Comment by mschuster91

Comment by mschuster91 3 days ago

> Many self-important people online are quick to pounce on short sellers as being evil, and that will forever be a serious red flag to me thanks in no small part to Nate Anderson and the folks at Hindenburg Research.

Credible arguments can be made however that short-selling itself, especially naked short selling, is an unethical thing to do as the pure possibility of short-selling makes some forms of crime possible in the first place, such as a criminal shooting up the road bus of a German soccer team to profit from falling stock prices [1]. Especially in the era of anything being credibly fake-able with widely available AI tools, short-selling can look to criminals as a very profitable way to make money.

Also, short-selling incentivizes large stock holders to be lazy and not do their jobs. Imagine a huge ass pension fund - they can (and do) make money as the counterparty in short-selling deals. Some see this as a necessary part of stocktrading life (because it provides liquidity), but personally I think that it removes incentives for the pension fund managers to do their job and audit the stock they hold for their shareholders in turn themselves.

Besides: enforcing securities code and auditing companies should not be the job of vigilantes. I applaud the efforts of ethical short sellers, but in an ideal world, that job would be done by the authorities.

[1] https://de.wikipedia.org/wiki/Anschlag_auf_den_Mannschaftsbu...

gizmo 3 days ago

1. Naked short selling basically doesn't happen anymore. To the extent that it does happen it's a mere technicality and the borrow is found after a couple of days.

2. There is very little money in shorting. Pumping and dumping by making up positive news is much more lucrative. "to the moon" has been a trope for years, and there is no equivalent on the short side. Even the world's most successful short seller Jim Chanos was successful because the short portfolio functioned as a hedge that enabled a leveraged long position on broad indices. It's pretty hard make money net short when the market goes up for two straight decades.

3. The authorities don't have the resources nor the dogged inclination to hunt down fraudsters. The authorities can't and shouldn't base an exhaustive investigation on vaguely shifty CEO behavior. Short sellers can and do start their investigation based on gut feeling.

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lucianbr 3 days ago

> The authorities can't and shouldn't base an exhaustive investigation on vaguely shifty CEO behavior.
Moral hazard. We are in this thread, where many people complain about the irrationality of the market, of bad choices having no ill effects, and at the same time it is argued that authorities should prioritize and only investigate and prosecute large cases where the ROI is good.
I think the ethical landscape created by this "selective investigation and prosecution based on ROI" is part of the problem. We officially abandon the concept that wrong-doing will get caught and punished as a rule and then we marvel that the markets are irrational and that bad actors profit and keep profiting over large time horizons. Who could have expected such?
I think over a longer time period these effects will compound and there will be larger and larger problems. You can't just abandon the rules because enforcing them is not cost-efficient and hope everything will be alright. But it does take time to see the effects so who knows when the larger problems will show up.

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- gizmo 2 days ago
  
  I broadly agree, except I think the greater moral hazard is in failing to prosecute the plain-as-day cases of fraud (regardless of size). I'm not arguing in favor of abandoning rules but given limited resources you have to prioritize somehow, and every prosecution strategy has significant externalities like those you touched on.
  
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weard_beard 3 days ago

1. FTDs are at an all time high. Naked short selling is an epidemic. This is provably false.
2. Operational shorting as a part of market making and derivatives strategies is an enormous part of the market. This is also demonstrably false.
3. The DOJ has the resources, not the jurisdiction. Self regulation will always be underfunded. Trying to argue that short selling is an effective form of privatized self regulation is laughable.

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- gmd63 3 days ago
  
  An increase in failures to deliver does not imply an increase in naked shorting.
  
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  weard_beard 2 days ago
  
  They are highly correlated. Most other causes are static processes which would not increase or decrease.
  
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- pclmulqdq 3 days ago
  
  The few firms (market makers) that are allowed to short naked pretty much always deliver.
  
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  weard_beard 2 days ago
  
  By “cheque kiting”. Trading back and forth perpetually with colluding firms to perpetually “deliver”, eventually landing these phantom shares in offshore swap agreements where reporting has conveniently been perpetually delayed.
  
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PoppinFreshDo 3 days ago

As for 3. Looking at the HR targets they don't look like hunch targets to me.
They seem to be going after egregious high flyers with a pattern of grift who are vulnerable to a short.
Of course I could be wrong

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Spivak 3 days ago

Truly perverse incentives such as one the one you linked aside I think it's mostly fine. Naked short selling is already illegal and the deck is heavily stacked against short sellers to begin with. A position betting on growth is by far and away the safest investment, the market directly incentivizes "irrationality" on the side of prices not going down, and it's infeasible to hold a short position for very long making it (mostly) noise to long term investors which are the ones we typically care about.

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mschuster91 2 days ago

> Truly perverse incentives such as one the one you linked aside I think it's mostly fine.
Well, the thing is, with AI being widely available the threat model explodes as the difficulty goes down drastically - imagine someone deepfaking a video of a C-level executive being involved in illegal or "extreme" sexual acts; we already have "nudifier" apps, the steps to cross for the mentioned scenario aren't that large. The number of potential threat actors explodes as the group is now "everyone with a smartphone", and it also explodes as the likelihood of getting caught (and sentenced to decades in jail, if not death) for shooting someone in public is significantly higher than getting caught "leaking" a faked video which at worst risks you a year or two for defamation.

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gmd63 3 days ago

I completely agree about the dangers and am disgusted by the story you shared and others like it.

In an ideal world nobody would commit a crime. Sadly we're far from an ideal world, and the US authorities in my experience are not well funded enough to adequately cover the ground they're responsible for. We also have a populace that voted for a felon who hates the IRS and has cronies who have floated dismantling the Consumer Financial Protection Bureau, so short sellers will have to do.

And the betting markets like Polymarket are worse. They had bets as to whether the fires in LA would be contained by certain dates. You can imagine the perverse incentives that creates.

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attila-lendvai 2 days ago

no amount of funding can compensate for inappropriately aligned incentives.
the ability to spend other people's money will always be the breeding ground of corruption (which includes not doing your job while accepting the salary).

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