threedots

Seconded. The last week has been actually quite unsettling and completely changed my perception of HN.

Friction is the difference. Naked shorting removes the need to locate borrow. That need acts to prevent runaway supply expansion. Naked short selling also circumvents the rights of share owners as a class to decide whether to allow synthetic share creation.

Short selling has both supply and demand effects. So while it 'soaks up investor money' it also creates demand for incremental money through lower prices.The laws right now basically exist to constrain the supply that can be brought on quickly to prevent that getting of line. That's one of the main reasons to ban naked short selling - because it removes the friction to massive and infinite supply increase. It's also super risky because if you don't succeed you end up short a bunch of shares at artificially lower prices. So practically the scenario you are worried about is already addressed in securities regulation.

I would say that short sellers are even more important around primary transactions because then share price matters more. Good prices prevent new investors being left holding the bag and inefficient allocation of capital which could have gone to a different business with better investment opportunities.

Rules already exist around what you can and can't say as a short seller. What is it that you don't like about them? Do you think no one should be allowed to say negative things about companies?

Shorts can't drive companies in the ground if that's not where they're headed anyway. First of all most short sellers are not activists. The perception that shorts causing companies to tank is because activist short sellers are right a high percentage of the time so often their reports result in a quick price adjustment. Being an activist short seller is a very high risk activity so they tend only to pull the trigger when they have high conviction. For example I'm not sure Muddy Waters has ever been wrong in calling out an accounting fraud. I have a really hard time buying the line that short sellers bring down good companies (examples?) and the fact that people do think that seems to me more of an indication of the power of corporations and their management than anything else.

What is the mechanism by which you think shortsellers cause companies to go bankrupt? Can you think of any examples of short sellers causing a bankruptcy?

I read that reddit thread earlier when it was at the top of r/all and it is unhinged.

How this went from vanilla pump and dump to this conspiratorial lunacy is beyond me and I hope it stops when GME comes back down to earth.

It had lots to do with GME in that GME was the source of the risk (because of its through the roof volatility) that the DTCC was protecting against. But if your implication is that the DTCC has a dog in that fight you are way off base - they exist several layers below hedge funds in the trading stack and have nothing to do with each other, in fact I'd be willing to bet Gabe Plotkin couldn't even tell you what DTCC stands for.

It's a good question. I can only speak for myself but I would only be interested in investing in a very small number of funds and they don't want my money (or sometimes anyone's money). Unless you are convinced a fund adds value after fees it's very hard to justify when you can construct your desired market exposure with passive products which are much cheaper and more liquid. It's painfully boring to do that so like everyone else I'm tempted to punt on sexier things every now and again but most of the time I don't.

To answer your last point, there's some of that for sure - in many parts of finance complexity is good for margins. And yes it's tough to demonstrate much value if your investing process amounts to placing buy orders for index funds. It's not all bad incentives though, hedge funds can offer uncorrelated (to the wider market) returns which are very valuable in a portfolio.

No you're good. I'm a career hedge-fund/market guy and all of my investable assets (outside of my company and my house) are in vanguard trackers. I'd guess most of my friends who are professional investors are the same (except they likely have some investment in their own fund).

That's not to say there aren't better investment options in the world but they aren't accessible to ordinary people (even quite rich ones).

There is a big difference between handing out light punishments and actively colluding. In the case of Cohen, his light punishment is because they were never able to find the smoking-gun evidence they needed to put him away properly on criminal charges despite a massive effort to do so so they settled for what they could get. It's not enough to be guilty (hi OJ), and Cohen was guilty as sin I don't doubt it.

It's trivial for the SEC

I don't know if you're implying the SEC is in cahoots with the hedge funds, and not just any hedge fund but one associated with SAC/Cohen whom the SEC went to war with. I'm sympathetic to your general point but as someone who has spent his whole career in the financial markets that seems vanishingly unlikely to be the case here.

The point is that without short selling option MMs couldn't hedge so no one would sell put options.

It does reduce prices because it increases the supply of available shares, it's just that reducing prices isn't necessarily a bad thing. We want the prices of bad things (e.g. frauds) to go down and more generally we want prices to reflect reality which happens more effectively when informed investors can express negative views through shorting.

Secondary markets provide liquidity for primary investors which makes making primary investments much more attractive. A stock market is just a highly organized kind of secondary market. How many VC investors there would be if they could never sell, or if they could only sell at prices which were random? Without a secondary market all investments would be permanent and that would make investing much less attractive.

Secondary markets also provide important capital allocation benefits. They make it easier for good companies to raise additional capital (e.g. via a rights issue) or buy other businesses (using their shares). They also provide an important benchmarking role allowing non-listed companies to price transactions on the basis of listed company valuations.

If they bought in at 10 and sold between 50-100 if they owned 14% of the free float they would have lost 0.5-1bn. That assumes they didn't increase exposure as the price went up and it ignores the borrow cost.

They then lost a bunch of money on options the exact amount of which we don't know. They also lost a whole bunch of money on other positions going against them which we don't know but can guess at.

To get to a 3bn loss (which btw is just a guessed number based on how much new capital they took)you probably only need to assume they are down around 10% on the rest of the short book (ex GME) which under the circumstances is entirely plausible. That assumes they run something like 200% gross exposure with an evenly balanced book with 12.5bn aum.

I'm not sure where the conspiracy is here. 3bn is a huge number to lose in a week but it looks roughly right given what happened and it's not exactly unprecedented either.