Short-Selling (VIDEO): Did It Contribute To The Market's Collapse?

Let's get our bearings here. What is short-selling? NYU Professor of Finance Steven Figlewski can explain:

"You sell the stock with the expectation, the intention, that you're going to buy the stock later. And in order to sell the stock, since you don't own it, you've got to borrow it from somebody."

The short seller intends to profit from the decline in price between the sale and repurchase.

Why do we care about all this market talk? Short-selling is not a new concept, dating back to the 1600s, and playing a part in the 1929 and 1987 crashes. Now, some experts are saying that "shorting" the market contributed in part to the latest global financial crisis, as "it can undermine investor confidence and ... in extreme cases, cause a run on a company's share price." Yikes.

However, just to make it a little more confusing, some bankers think the complete opposite, saying it "enhances liquidity and pricing efficiency in the markets." So who do you believe?

WATCH CNN's look into short-selling:

Comments

[JPMorganEmp]

Why do people always try to give it a negative meaning? it's good for the market.

[RenoSage]

Naked short selling is illegal.
I think selling short should be illegal also.
It involves making a deal with a broker to sell "borrowed stock".

It certainly does not contribute to investing in America's growth and industry
like long term investing does. It is designed only to enrich the greedy.

[american-dolt]

We should declare War on these creeps. This system will never work for the "Working People".

[MyWhiteHouse]

WHERE ARE THE JOBS YOU PROMISED, OBAMMI?

good articles: http://financeopinionss.blogspot.com

[Matt Osborne - Huffpost Blogger]

Obvious tr_ll is obvious.

[LeeX]

The headline says "naked short selling" but this article only describes short-selling. Shorting stocks is very common and perfectly legal. Traders have been doing it forever. Naked short selling and short selling are not the same thing! Don't confuse the two!

[Matt Osborne - Huffpost Blogger]

This is a CNN whitewash of a criminal fraud at the center of the financial meltdown. Here's a much more informative video:

http://www.osborneink.com/2009/03/deep-capture.html

[Pearlswan]

Nothing here in this article about the trillions of dollars in the dark pool of naked short-selling. In fact, it doesn't appear the headline writer even knows the difference between naked short-selling and traditional short-selling strategies. No wonder we can't get the Congress to regulate what few even understand. Its too-big-to-fail institutions and their too-compli­cated-to-r­egulate products that should be outlawed rather than standard short-selling in the market. Here's the scoop on NAKED short-selling by Matt Taibi:

http://taibbi.rssoundingboard.com/short-selling-vs-naked-short-selling-an-explanation


And, an example of how it works in real life to double your profits:

http://market-ticker.denninger.net/archives/1545-Goldmans-Dissembling-Dark-Pools-.et.al..html

[jerrkowa]

The headline is misleading as it mentions "Naked Shorting" which is not mentioned in the article. Naked Shorting, in effect, is counterfeiting of stock shares as no stock is borrowed. It is supposed to be illegal but the SEC and brokers routinely ignore this fact and naked shorting is rampant in many cases.

[Virgo4Obama]

100% wrong.

Shorting a stock is borrowing the shares and selling them to the market. If the stock goes down, you make money when you buy the shares back. If the stock goes up, you lose money. Since a stock price can theoretically go up to infinity, the risk in this type of trade is infinite. So, brokerages generally require you to be able to cover the money you could lose by either owning an equal amount of shares that you're borrowing, or having a very large amount of money in your account in case the trade goes against you. They will force you to buy to cover before you run out of money.

Naked short selling is not having the shares or the money in your account to cover your position. The only way shorting could negatively affect the economy or be part of the reason for the meltdown would be if the banks were shorting very large amounts that they couldn't cover. Their lack of cash on hand (the cornerstone of the meltdown) did indeed happen. But I'm not sure if this was one of the reasons.

"Counterfeiting of stock shares?" I have no idea what you're talking about here.

[Pearlswan]

I assume jerrkowa is talking about Matt Taibi's article on naked short selling where he calls this practice counterfeiting of stock shares because 100 different sellers can borrow the same 50 stocks even though the company may not even have a total of 5000 shares to sell, making 4950 of them effectively counterfeit stocks because the sellers never deliver a hard copy of ownership to the buyers. Here's the article:

http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print

[Winston120]

Pal, the original comment was more correct than you.

Hedge funds were creating shares they had no intention of taking ownership of. The SEC let this go on. These criminals covered their bogus short positions, effectively canceling out the deal and pocketing a huge amount of cash. So I understand what he meant by counterfeit.

[Matt Osborne - Huffpost Blogger]

"Counterfeiting of stock shares": let's imagine your company has issued 100 million shares and you decide to buy ALL the outstanding shares to have 100% ownership.

Then the next day, more than 30 million shares of your stock get traded in markets around the world. But how is that possible when you have 100% of the number of shares ever issued?

The answer is that brokers and investors have created phantom shares of stock. This is happeneing every day as millions of shares go undelivered -- not delayed, not held up, but completely and permanently undelivered because they never existed in the first place.

This has actually happened. http://www.deepcapture.com has the details.

[malodorousgit]

Well, naked short-selling SOUNDS exciting. But I bet it isn't.

[D-V-H]

LOL
Is that what Ensign, Sanford & Vitter were doing?

[Kache]

Very exciting when it works! In fact, it's just as addictive as sex or drugs. But, like sex or drugs, it's a real bummer when it doesn't work and you're left standing there with your bare ass hanging out and nothing to show for it.

[yappnmutt]

all poorly managed, close to bankrupt and declining companies don't like short selling.

all well run, profitable, growing companies could care less.

figure it out.

[D-V-H]

Even well run companies can have their stock tanked by short-selling.

Also there is the issue of shareholder voting. Folks "borrow" the stock, like in short-selling, vote to install who they want on the board, thereby assuring they have control. All without ever having to buy any stock whatsoever.

Check out Taibbi's article...­..........
Wall Street's Naked Swindle
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print

[drkazmd65]

But the difference between 'short-selling' and 'naked short-selling' is the difference between 'legal' and 'illegal' activity yappnmutt.

Anybody that is caught in a naked short-sell should immediately be fined the value of what they just 'stole' plus court costs, and find thier butts in jail for a significant period of time.

[yappnmutt]

the problem is the short selling issue is used to disparage short selling.

read the post below.

naked short selling is illegal and, despite all protestations otherwise, it is not a real problem. most naked shorts are cleared within the 3 day settlement period. the rest are usually cancelled. yes, they are traders abusing the 3 day settlement period and have in the past been allowed to let their naked short hang open without being covered but the fact remains that no good, sound company has ever been shorted to oblivion, naked or not.

[D-V-H]

Tell that to companies that were run into the ground from short-selling. When a company is reduced to a penny stock from traders seeking to_destroy it, they are effectively gone.
Also there is the issue of excess shares, in other words there are more stocks being traded than were ever issued. The worst form of this is with shareholder votes where someone "borrows" stock and then votes to install their guys on the board.
No matter how you try to spin it, it is a form of market manipulation. Why can't actual shareholders decide whether a stock is worth the price. Wouldn't THAT be letting the free-market decide? Instead, with short-selling, you have folks with no vested interest dictating what the price will be. Well, actually their "vested interest" is insuring that the price drops.

Must read article...
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print

[SCLAW]

I love the Wiki ling to
its article on short-selling.

Remember the primary article on derivatives on Wiki
came from an isp located in a NYC investment house.

Thus lazy reporters would look it up and read a tendentious
edited and purged article making them seem innocuous.

Wiki is for liars

[PilotZ27]

99.9% of the Public does NOT understand short selling.

Here is ONE FACT that these "Horrors Of Short Selling" pundits always seem to leave out:

~ The ONLY stock you can "borrow" and "sell short" are shares in MARGIN ACCOUNTS or shares which INSIDERS at companies put up for a FEE to sell short. Stock in "Margin Accounts" has NOT been PAID FOR! It's bought on CREDIT! The broker that SOLD the stock on CREDIT will gladly loan it out, for a FEE, since the IDIOT who bought the stock on CREDIT will probably go BROKE.

All that a company that feels it is being targeted by short sellers has to do is ........RUN YOUR BUSINESS.

Short Selling can't touch the profitability of any company.

But lots of Corporate LOSERS who can't make a DIME will blame the short sellers of their stock, when, in FACT, those same corporate LOSERS are getting a FEE for Loaning their shares of stock to short sellers.

As I say ...... 99.9% of the PUBLIC does NOT understand short selling, and never will.

That's why these BOGUS stories about the EVILS of short sellers continue to attract attention.

Run your company profitably and decently. That is how you can avoid your stock being sold short.

[denny8844]

That is assuming that the market will value the stock based on how well the operation is run rather than some rumors that run wild that dont bear reality then the stock can still take a huge hit. As long as the market prices the stock based on facts you are right

[sickofgov]

Same thing can happen on the up-side. Baseless rumors can also drive up a worthless company's stock. So much for your line of reasoning.

[blaising]

The problem with a society that places high-five value on failure, from World's Greatest Bloopers to "Glad we lost the Olympics bid to 'I hope the Obama administration fails to Sara Palin (everything), is that we forget how to accomplish anything.

Could we send a man back to the moon like we did back in the 60's, or even define such "because it's there" goals? Can we win a war like we did back in the 40's, or worse, even define what a "win" is? Can we build major infrastructure projects like we did back in the 30's and the 50's, or worse, even maintain the stuff that's already been built?

It's spooky the way we seem to be racing toward "Idiocracy".

[blaising]

There's only one kind of "insider" information that's worth anything in today's market, and that's information related to who and how much short or long trading is gonna happen. Stock traders make money on the market going up OR going down. Traders just don't want to be caught on the wrong side of that swinging pendulum. I's a lot like musical chairs, really.

And because money is made on business success OR failure, there is NO RELATION between the stock market and the real economy.

BTW, human nature is such that it's much easier to drive a company's stock price down with rumor and false information that to pump it up. Hence, the attraction of the relatively quick "investment" opportunities of short selling.

Check out what short selling did to a legit company called Overstock.com. It'll open your eyes.

[Fight The Right]

The Stock Market and Corporations need to be outlawed.