Is anyone else following the Citron short seller vs WallStreetBets chaos?

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).

Hereā€™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:

https://pdfs.semanticscholar.org/e878/79d42b50b8b0efcfac28883a85e1bd4a8c43.pdf

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 arenā€™t as heavily incentivised to find fraud, itā€™s clear in the past they have avoided disclosing it either through negligence / bad incentives. Shorts are always incentivised to disclose fraud.

I really donā€™t think the evidence supports an argument to ban short selling entirely, although that doesnā€™t preclude further regulation.

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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 youā€™ve linked there.

I guess what doesnā€™t sit right with me, how one can sell something they donā€™t own. Further regulation and accountability sounds like the right answer, but not sure what that would like.

Thanks @Cameron

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 everyoneā€™s memory.

It might lead to regulatory intervention. But how could that work?! As far as Iā€™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 didnā€™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 basisā€¦ 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.

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It happens all the time, thatā€™s what contracts are for - committing to a future obligation that you canā€™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 donā€™t own.

Developers sell houses that they havenā€™t built yet.

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

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Lance Armstrong was caught after a campaign by a few journalists- you donā€™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 itā€™s different and theyā€™re special. I donā€™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.

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I agree it should be more public, but this information (short interest) is already available to everyone with a Bloomberg terminal.

Itā€™s crazy that so many conspiracies persisted about institutions not closing short positions for so long when hundreds of thousands of people can literally look up this information in seconds.

David Walsh, Armstrongā€™s journalist nemesis, has made an entire career out of exposing Armstrong. Yes, there was an ethical motive there to keep the yellow jersey to those who deserve it, etc but I doubt weā€™d have heard of the Tour de france doping scandal if journalists had to do it all for free.

The same goes for the Boston Globe when it came to exposing widespread paedophelia in the Catholic Church, or Lawyer Rob Bilott when it came to suing the DuPont company for poisoning thousands. Clearly an ethical motive in there, but the financial motive plays an important part. I donā€™t think thereā€™s anything wrong with that, if you work hard enough to expose wrongdoing on these kind of scales you deserve a payday in my view.

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And thatā€™s basically the entire premise of The Big Short, which is one of the 3 films that forms the entire financial education for most of WSBā€™s subs.

People love the film which depicts a massive bubble growing in an asset class that canā€™t be shorted until Burry creates an instrument that enables shorting, which in turn is used to incentivise hedge funds to research the mortgage bubble and ultimately correct prices.

Yet now they hate it?

Obviously the real answer is that views havenā€™t changed, the people have. Iā€™m sure 90% of wsb would support short selling 1 year ago, yet now they make up 10% of the current subscribers.

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Donā€™t have access to a Bloomberg terminal. Only have access to a Google terminal

Some institutions opened new positions while overlooking the short to float ratio. Maybe thatā€™s common practice, but itā€™s the seed, root and stem of the current problem. Maybe it wouldnā€™t have became a problem with the potential to obliterate the entire system if it wasnā€™t noticed. But it was. And Iā€™m glad it was.

I believe itā€™s wrong to sell more stuff than what you have available.

Of course one can argue that airlines overbook flights because more often than not thereā€™s people loosing their flights and that way with overbooking more people have the chance to be served. But there are also times when thereā€™s 2 people with a ticket for the same seat. Thereā€™s no way to create extra seats on the spot. And one is asked to leave the flight and wait for the next one. I think this is wrong. I think this should be obscenely compensated for the troubles causedā€¦

With overshortings thereā€™s a potential twist though. Management of the overshorted company could issue new shares to raise capital in an opportunistic move.

Edit:

Funny you mention

I feel like that character right now. But now on the opposite side of the tradeā€¦ and tell to myself ā€œOkā€¦ buy itā€ā€¦ but these prices are insane and one day they will free fall. Hope everybody realises that

Edit2: time to go to work

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Yeah and to be honest now this has happened I imagine market forces are going to prevent it happening again (no one wants to be the next loser). That said further regulation may also help.

Some people have just taken the argument against shorting to extremes. When cars crash we regulate for safety, not banning cars.

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Sorry, but I donā€™t think thatā€™s fair.

As I understand it, Bury was a contrarian investor. He was doing the opposite of what most hedge funds were doing - so much so that he had an investor revolt (ā€œrunā€ on his fund) on his hands. itā€™s part of the reason he made so much money - the opportunity he uncovered was overlooked big time.

most hedge funds, on the other hand, were buying the collateralised debt obligations (CDOs; mortagge bund;es) - which were ticking time bombs, sometimes with peoples pension money.

There are great, ethical hedge funds/short sellers out there. Hell, Carson Block is one of my heroes. But I think itā€™s fair for wsb to say wall street/hedge funds on the whole need to be put in their place.

Scion got its reputation (and most of itā€™s capital) from the massive returns he made shorting tech stocks in the early 2000s collapse of the .com bubble. It was very much a traditional hedge fund

People were scared about his move to FI products from equity, shorting was nothing new for Burry.

Yes hedge funds buy some long products, but you know who buys more long products? Long-onlys.

I think I probably didnā€™t get my message across right: Iā€™m saying that scion were indeed a hedge fund (ofcourse), but their ā€˜big shortā€™ was not a play the other hedge funds were doing. The bet, not the fund was contrarian.

But no one else was shorting the housing market bar scion, frontpoint, etc. Most hedge funds, on the other hand, were pumping the CDO market and in turn causing/worsening the crisis - look up magnetar, etc.

I may or may not have posted a tweet about Freetradeā€™s Honey newsletterā€¦ I mean it definitely didnā€™t age well :upside_down_face:
https://twitter.com/ctspeck/status/1355170211809398787?s=21

Itā€™s a short thesis that doesnā€™t give me the counter factual Iā€™m afraid. Bottom line is that the research doesnā€™t actually explain adequately, for me, cause and effect. It is a great guess that the short ban may have caused the behaviour described but fails to take to account other factors that could have contributed to it. Certainly KPMGā€™s summary of evidence suggests bias, but thatā€™s just my reading.

The bit that I find dangerous though is the idea that somehow funds are the ā€œpolicemenā€ of markets. Let me be clear here. Iā€™m not saying you are dangerous to voice this. I am saying that over reliance on for profit organisations to ā€œexposeā€ wrongdoing is dangerous. Not in the least because as we have seen with the whole GME example they will do anything but

Iā€™m really not sure how you came to that conclusion, the original authors wording is very similar.

Marsh & Payne:

The deterioration was symmetric, affecting the limit buy and limit sell side of the order book equally. Finally we show 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.

Beber and Pagano:

The evidence in this paper suggests that the reaction of most stock exchange regulators
around the globe to the financial crisis ā€“ imposing bans or regulatory constraints on shortselling
ā€“ was detrimental for market liquidity, especially for stocks with small market
capitalization, high volatility and no listed options. Moreover, it slowed down price
discovery, and was at best neutral in its effects on stock prices.

There are other things to consider (e.g. HFT vs traditional hedge) but I still canā€™t see why anyone would support a complete ban on short selling, given the historical evidence.

ā€œA complex system is a system composed of many components which may interact with each other. Examples of complex systems are Earthā€™s global climate, organisms, the human brain, infrastructure such as power grid, transportation or communication systems, social and economic organizations (like cities), an ecosystem, a living cell, and ultimately the entire universe.ā€

Complexity by design :laughing:

Humans are not rational but rationalizing animals.

Thats why we love stonks.

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