Can one of you guys who understand these things explain something to me about shorting, please.
Lets keep it simple. I own 100 shares in a company that are valued at £20 each. The paper value of those shares to me is £2000.
A hedge fund comes to me and says can we borrow your shares to short. I say yes.
The hedge fund sells those shares and pockets £2000. After forcing the share price down, it buys them back for £10 - a £1000 in total - giving the hedge fund an actual profit of £1000.
Presumably, it then gives me my shares back. But they are now only worth £1000. So through my good work of loaning them my shares, I am now personally £1000 worse off.
Clearly I am missing something but on the face of it, why would you loan shares to a company so they can force the price down meaning that you are going to end up owning an asset that is worth less than when you loaned it out?
Okay, you're basically bang on, and your last question is a fair one.
The answer is what gives shorting its name: in the short term, you (as the lender) do not care, so long as you get your shares back. Because 100 shares is still 100 shares.
You are investing for the long term - of course, the opposite to the short. So you don't mind if someone has taken a risk on your stock price falling over the course of, say, a day or a week, because in the long run (over a few years) you can generally expect/hope your stock or portfolio or holding etc to make money.
--------
However, in the case of Gamestop, we are seeing something hitherto unprecedented that exploits and exposes the pitfalls of shorting quite as much as has happened. 140% of shares being shorted is just insane, and that it so happened to be Reddit/the average punters in their thousands to exploit the situation is really getting on the nerves of the hedge fund managers and fat cats.
Please do let me know if I've got any of the intricacies wrong on this btw.
Thanks.
All I can say is I'm scratching my head at the wisdom of people lending assets knowing that they will come back shortly at a cheaper price than they have been lent out at! And if shorting the shares in a company leads that company into financial distress, good luck in thinking you will get your money back in the long run!
Can one of you guys who understand these things explain something to me about shorting, please.
Lets keep it simple. I own 100 shares in a company that are valued at £20 each. The paper value of those shares to me is £2000.
A hedge fund comes to me and says can we borrow your shares to short. I say yes.
The hedge fund sells those shares and pockets £2000. After forcing the share price down, it buys them back for £10 - a £1000 in total - giving the hedge fund an actual profit of £1000.
Presumably, it then gives me my shares back. But they are now only worth £1000. So through my good work of loaning them my shares, I am now personally £1000 worse off.
Clearly I am missing something but on the face of it, why would you loan shares to a company so they can force the price down meaning that you are going to end up owning an asset that is worth less than when you loaned it out?
Okay, you're basically bang on, and your last question is a fair one.
The answer is what gives shorting its name: in the short term, you (as the lender) do not care, so long as you get your shares back. Because 100 shares is still 100 shares.
You are investing for the long term - of course, the opposite to the short. So you don't mind if someone has taken a risk on your stock price falling over the course of, say, a day or a week, because in the long run (over a few years) you can generally expect/hope your stock or portfolio or holding etc to make money.
--------
However, in the case of Gamestop, we are seeing something hitherto unprecedented that exploits and exposes the pitfalls of shorting quite as much as has happened. 140% of shares being shorted is just insane, and that it so happened to be Reddit/the average punters in their thousands to exploit the situation is really getting on the nerves of the hedge fund managers and fat cats.
Please do let me know if I've got any of the intricacies wrong on this btw.
Thanks.
All I can say is I'm scratching my head at the wisdom of people lending assets knowing that they will come back shortly at a cheaper price than they have been lent out at! And if shorting the shares in a company leads that company into financial distress, good luck in thinking you will get your money back in the long run!
You don't know they are coming back at a lower price. The people borrowing think the price is going down enough to cover your fee, and make a profit themselves.
NASDAQ ceo now saying they might halt trading for a couple of weeks so bigger investors can adjust their positions.
Must be time for people to start using decentralised exchanges and tokenised stocks after this, surely?
Hopefully people now see how rigged the game is.
It's all fake but only the people in power are allowed to make money. Redistribution of wealth to the masses needs to be stopped.
Doesn't bother me. That's life & its how some people make their money. We all benefit from it by an increase in our pensions, ISA's and other savings. If you don't like the system then don't play the game.
Can one of you guys who understand these things explain something to me about shorting, please.
Lets keep it simple. I own 100 shares in a company that are valued at £20 each. The paper value of those shares to me is £2000.
A hedge fund comes to me and says can we borrow your shares to short. I say yes.
The hedge fund sells those shares and pockets £2000. After forcing the share price down, it buys them back for £10 - a £1000 in total - giving the hedge fund an actual profit of £1000.
Presumably, it then gives me my shares back. But they are now only worth £1000. So through my good work of loaning them my shares, I am now personally £1000 worse off.
Clearly I am missing something but on the face of it, why would you loan shares to a company so they can force the price down meaning that you are going to end up owning an asset that is worth less than when you loaned it out?
Okay, you're basically bang on, and your last question is a fair one.
The answer is what gives shorting its name: in the short term, you (as the lender) do not care, so long as you get your shares back. Because 100 shares is still 100 shares.
You are investing for the long term - of course, the opposite to the short. So you don't mind if someone has taken a risk on your stock price falling over the course of, say, a day or a week, because in the long run (over a few years) you can generally expect/hope your stock or portfolio or holding etc to make money.
--------
However, in the case of Gamestop, we are seeing something hitherto unprecedented that exploits and exposes the pitfalls of shorting quite as much as has happened. 140% of shares being shorted is just insane, and that it so happened to be Reddit/the average punters in their thousands to exploit the situation is really getting on the nerves of the hedge fund managers and fat cats.
Please do let me know if I've got any of the intricacies wrong on this btw.
Thanks.
All I can say is I'm scratching my head at the wisdom of people lending assets knowing that they will come back shortly at a cheaper price than they have been lent out at! And if shorting the shares in a company leads that company into financial distress, good luck in thinking you will get your money back in the long run!
Good question and I think the jigsaw piece you are missing is ...
You're not lending the stock and it's generally not in your interests to do so.
However, the custodian holding your stock IS lending it and IS motivated to do it as they're the ones collecting the interest, which they split with whichever institution has parked your stock with them (e.g. Hargreaves Lansdowne). They both bank the interest, you get nothing in return, except the privilege of holding a stock that is being shorted against your (short term) interests.
It's something I have been arguing about in the City for years. I think you should be able to elect whether or not you want your stock lent and, if you elect to do so, be paid for it.
As for GAMESTOP etc., all great fun and will end in tears because the big guys will f*ck them eventually. Judging by the number of so-called 'brokers' who are only allowing liquidations, this has already started and there is going to be a stink about this. Of course, most of these 'brokers' aren't brokers at all and are not doing this in the interests of an 'orderly market' but are actually market makers who are also taking large losses.
That's one way that they keep their fees so low (apart from wider spreads) - they sell you stock in the expectation of being able to buy back cheaper without going to the central market, so saving on execution, fx, clearing and custody fees. They, of course, charge you all these fees and commissions regardless and merely have to prove they gave you the best price available in the market at the time (at least, under MifID). That model has gone wrong this week until they refused to allow more buying 'for the sake of an orderly market', (my arse). Goes what, the stock price will go down and they won't lose.
To be fair, it's not an orderly market allowing ramping and the regulators have to work out what to do about it. It's been going on forever but the tech now is scaling it to hitherto unseen levels.
NASDAQ ceo now saying they might halt trading for a couple of weeks so bigger investors can adjust their positions.
Must be time for people to start using decentralised exchanges and tokenised stocks after this, surely?
Hopefully people now see how rigged the game is.
It's all fake but only the people in power are allowed to make money. Redistribution of wealth to the masses needs to be stopped.
Doesn't bother me. That's life & its how some people make their money. We all benefit from it by an increase in our pensions, ISA's and other savings. If you don't like the system then don't play the game.
And how do you not play the game, move into Siberia with a tent, a goat and some seeds? Might not bother you cos you've got a good job, a house and enough food to live but not everyone has that. "the game" isn't working for them
Probably the biggest PR gaffe in recent Wall Street history this. Dems have the house and senate and a democratic president, easy points for them at this point doing what they want to do which is slap Wall Street with some more regulation.
And yeah, Robin Hood have essentially torched the brand they’ve built up over the last few years in the space of 48 hours.
Interesting to see what happens here. Trading is essentially only free for the big boys and once private investors start fighting hedge funds it could be chaos.
Social media has facilitated this so we have to expect more of the same.
Posting some tweets from a smart young Czech guy I follow. He's usually on the money. My own take: as I suspected, a lot of people are buying stuff without really knowing or even thinking about what they are buying - which is also my problem with crypto - and many of the same people buying both. When that happens, people get stiffed. The little people, that is..
Does Musk own that much bitcoin? He didn't till quiet recently. Suspect he's wealth is driven by the Tesla stock price (which I've done alright on, thank you very much)
The issue that the Reddit thing has thrown up is not a straight forward David and Goliath story.
It's been a concern ever since markets went electronic. In the 'good old days', markets were closed shops and the people who had direct access had huge advantages to cream off money, so long as they followed sensible trading disciplines (i.e. I'm not saying it's easy being a trader). That's still largely true in equity markets. Although the market talks about 'compressing margins' a cursory look at the profits of stockbrokers and asset managers tells you there's plenty of out size profits being made .
The quid pro quo was that they had to follow market rules and their reputation for fair and honest dealing was important if they were going to be allowed to get into (and, most importantly) get out again. Traders had to prove competency, put up minimum capital requirements, etc. This was to enable an 'orderly market', without which trust would break down and the market would die.
When we started building electronic markets (mid to late 90s) it threw up a number of dilemmas. On one side were people like me, arguing that it would ultimately bring huge liquidity, better prices, democratise markets and dis-intermediate the middle men and it was a GOOD THING.
On the one hand you had vested interests who didn't want to be dis-intermediated (easy to ignore) but you also had regulators that saw that they would lose a vital control over who was doing what in the market and that they 'would know who was ultimately at the end of the wire' (more troubling but we just thought they were dinosaurs and just didn't 'get it'). Fortunately (!), people like me didn't know anything about markets, their history or the risks we were introducing at the time - we were just the IT guys - and we pushed on.
The regulatory solution we came up with was the 'responsible trader' (we all had a good laugh about that oxymoron and the term is back, with Brexit) and automated price controls (what the US, when they finally cottoned on to their necessity many years later, call 'circuit breakers'). The idea was that the central market had lost some of its ability to monitor and control the market and that the regulator would have to hold the market participants more to account.
If Mrs Mop propped her cleaning device on the table, hit the enter button and accidentally bought 1,000,000 BP shares, it was going to be down to whoever had logged that computer on and left it vulnerable. Ditto, if he was funnelling toxic and laundered money through his 'login'. Now the market couldn't record them physically trading on the floor, the regulator needed access to any and all communication devices.
The central market (if there was one) would still have the responsibility to run an orderly market and the price controls allowed market officials time to check that the market was running in an orderly fashion and decide whether to re-open the market, back out erroneous trades or shut it down, e.g. a company had gone insolvent.
So, over the last few days the 'brokers' were arguing they were following their responsibility to not put through 'erroneous' trades and the exchanges are arguing the same. That's a moot point - are the shares being ramped, which is ultimately not good for the integrity of the market and will undermine it and therefore should be prevented- or are 'investors' taking a view on future prospects? Also, are these guys foremost brokers - merely earning commissions on trades - are are they disguised market makers, like the spread betters?
As Benjamin Graham famously said, "in the short term the market is a voting machine, in the long term, it's a weighting machine." The market supervisors have to take a view on the long term integrity of the market and protect EVERYONE from market manipulation.
What hasn't helped was the demutualisation of the exchanges, particularly in the US, which has driven profit motive (volumes) over regulatory concerns.
Now, you can argue that the 'big boys' have been manipulating markets at the expense of the little guys for years and I would totally agree. But the answer is to hold the big boys to account, not allow the wild west.
As they say on Seeking Alpha, in the mean time, I am long HL, JUP, CMCX, IGG ....
Posting some tweets from a smart young Czech guy I follow. He's usually on the money. My own take: as I suspected, a lot of people are buying stuff without really knowing or even thinking about what they are buying - which is also my problem with crypto - and many of the same people buying both. When that happens, people get stiffed. The little people, that is..
Posting some tweets from a smart young Czech guy I follow. He's usually on the money. My own take: as I suspected, a lot of people are buying stuff without really knowing or even thinking about what they are buying - which is also my problem with crypto - and many of the same people buying both. When that happens, people get stiffed. The little people, that is..
Posting some tweets from a smart young Czech guy I follow. He's usually on the money. My own take: as I suspected, a lot of people are buying stuff without really knowing or even thinking about what they are buying - which is also my problem with crypto - and many of the same people buying both. When that happens, people get stiffed. The little people, that is..
For those of you who want to understand what's going on in the blockchain world or to demystify it a little, I recommend the following, written by a good friend of mine, Keith Bear.
Comments
Have seen this often enough to not be concerned with the often kinked progress of markets.
All I can say is I'm scratching my head at the wisdom of people lending assets knowing that they will come back shortly at a cheaper price than they have been lent out at! And if shorting the shares in a company leads that company into financial distress, good luck in thinking you will get your money back in the long run!
It's all fake but only the people in power are allowed to make money. Redistribution of wealth to the masses needs to be stopped.
The people borrowing think the price is going down enough to cover your fee, and make a profit themselves.
Doesn't mean it will.
You're not lending the stock and it's generally not in your interests to do so.
However, the custodian holding your stock IS lending it and IS motivated to do it as they're the ones collecting the interest, which they split with whichever institution has parked your stock with them (e.g. Hargreaves Lansdowne). They both bank the interest, you get nothing in return, except the privilege of holding a stock that is being shorted against your (short term) interests.
It's something I have been arguing about in the City for years. I think you should be able to elect whether or not you want your stock lent and, if you elect to do so, be paid for it.
As for GAMESTOP etc., all great fun and will end in tears because the big guys will f*ck them eventually. Judging by the number of so-called 'brokers' who are only allowing liquidations, this has already started and there is going to be a stink about this. Of course, most of these 'brokers' aren't brokers at all and are not doing this in the interests of an 'orderly market' but are actually market makers who are also taking large losses.
That's one way that they keep their fees so low (apart from wider spreads) - they sell you stock in the expectation of being able to buy back cheaper without going to the central market, so saving on execution, fx, clearing and custody fees. They, of course, charge you all these fees and commissions regardless and merely have to prove they gave you the best price available in the market at the time (at least, under MifID). That model has gone wrong this week until they refused to allow more buying 'for the sake of an orderly market', (my arse). Goes what, the stock price will go down and they won't lose.
To be fair, it's not an orderly market allowing ramping and the regulators have to work out what to do about it. It's been going on forever but the tech now is scaling it to hitherto unseen levels.
Today despite a 14mil drop, hasn't sold anymore of the shares he's got. I suppose when you started with 53k USD, this now feels quite personal!
https://www.zerohedge.com/markets/you-can-not-purchase-additional-shares-robinhood-reportedly-removed-shuts-down-buying
Social media has facilitated this so we have to expect more of the same.
It's been a concern ever since markets went electronic. In the 'good old days', markets were closed shops and the people who had direct access had huge advantages to cream off money, so long as they followed sensible trading disciplines (i.e. I'm not saying it's easy being a trader). That's still largely true in equity markets. Although the market talks about 'compressing margins' a cursory look at the profits of stockbrokers and asset managers tells you there's plenty of out size profits being made .
The quid pro quo was that they had to follow market rules and their reputation for fair and honest dealing was important if they were going to be allowed to get into (and, most importantly) get out again. Traders had to prove competency, put up minimum capital requirements, etc. This was to enable an 'orderly market', without which trust would break down and the market would die.
When we started building electronic markets (mid to late 90s) it threw up a number of dilemmas. On one side were people like me, arguing that it would ultimately bring huge liquidity, better prices, democratise markets and dis-intermediate the middle men and it was a GOOD THING.
On the one hand you had vested interests who didn't want to be dis-intermediated (easy to ignore) but you also had regulators that saw that they would lose a vital control over who was doing what in the market and that they 'would know who was ultimately at the end of the wire' (more troubling but we just thought they were dinosaurs and just didn't 'get it'). Fortunately (!), people like me didn't know anything about markets, their history or the risks we were introducing at the time - we were just the IT guys - and we pushed on.
The regulatory solution we came up with was the 'responsible trader' (we all had a good laugh about that oxymoron and the term is back, with Brexit) and automated price controls (what the US, when they finally cottoned on to their necessity many years later, call 'circuit breakers'). The idea was that the central market had lost some of its ability to monitor and control the market and that the regulator would have to hold the market participants more to account.
If Mrs Mop propped her cleaning device on the table, hit the enter button and accidentally bought 1,000,000 BP shares, it was going to be down to whoever had logged that computer on and left it vulnerable. Ditto, if he was funnelling toxic and laundered money through his 'login'. Now the market couldn't record them physically trading on the floor, the regulator needed access to any and all communication devices.
The central market (if there was one) would still have the responsibility to run an orderly market and the price controls allowed market officials time to check that the market was running in an orderly fashion and decide whether to re-open the market, back out erroneous trades or shut it down, e.g. a company had gone insolvent.
So, over the last few days the 'brokers' were arguing they were following their responsibility to not put through 'erroneous' trades and the exchanges are arguing the same. That's a moot point - are the shares being ramped, which is ultimately not good for the integrity of the market and will undermine it and therefore should be prevented- or are 'investors' taking a view on future prospects? Also, are these guys foremost brokers - merely earning commissions on trades - are are they disguised market makers, like the spread betters?
As Benjamin Graham famously said, "in the short term the market is a voting machine, in the long term, it's a weighting machine." The market supervisors have to take a view on the long term integrity of the market and protect EVERYONE from market manipulation.
What hasn't helped was the demutualisation of the exchanges, particularly in the US, which has driven profit motive (volumes) over regulatory concerns.
Now, you can argue that the 'big boys' have been manipulating markets at the expense of the little guys for years and I would totally agree. But the answer is to hold the big boys to account, not allow the wild west.
As they say on Seeking Alpha, in the mean time, I am long HL, JUP, CMCX, IGG ....
bitcoin dips 20% = see i was right! It's a bubble!
bitcoin pumps 20% = see i'm right! It's a bubble!
... send it to $1
https://etf.invesco.com/sites/default/files/Hyper-real-global-blockchain-industry-trends-Whitepaper.pdf
*sometime in the next 5 years
I wouldn't worry, markets go up and down, maybe invest more!
/s