Jump to content
House Price Crash Forum
Sign in to follow this  
interestrateripoff

Short-sellers Bet On Stock Market Crash

Recommended Posts

http://www.guardian.co.uk/business/2008/ju...s.marketturmoil

Investors across the world are betting more than one trillion dollars on a collapse in stock prices.

More than $1.4tn of equities worldwide are now on loan, about a third more than at the start of 2007, according to Bloomberg. Almost all of that is being used to speculate that shares will fall.

Fund managers made at least $1.4bn in July from betting against the troubled US mortgage groups Fannie Mae and Freddie Mac.

Short-selling of the two firms, which were rescued by a government loan last week, surged before the shares plummeted in the first two weeks of this month on fears that they would need a government-led bail-out that would wipe out shareholders.

Stock markets have fallen around the world on fears of recession in the wake of the credit crunch. The plunge in the FTSE 100 index to 5261 just over a week ago meant the index of Britain's top 100 companies had fallen more than 20% since its peak - the definition of a bear market. In Karachi, shareholders smashed windows and burned tyres to protest against plummeting stock prices and the economic downturn.

While US and UK regulators are tightening rules on short sellers amid concern that they are accelerating more than $11tn in global stock losses this year, countries from Indonesia to India are opening up to the practice. Short-selling involves borrowing stock to sell it in the expectation it can be bought at a lower price before paying back the loan.

Short selling on the New York Stock Exchange rose to 4.6% of total shares last month, the highest since at least 1931.

Accurate reporting?

Share this post


Link to post
Share on other sites

When I first learned about the stock market I read that short-sellers did not destabilise the market as they are obliged to buy the share back at the end of their contract.

IE

Short seller sells a share (s)he doesn't have, adding to supply and potentially pushing down the price...

then after some time...

Short seller is obliged to buy the share back, adding to demand and potentially pushing up the price.

So the medium-term effect on price is nothing.

Is this correct?

Share this post


Link to post
Share on other sites
Short seller sells a share (s)he doesn't have, adding to supply and potentially pushing down the price...

then after some time...

Short seller is obliged to buy the share back, adding to demand and potentially pushing up the price.

So the medium-term effect on price is nothing.

Is this correct?

My understanding is that short sellers 'rent' shares, usually from large institutional investors, for a specific period then sell those shares and buy them back (hopefully at a lower price) when they are due to be returned to the long-term holder.

Whilst short-selling is symptomatic of City greedy excesses, it has the merit to expose companies that face hard times or have unsustainable business models (BTL lenders and housebuilders .......).

I've yet to hear of anyone shorting Tesco for exemple ......

Share this post


Link to post
Share on other sites
When I first learned about the stock market I read that short-sellers did not destabilise the market as they are obliged to buy the share back at the end of their contract.

IE

Short seller sells a share (s)he doesn't have, adding to supply and potentially pushing down the price...

then after some time...

Short seller is obliged to buy the share back, adding to demand and potentially pushing up the price.

So the medium-term effect on price is nothing.

Is this correct?

There is a big problem with naked short selling. In this case the shorter sells shares they have not borrowed and have no intention of delivering. Even though it is illegal, there is a big problem with these undelivered shares in the US. The problem is so huge that the authorities are concerned that if these naked shorters were forced to cover these undelivered shares it would cause huge turmoil in the markets. Consequently they have "grandfathered" some of these outstanding shares, a term which I believe means that they will never be delivered. So, if I understand this correctly, there are shares out there that should not exist - the so called "phantom shares". What's in your portfolio? You might not own what you think you do if you or your broker was sold phantom shares by a naked shorter. Always take delivery of your share certificates if you can.

In an aditional twist, it would appear that the very financial institutions in the US that are being protected from short selling have been fined on more than one occasion for doing that from which they now seek protection - they certainly don't like it up 'em!

Share this post


Link to post
Share on other sites
There is a big problem with naked short selling.

Curiously, we don't have a similar concept of nakedness when it comes to financial derivatives... for example, CDS.

Share this post


Link to post
Share on other sites
My understanding is that short sellers 'rent' shares, usually from large institutional investors, for a specific period then sell those shares and buy them back (hopefully at a lower price) when they are due to be returned to the long-term holder.

Whilst short-selling is symptomatic of City greedy excesses, it has the merit to expose companies that face hard times or have unsustainable business models (BTL lenders and housebuilders .......).

I've yet to hear of anyone shorting Tesco for exemple ......

The media have ingrained into us, IMO the bias for upside only. The bias os always on the upside. Why should there be any bias to the up or down side? Doesn't make sense to me. Buy and hold fund managers give it a bad name, and short sellers are always purported to be the villains in the eyes of the media and general public...

When you see the headline...."£500 billion was wiped of the FTSE 100, yesterday in a selling panic" the same headline would make as much sense to say..."£500 billion was made on a buying spree on the FTSE 100 yesterday"

If a company has deteriating fundamentals and has falling earnings, and dire prospects, surely you should be able to take a view on the downside. I mean when a company is doing well, and has good prospects, then we buy shares...I dont see any reason for this bias. I know why it is villified, again there is a vested interest in that. However, that doesn't mean it is bad...

Without the ability to short markets would become even more bubble orientated and the efficiency of the price to find fair value would be retarded in my view...

Of course naked short selling is a fraud and should not be allowed. I m not advocating that. But legitimate short selling is fine in my opinion...I dont see it as anymore greedy than buying shares. Infact I dont see it as greed. Greed boils down to individuals, and you can't tarnish everyone with the same brush...

By the way, Tesco shares are short sold on a daily basis...

Share this post


Link to post
Share on other sites
The media have ingrained into us, IMO the bias for upside only. The bias os always on the upside. Why should there be any bias to the up or down side? Doesn't make sense to me. Buy and hold fund managers give it a bad name, and short sellers are always purported to be the villains in the eyes of the media and general public...

When you see the headline...."£500 billion was wiped of the FTSE 100, yesterday in a selling panic" the same headline would make as much sense to say..."£500 billion was made on a buying spree on the FTSE 100 yesterday"

If a company has deteriating fundamentals and has falling earnings, and dire prospects, surely you should be able to take a view on the downside. I mean when a company is doing well, and has good prospects, then we buy shares...I dont see any reason for this bias. I know why it is villified, again there is a vested interest in that. However, that doesn't mean it is bad...

Without the ability to short markets would become even more bubble orientated and the efficiency of the price to find fair value would be retarded in my view...

Of course naked short selling is a fraud and should not be allowed. I m not advocating that. But legitimate short selling is fine in my opinion...I dont see it as anymore greedy than buying shares. Infact I dont see it as greed. Greed boils down to individuals, and you can't tarnish everyone with the same brush...

By the way, Tesco shares are short sold on a daily basis...

stupid question probably,but if you can sell shares that don't exist,can you buy shares that don't exist,apart from those sold by naked shorters? :huh:

Share this post


Link to post
Share on other sites
Accurate reporting?

I have no reason to assume it is not.

When I first learned about the stock market I read that short-sellers did not destabilise the market as they are obliged to buy the share back at the end of their contract.

...

So the medium-term effect on price is nothing.

Is this correct?

You need a clearer definition of destabilise. Short selling doesn't alter the number of shares that actually exist... and, yes, I understand that (when no-one breaks the rules) a share is sold when someone shorts it (even if they're not the owner) and they are then required to buy it (or, rather, any identical share) back later... which might incur a loss.

It is true that for every additional share that is supplied now, there is a corresponding additional demand at some point in the future. It is not, in my opinion, true that there is no effect on price. For a start, there's a period when two people think they own a share - but where there was only one share for which they would otherwise have had to compete. If you take this to an extreme, assume there is 1 free share in Acme Corp for sale at £1, the remaining 99 shareholders (with 1 each) are not willing to sell at below £1000 while the outlook is good. Bob and Barbra think Acme Corporation is a great investment... and have a maximum budget of £500 for one share. Here are two scenarios:

1. Bob & Barbara compete... and bid up the prices until the share sells at £500 to Bob (the maximum price either was willing to pay.) The market expects future shares to trade at £500... and Barbara has open interest to buy any share at £500. Acme Corp's market capitalisation has risen from £100 to £50,000 - this makes Acme Corp extremely credit worthy - which allows them to finance their ambitious projects until they fail to pay a creditor... which is unlikely since they've got such a great credit profile.

2. Bob bought his share in a self-select ISA... and the ISA provider is obliged only to sell the share for Bob at the market price if Bob asks - Bob doesn't want to vote at the AGM because the thinks the board are great - so he doesn't care about the share itself. The ISA provider is approached by a big investment bank to borrow Bob's share - because Charlie wants to short it. The upshot is that the ISA provider knows the investment bank that backs Charlies short is 100% creditworthy - so lending the share holds zero risk for the ISA provider. Charlie shorts the share and it sells to Barbara for £500 - and she's now a happy shareholder - all funds invested. Apart from Bob and Barbara - at this time - no-one else has the vision to appreciate the potential of Acme Corp's business plan... and there is open interest only from Roadrunner - and he only has 1p to invest. The market price for Acme shares plummets from £50,000 to £1... and creditors get very nervous... suppliers demand prompt payment and - risk profile shot - Acme Corp starts to have to pay more for its loans - crippling cash flow and leading it to abandon projects it previously thought were lucrative... long-term plans come crashing down... and the company's real value - like its stock price - plummets. The business can't recover from the setback - and abandons all its lucrative projects in an attempt to avoid bankruptcy. With the ambitious venture now obviously dead, there is no reason for any of the existing shareholders to wish to continue holding the company's shares. Quckly one can be found who jumps at the chance to recover £1 when his share is only worth 1p - and there is no prospect for future dividends from the scuppered business. Charlie makes a killing - £499 over just a few short months it took to undermine public confidence in the Acme Corp share price.

Obviously, the real situation is more complex - more shareholders and lots more shares and lots more interest at lots of different prices... but the principle is identical. Shorting a share does affect its price. N.B. it might seem that the effect is always negative - but this is only the case when short sellers have access to more credit than do long investors... and where the long investors' shares continue to be loaned. If I had a share in Acme Corporation (and I had good credit) then I'd buy the share short sold by Charlie - but not through an ISA. I'd buy it as a proper voting share... and refuse to either lend it or sell it for anything less than £1000. Acme Corp would then be "worth" £50,000 and the only people whose opinions count hold shares and vote at the AGM. Charlie can't short our shares unless he first buys them from us... and he won't want to short-sell something he already owns as a speculative play.

stupid question probably,but if you can sell shares that don't exist,can you buy shares that don't exist,apart from those sold by naked shorters? :huh:

In principle, yes - this is possible. You can't vote with such a share, however. I wouldn't be at all surprised if the shares in your pension fund don't really exist, or the shares in your ISA are actually a long contract with a short seller.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 396 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.