Yes, the best reason why short sellers short a stock is because they find something fundamentally incorrect about the mainstream perception of a company.
But, what happens when shorting is the mainstream perception? That is when they get squeezed. Except.. unfortunately, there's no other sheriff in town.
This is a bullshit argument. If a company falls apart, its equity value will crumble, short sellers or no short sellers.
Short sellers simply drive the price action faster. That's probably not a good thing for the equity holders, nor does it serve a function that wouldn't get handled without short selling enabled.
If something is worthless, people will figure it out organically and the price will follow. You don't need selling pressure by non-holders to get there. In fact, you don't need selling at all. Companies that fall apart don't go to zero by selling pressure, but by lack of buyers at the erstwhile price.
> In fact, you don't need selling at all. Companies that fall apart don't go to zero by selling pressure, but by lack of buyers at the erstwhile price.
Without sellers, there's no one for buyers to buy from and reach a price. Markets require both buyers and sellers.
People borrowing the good being traded to sell or borrowing money to buy may be optional, but both sellers and buyers are required for trading and, therefore, price setting.
The bid isn't the market price, neither is the ask.
The market price is where bid and ask meet for a trade.
> If a company declares bankruptcy on Friday at 10pm, the stock will open lower the next week
If a company declares bankruptcy, trading will generally be halted on its stock, and usually existing stock will be cancelled as part of the bankruptcy reorg, even in a no liquidation bankruptcy.
For more general bad news at 10pm Friday, it's true that the stock price would usually open lower on Monday, but not without trading taking place; the lower opening price is the price at which clearing occurs in the opening auction (there'd typically also be premarket trades on Monday.)
The bid/ask is a "market". If someone says "make me a market on XYZ" they're asking for a two way price. More generally a market is a place where buyers and sellers meet. The dynamics of that market can change even when no trades cross.
Companies declare bankruptcy and continue trading all the time. Look at CHK. Not every bankruptcy is a liquidation.
Lets say I am a private individual that can print an infinite quantity of money. I can buy all the stock and relist it at overinflated prices. If nobody is buying the stock at that price it simply isn't worth the price I chose. If someone bought options that forces them to buy my stock then yes, the stock truly is worth as much as I chose.
Most markets are too liquid for people to notice what happens when there is zero liquidity. Meanwhile in prosperous universe commodity exchanges are illiquid. Lots of players put up products at overinflated prices and nobody is buying them. They just stay there forever and thus do not influence the market price. Heck, some players intentionally use the commodity exchange as an infinite storage mechanism because you aren't even trading futures like in the real world, you're trading the good itself, which causes it to be immediately transported from your inventory to the commodity exchange.
You're assuming news will automatically spread about a fraud, but the invisible hand isn't magic. Someone has to do the work. Not every company has a lot of people watching it. Short-selling is an incentive for publishing bad news about a company. The article gives a specific example.
The beneficiaries are near-term buyers who would otherwise have bought at a higher price, because they didn't know (yet) that something was wrong.
Maybe eventually, everyone will figure it out, but too late for the people who already bought.
The article admits that the research was done by a third-party and not the short sellers. Why didn’t they just release the report, or share it directly with the SEC? I don’t see how the short selling was necessitated to expose the fraud...?
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[ 0.20 ms ] story [ 36.9 ms ] threadBut, what happens when shorting is the mainstream perception? That is when they get squeezed. Except.. unfortunately, there's no other sheriff in town.
Short sellers simply drive the price action faster. That's probably not a good thing for the equity holders, nor does it serve a function that wouldn't get handled without short selling enabled.
If something is worthless, people will figure it out organically and the price will follow. You don't need selling pressure by non-holders to get there. In fact, you don't need selling at all. Companies that fall apart don't go to zero by selling pressure, but by lack of buyers at the erstwhile price.
Without sellers, there's no one for buyers to buy from and reach a price. Markets require both buyers and sellers.
People borrowing the good being traded to sell or borrowing money to buy may be optional, but both sellers and buyers are required for trading and, therefore, price setting.
If a company declares bankruptcy on Friday at 10pm, the stock will open lower the next week without a single share having traded.
The market price is where bid and ask meet for a trade.
> If a company declares bankruptcy on Friday at 10pm, the stock will open lower the next week
If a company declares bankruptcy, trading will generally be halted on its stock, and usually existing stock will be cancelled as part of the bankruptcy reorg, even in a no liquidation bankruptcy.
For more general bad news at 10pm Friday, it's true that the stock price would usually open lower on Monday, but not without trading taking place; the lower opening price is the price at which clearing occurs in the opening auction (there'd typically also be premarket trades on Monday.)
Companies declare bankruptcy and continue trading all the time. Look at CHK. Not every bankruptcy is a liquidation.
You're just making stuff up.
Most markets are too liquid for people to notice what happens when there is zero liquidity. Meanwhile in prosperous universe commodity exchanges are illiquid. Lots of players put up products at overinflated prices and nobody is buying them. They just stay there forever and thus do not influence the market price. Heck, some players intentionally use the commodity exchange as an infinite storage mechanism because you aren't even trading futures like in the real world, you're trading the good itself, which causes it to be immediately transported from your inventory to the commodity exchange.
The beneficiaries are near-term buyers who would otherwise have bought at a higher price, because they didn't know (yet) that something was wrong.
Maybe eventually, everyone will figure it out, but too late for the people who already bought.