The practice of short selling is a major cause of the current instability in world financial markets. It’s institutional fraud, is morally indefensible, and deeply destabilizing.
Here’s an example (my ellipsis):
A hunt has been launched for a stock market trader who may have made £100 million in a “modern day bank robbery” after an attack on the share price of the country’s biggest mortgage lender.
Shares in Halifax Bank of Scotland fell by 17 per cent as traders attempted to make a fortune by betting on the bank’s falling stock.
Malicious rumours circulated by speculators were blamed for the run, which saw more than £3 billion wiped off the bank’s value.
Britain’s financial watchdog launched a criminal investigation to hunt down “ruthless” rogue traders, including one speculator thought to have made £100m from buying and selling shares during the day.
…(one hedge fund previously) made £500m from (shorting) Northern Rock…
There are two crimes here:
– borrowing the shares used to “bet on stock”
– spreading the false rumors
The rumor part is optional, because short selling is visible to the market and a big enough short can trigger a market sell-off, so fulfilling the false prophecy.
Here’s how it works (my emphasis):
…assume that shares in XYZ Company currently sell for $10 per share. A short seller would borrow 100 shares of XYZ Company, and then immediately sell those shares for a total of $1000.
If the price of XYZ shares later falls to $8 per share, the short seller would then buy 100 shares back for $800, return the shares to their original owner, and make a $200 profit.
This practice has the potential for losses as well. For example, if the shares of XYZ that one borrowed and sold in fact went up to $25, the short seller would have to buy back all the shares at $2500, losing $1500.
Certain large holders of securities, such as a custodian or investment management firm, often lend out these securities to gain extra income, a process known as securities lending. The lender receives a fee for this service.
Custodians and investment management outfits hold our shares – which we leave with them for convenience.
The fine print of your brokerage agreement may authorize such loans of your property, but it’s still fraud, since they’re loaning your stock to gangs who aim to reduce its value.
It’s as if parking garages insisted you leave your car keys with them, covertly hired your car out for profit, and returned it damaged. Then claimed this was authorized by their terms and conditions.
It gets worse (my ellipsis):
Because both the short seller and the original long holder (they mean you, the owner) can sell the same shares at the same time, selling pressures can be artificially magnified…causing larger price drops than would be normally justified by…negative news.
So legalized theft is undermining the value of your investments and looks to destroy millions of jobs.
Short selling is epidemic in the US and UK, so if you have stock there you should make sure you take physical possession of your stock certificates.