Short selling - how's that again?
Short selling - how's that again?
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Discussion

cmsapms

Original Poster:

708 posts

274 months

Friday 19th September 2008
quotequote all
The beeb "explained" short selling last night.

John, a punter, has 1000 shares worth £2 each in a company that makes, for the sake of argument, faggots*. A trader, let's call him Toby, arranges to "borrow" John's shares promising John a guaranteed sweetener, say £500. Toby sells the shares and pockets £2k, whilst spreading lies telling tall tales about the company to force its share price down. Toby twiddles his thumbs whilst the shares plummet then buys 1000 shares at £1 each. Toby now has £1K in shares which he returns to John and £1k cash, £500 of which he gives to John. This leaves Toby with £500. Result!

From this, we can deduce that Toby is a silver tongued genius, whilst John who has, on the face of it, lost £500 off the value of his holding is an utter spaz. Now obviously there has to be more to it than this as I believe this short selling scam malarkey has been quite popular. Are there really a lot of rich mongs out there that can be so easily parted from thir wealth?

What am I, and Robert bl00dy "you know" Peston missing?

Ta.


* well there have to be some brains in this somewhere

Justayellowbadge

37,057 posts

272 months

Friday 19th September 2008
quotequote all
cmsapms said:
The beeb "explained" short selling last night.

John, a punter, has 1000 shares worth £2 each in a company that makes, for the sake of argument, faggots*. A trader, let's call him Toby, arranges to "borrow" John's shares promising John a guaranteed sweetener, say £500. Toby sells the shares and pockets £2k, whilst spreading lies telling tall tales about the company to force its share price down. Toby twiddles his thumbs whilst the shares plummet then buys 1000 shares at £1 each. Toby now has £1K in shares which he returns to John and £1k cash, £500 of which he gives to John. This leaves Toby with £500. Result!

From this, we can deduce that Toby is a silver tongued genius, whilst John who has, on the face of it, lost £500 off the value of his holding is an utter spaz. Now obviously there has to be more to it than this as I believe this short selling scam malarkey has been quite popular. Are there really a lot of rich mongs out there that can be so easily parted from thir wealth?

What am I, and Robert bl00dy "you know" Peston missing?

Ta.


* well there have to be some brains in this somewhere
The price of John's holding would have dropped anyway, unless you believe that shorts control the market.

So this way he makes a little vig.


Dupont666

22,938 posts

222 months

Friday 19th September 2008
quotequote all
I believe this is to be barred now (til mid jan on anything more than 0.25% of the companys worth) and one of the reasons that HBOS almost went under!!

All is fair in IB and im sure quite a few short sellers are now a bit grumpy today.


Guffy

2,372 posts

295 months

Friday 19th September 2008
quotequote all
There's noting wrong with short selling, but the spread of malicious information to get the share price to drop is where it becomes a bit dodgy.

MikeyT

18,448 posts

301 months

Friday 19th September 2008
quotequote all
It just seems 'wrong' to me - selling something you have 'borrowed' - so creating yet another 'market' for the thing - a market that you 'can' influence ... so wonder the banks are in such strife.

JP_Midget

438 posts

241 months

Friday 19th September 2008
quotequote all
Justayellowbadge said:
cmsapms said:
The beeb "explained" short selling last night.

John, a punter, has 1000 shares worth £2 each in a company that makes, for the sake of argument, faggots*. A trader, let's call him Toby, arranges to "borrow" John's shares promising John a guaranteed sweetener, say £500. Toby sells the shares and pockets £2k, whilst spreading lies telling tall tales about the company to force its share price down. Toby twiddles his thumbs whilst the shares plummet then buys 1000 shares at £1 each. Toby now has £1K in shares which he returns to John and £1k cash, £500 of which he gives to John. This leaves Toby with £500. Result!

From this, we can deduce that Toby is a silver tongued genius, whilst John who has, on the face of it, lost £500 off the value of his holding is an utter spaz. Now obviously there has to be more to it than this as I believe this short selling scam malarkey has been quite popular. Are there really a lot of rich mongs out there that can be so easily parted from thir wealth?

What am I, and Robert bl00dy "you know" Peston missing?

Ta.


* well there have to be some brains in this somewhere
The price of John's holding would have dropped anyway, unless you believe that shorts control the market.

So this way he makes a little vig.
and they're probably not John's shares in the first place, he's probably fund manager, and it's the fund that would have lost the 1k off their total. John would have pocketed the 500 quid himself in all probability... in fact there's probably no Toby at all, and John has loaned himself the shares.

A 'good fund manager'? maybe would have sold at 2 quid each, spread rumours and bought 2k's worth when they dropped to 1 quid, doubling their hold in the company. Let the rumours subside and shares return to their initial value, and then had 4k's worth invested.

At least that's how I think it works.

cmsapms

Original Poster:

708 posts

274 months

Friday 19th September 2008
quotequote all
Justayellowbadge said:
The price of John's holding would have dropped anyway, unless you believe that shorts control the market.

So this way he makes a little vig.
Ahhh, that'd be it. So the trader is forewarning his customer, and getting him the least worst return on his holding?

anonymous said:
[redacted]
That's what prompted the question. They seemed to be being deliberately misleading.

cmsapms

Original Poster:

708 posts

274 months

Friday 19th September 2008
quotequote all
JP_Midget said:
and they're probably not John's shares in the first place, he's probably fund manager, and it's the fund that would have lost the 1k off their total. John would have pocketed the 500 quid himself in all probability... in fact there's probably no Toby at all, and John has loaned himself the shares.

A 'good fund manager'? maybe would have sold at 2 quid each, spread rumours and bought 2k's worth when they dropped to 1 quid, doubling their hold in the company. Let the rumours subside and shares return to their initial value, and then had 4k's worth invested.

At least that's how I think it works.
In banking, it seems, there are many ways to skin a cat! Including replacing the skin and starting again.

edited for missing comma

Edited by cmsapms on Friday 19th September 09:24

Simpo Two

92,948 posts

295 months

Friday 19th September 2008
quotequote all
Well this is what happens if you put barrowboys in charge of too much money.

2something

2,145 posts

238 months

Friday 19th September 2008
quotequote all
Media spreads panic

Said panic ensures the short sellers make even more money than they expected to

Media blames everything on short sellers

-> See the problem ?

It's not the medias fault we're in this mess, but they have been out there fanning the flames 24 hours a day, so to then go and try to pin blame on short sellers is a bit rich.


turbobloke

117,332 posts

290 months

Friday 19th September 2008
quotequote all
cmsapms said:
Justayellowbadge said:
The price of John's holding would have dropped anyway, unless you believe that shorts control the market.

So this way he makes a little vig.
Ahhh, that'd be it. So the trader is forewarning his customer, and getting him the least worst return on his holding?

anonymous said:
[redacted]
That's what prompted the question. They seemed to be being deliberately misleading.
Isn't that written (in communist red) into the BBC's Charter these days?

Politically biased and misleading where possible?

Shadytree

8,291 posts

279 months

Friday 19th September 2008
quotequote all
I've tried to expalin short selling to my mother over the last 20 years... still no clue!

Some people you need to just say... "have a nice cup of tea and don't worry about it"

Don

28,378 posts

314 months

Friday 19th September 2008
quotequote all
MikeyT said:
It just seems 'wrong' to me - selling something you have 'borrowed' - so creating yet another 'market' for the thing - a market that you 'can' influence ... so wonder the banks are in such strife.
But it isn't borrowing is it? It's an agreement to buy/sell in the future...for a fee. You can win and lose on it...same as on anything.

bobt

1,323 posts

233 months

Friday 19th September 2008
quotequote all
Sort of on topic, but going into tinfoil hat mode.

Didn't Bush senior, Cheyney and no doubt a bunch of guys called Weinberg, Goldstein etc. short a whole tonne of airline stock in the first week of September 2001?

getmecoat

JRM

2,065 posts

262 months

Friday 19th September 2008
quotequote all
cmsapms said:
The beeb "explained" short selling last night.

John, a punter, has 1000 shares worth £2 each in a company that makes, for the sake of argument, faggots*. A trader, let's call him Toby, arranges to "borrow" John's shares promising John a guaranteed sweetener, say £500. Toby sells the shares and pockets £2k, whilst spreading lies telling tall tales about the company to force its share price down. Toby twiddles his thumbs whilst the shares plummet then buys 1000 shares at £1 each. Toby now has £1K in shares which he returns to John and £1k cash, £500 of which he gives to John. This leaves Toby with £500. Result!

From this, we can deduce that Toby is a silver tongued genius, whilst John who has, on the face of it, lost £500 off the value of his holding is an utter spaz. Now obviously there has to be more to it than this as I believe this short selling scam malarkey has been quite popular. Are there really a lot of rich mongs out there that can be so easily parted from thir wealth?

What am I, and Robert bl00dy "you know" Peston missing?

Ta.


* well there have to be some brains in this somewhere
Well you are missing the fact that the market price might actually increase and therefore the short sell gamble won't of paid off.

Toby has to buy shares at £2.50 and therefore makes a loss.

Beside short-selling is rarely used on it's own, it's there to hedge potential loss on a falling sotck, so a portfolio manager might well pick stock he thinks are going to rise but will buy an option to short sell that same stock to cover part of his loss should that stock fall.

Obviously you couldn't ever mitigate to zero but it 'hedges his bet'

As for spreading the rumours inorder to make the drop occur and obviously gambling everything on a short sell, that's the illegal bit. It's the same as buying shares in a compnay and then spreading rumours of a take-over to push the price up. Illegal, but does still occur to some degree

SleeperCell

5,591 posts

272 months

Friday 19th September 2008
quotequote all
bobt said:
Sort of on topic, but going into tinfoil hat mode.

Didn't Bush senior, Cheyney and no doubt a bunch of guys called Weinberg, Goldstein etc. short a whole tonne of airline stock in the first week of September 2001?

getmecoat
You're probably thinking of this
http://www.snopes.com/rumors/putcall.asp

bobt

1,323 posts

233 months

Friday 19th September 2008
quotequote all
SleeperCell said:
bobt said:
Sort of on topic, but going into tinfoil hat mode.

Didn't Bush senior, Cheyney and no doubt a bunch of guys called Weinberg, Goldstein etc. short a whole tonne of airline stock in the first week of September 2001?

getmecoat
You're probably thinking of this
http://www.snopes.com/rumors/putcall.asp
Oh that'll be all right then as the 9/11 commission says the numbers are just a coincidence. You don't need to be an actuary to work out the probabilities, statistics 101 would do.

Don't suppose they thought all the evidence would have gone in building 7.


215cu

2,956 posts

240 months

Friday 19th September 2008
quotequote all
I think it's all total bks. Short selling is a very good tool to expose any shortcomings in any firms financial strategy. It's also an important way to make money in a bear market.

However, spreading false allegations is not on. Besides, I would imagine it would be very difficult to truly convince the market as there are opposite numbers of speculators hoping to make money on the stock price rising.

Incidentally, post merger, I did hear for former Chief Exec of HBOS practically admit they were financing their mortgage portfolio with the use of wholesale money which they were finding increasingly hard to find even before the run on the Bank's stock. If the fear of bad debt in HBOS is real, then the short sellers are providing an important service in placing the value of that firm into proper context.

Portraying them as a pack of spivs does no-one any favours, as for the BBC, when they can start get the market information on Newsnight right, then I might just pay a little more attention to the rest of their financial analysis. Which has gone really downhill since Jeff Randall left.

Peston is a little too close to Brown for my liking (he wrote a biog on him), along with that tt Marr they are both too pally-pally to this government to have any credence of objectivity.

MikeyT

18,448 posts

301 months

Friday 19th September 2008
quotequote all
anonymous said:
[redacted]
Makes no difference whether it's up or down - it's up or down for someone's again one way or the other. All wrong.

bigbadbikercats

653 posts

238 months

Friday 19th September 2008
quotequote all
215cu said:
...I would imagine it would be very difficult to truly convince the market as there are opposite numbers of speculators hoping to make money on the stock price rising.
This is the bit I've never quite got in the whole "Short sellers are evil and must die!" story. In order to close the position and turn a theoretical profit into actual money someone's got to be buying and hence have an interest in the stock rising[1]. If you take market manipulation (which is already illegal anyway and could be used to gain advantage from any other kind of trade) out of the picture it's difficult for me to see why short selling in itself should have any more influence on the market than any other kind of trade.

[1] Unless of course they're hoping to end up owning a chunk of a company at much less than it's asset value and have some dastardly plan to gut it overnight...

--
JG