to go to sleep now
good shout lol guess it all comes down to corruption
Bring on tomorrow I can’t wait!
Whilst I agree with Raul, I hope this go’s as WSB plan’s and some serious regulation is brought in to stop this from being abused like it is in the future.
It’s good to see them get their hands slapped.
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:
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
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.
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.
Check out the WallStreetBets Reddit thread. I doubt very much this is over just yet. Justin Sun has claimed to take a $1m long position on Friday (I think that was the date off the top of my head).
Appreciate the insight, and will definitely check out the papers you’ve linked there.
I guess what doesn’t sit right with me, how one can sell something they don’t own. Further regulation and accountability sounds like the right answer, but not sure what that would like.
I hope short selling is not banned, nor over regulated. Maybe all it takes to prevent overshorting in the future is for a stand to happen. That stand might be the GME squeeze if it causes so much damage that it gets printed with fire in everyone’s memory.
It might lead to regulatory intervention. But how could that work?! As far as I’m aware naked shorts are illegal, yet some geniuses managed to over-short a stock in a process that some call counterfeit stock scheme and regulators didn’t notice. Private investors did.
Maybe Chamath Palihapitiya is right when he calls for daily full transparency on the sizes of short positions. According to his argument if every long mutual fund has to disclose their long positions on a daily basis… Because transparency
Retail investors will be keeping an eye on the list of shorts now, just as they have this week with all the non-GME memes. Then its up to the hedge funds if they want to risk it.
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.
Lance Armstrong was caught after a campaign by a few journalists- you don’t need to be able to make millions of dollars to be able to hold people to account and for people to call out cheating / fraud.
The financial markets will tell you that it’s different and they’re special. I don’t buy it, sorry. As we mature into the Information Age where I have access to more information on my smartphone than a Wall Street broker had 10/15 years ago this kind of behaviour belongs in the past.