13 thoughts on “Short Sellers”

  1. Other funds may opt for using discrete over-the-counter put options to place short bets, since they don’t need to be disclosed in regulatory filings. Melvin Capital’s shorts being listed in their public filings helped make them a Reddit bro target.

    Can someone explain why straight puts aren’t used exclusively? Is it because entities like GameStop are too small so there just aren’t enough (or any) available? Why go through the trouble of actually borrowing the shares if you don’t need to. And how the hell does allowing 140% of all shares outstanding to be borrowed make any sense?

    1. I haven’t looked at the chain (and it might be a different story now) but at the time, the options may not have had enough liquidity. If you want to buy/sell options, you have to have a seller/buyer. I don’t trade puts with a big bid-ask spread. The hedge funds have enough capital that they can just deal directly with the underlying asset. As for the percentage of shares borrowed, that’s probably something for the SEC to investigate.

    2. For the record I understand the “bet against the equity bet on the debt” thing, it’s straight forward and appropriate (maybe probably even necessary). And the temporal disadvantages of the options market (why am I getting a Jon Corzine vibe). Still, 140% is either stupid, or a feint to the Chinese: “hey you, this how grow economy!”

  2. “Boo-hoo and woe is us” and “we ain’t all bad” seems to be a major themes in that article.

    Nothing about the naked short selling that Melvin &co were doing. Have been doing for years, apparently. Regulators like the SEC are supposed to prevent such activity. They weren’t doing their job, so a mob did it for them.

    Expect more such vigilante justice as the Democrats under Biden* try step up their regulation of everything.

    Actually, this whole episode is good news. The highlighted Citron tweet in the article shows just how these guys don’t understand that the mob each buying a single share with their stimulus check isn’t in it for the money. People found a non-violent way, at the cost of a few hundred dollars each, to vent their frustrations with our overlords, and this is the sort of thing that may prevent things from going “kinetic” in the near future, as other such “monkey-wrenching” gets done.

    1. In the past 2-3 months, Americans have been conclusively shown that:
      a) their government is incompetent, bought and corrupt
      b) their elections are fixed
      c) there are two sets of law, one for you and one for the connected
      d) there is no such thing as free speech
      and now
      e) the stock market is fixed. You can’t win but you still have to play

      Things *will* get kinetic at some point. No other option at this stage, really.

      (And I take no pleasure in saying this. I don’t want violence, destruction or war. But “the avalanche has started; it’s too late for the pebbles to vote.”)

  3. Doubtful. Stocks are cyclical, if mostly increasing over time. And it’s morally wrong to let suckers keep their money. We will always need crows to clean up the roadkill.

  4. It is an interesting paradox. But I doubt you will find sympathy for these two Wall St. behaviors: 1) Short sellers that publish “research” used to drive DOWN shares that they hold short. 2) Short sellers that are over-leveraged in their short positions.

    So some possible reforms might be:

    1) Hedge funds that participate in short sells are prohibited from making public statements that can manipulate markets that are in clear conflict-of-interest. If they want to do research, that’s fine, but keep their opinions within the fund. Investors in the fund might find this disconnect disconcerting, but not every mutual fund discloses all its research to its investors either. You either trust the fund managers or you don’t. But you don’t allow the managers to go public in attempts to manipulate the market. Of course independent research companies are free to publish what they wish, as long as they aren’t participating in the market or receiving too much of their operating revenue from those who do. That latter part will be tough to enforce. Always has been, and in a free market always will be.

    2) Put capital caps on hedge funds to prevent them from being over-leveraged to protect their investors. That doesn’t seem too controversial does it? Yeah it makes the pie smaller, but what’s better: a small pie or picking the fractured pieces of a once large pie out of the trash?

  5. I respectfully disagree with your Reform 1).

    Let people say whatever they want, whether they are dude-bros on Reddit or suits on Wall Street.

    In today’s climate, you know that any controls on free speech will be placed on the dude-bros long before the suits.

    1. Yup. The best plan is to let over leveraged short sellers lose big bucks. Then they’ll learn to be more cautious. (Same goes for people who screw up trying to corner the market, whether they be Reddit bros or billionaires. )

    2. Let people say whatever they want, whether they are dude-bros on Reddit or suits on Wall Street.
      Well the SEC already prohibits such behavior among the suits, registered trading firms trying to artificially move the market in self-interest. Whether it be pump and dump or suck and sell. To be clear, I don’t think unregulated traders should be subject to those rules but I fear mass moves triggered my social media is going to get close scrutiny. Again more restrictions on free speech. There was nothing to suggest market manipulation when people bought into market “wisdom” from subscription newsletters either. The only difference I can see is speed and scale.

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