Reddittors vs Wall Street

[El Pollo Diablo]

lmfao at the audacity of suggesting that de facto practice of short-selling by hedge farms is a social good

I'm not certain that hedge farms routinely get involved in short-selling tbh, unless that refers to selling hedges that are far too small.

[shpalman]

... The share price would rise in response to the extra profits...

The share price would only have risen if people would have seen the extra profits and bought shares.

[Woodchopper]

I'm willing to accept that the practise of short-selling in general may be in some cases defensible. But I can't think of many.

When you're a professor you'll be glad of short selling and lots of other similar practices, as they'll be used by the people who are generating a return which will be used to pay your pension. The social good from short selling comes from it making it easier to reduce risk, which applies way beyond pension funds.

[lpm]

... The share price would rise in response to the extra profits...

The share price would only have risen if people would have seen the extra profits and bought shares.

Due to regulators, the US is good at the flow of information to potential investors, with direct things like quarterly earnings, trading updates and conferences, plus indirect things like hedge funds using google data to see footfall in shopping malls or tracking social media. If markets are efficient enough, the share price should increase ahead of any actual purchase activity by Redditors.

[JQH]

There are plenty of other things in life where you risk losing everything. You might suddenly step out into the road without looking and be killed in a crash, or you might vote for the wrong government and bring on economic disaster or a public health disaster.

If you lose everything in short trades, it's your own money. If your investors lose everything, it's their fault for trusting you with their money. If the lenders of the shares lose their shares (note the losses here are capped to the total shares you borrowed), it's their fault for letting you borrow them and the risk is, presumably, built into the loan fee. All of the people involved are wealthy, sophisticated investors. Do you think these are the sort of people who should be protected from themselves?

Depends on whether they ask for a government bailout when they lose their shirts.

[Chris Preston]

I'm willing to accept that the practise of short-selling in general may be in some cases defensible. But I can't think of many.

Leaving the share market for a while, a similar practice occurs in agriculture. Farmers can forward sell their crop, before they have harvested it. Many of the farmers I know participate in this. Grain prices are often lowest just after harvest, when there is plenty of product available, and highest a few months before harvest. Forward selling allows the farmers to increase the price they get without having to take the risk with product storage. For the buyers, it ensures supply, rather than taking a risk on how much product is available. Most farmers forward sell between a third and half their crop. One farmer I know waits until the wheat price reaches a certain price and forward sells a third as he will make sufficient profit. If the price goes up, he sells another third. There is a risk if there is a drought and production does not meet the amount forward sold, but otherwise the practice provides both buyer and seller with some level of certainty.

[lpm]

Socrates or Aristotle or one of those old blokes wrote about the use of financial derivatives for olive oil. They are a natural way to spread risk and make markets run more smoothly.

Humans appear to have a natural affinity with activities that increase risk and reduce risk. Gambling reaches back into prehistory. Insurance goes back to the Babylonians.

[plodder]

I'm willing to accept that the practise of short-selling in general may be in some cases defensible. But I can't think of many.

When you're a professor you'll be glad of short selling and lots of other similar practices, as they'll be used by the people who are generating a return which will be used to pay your pension. The social good from short selling comes from it making it easier to reduce risk, which applies way beyond pension funds.

Yes, but where are my potatoes? Someone else has them and my shopkeeper can't afford to buy another sack because he's having to take the person who"borrowed" them to court.

[plodder]

... The share price would rise in response to the extra profits...

The share price would only have risen if people would have seen the extra profits and bought shares.

Due to regulators, the US is good at the flow of information to potential investors, with direct things like quarterly earnings, trading updates and conferences, plus indirect things like hedge funds using google data to see footfall in shopping malls or tracking social media. If markets are efficient enough, the share price should increase ahead of any actual purchase activity by Redditors.

Due to the excellent work of regulators we only have a gigantic crash every 10-15 years that costs more in productivity that the imagined efficiencies of the financial services industry.

[lpm]

There was a gigantic crash in 1929-34 and 2008-2013. I have been trained in maths and have been able to calculate this as a gap of 79 years rather than 10-15 years, although I wouldn't mind if someone checked my workings.

[headshot]

There was a gigantic crash in 1929-34 and 2008-2013. I have been trained in maths and have been able to calculate this as a gap of 79 years rather than 10-15 years, although I wouldn't mind if someone checked my workings.

8 minus 29, carry the four, divide by 12...erm plus the difference.

Yep, all seems to check out.

[dyqik]

lmfao at the audacity of suggesting that de facto practice of short-selling by hedge farms is a social good

Nobody came up with a single reason why short selling is bad - apart from very basic beginner errors of thinking share price has an effect on the company's finances.

I was hoping someone would get the correct answer - that it isn't short selling that's the problem but market manipulation by scummy coked-up fund managers. Which is what this particular scummy hedge fund has a reputation for. A struggling company benefits from having its share price driven down by sellers - being over valued is harmful. A thriving company is the other way - benefits from being over valued. But nobody benefits from having its share price manipulated.

I was then going to point that the cure for a hedge fund manipulating a market is not to massively manipulate it the other way. But we never got that far.

I was taking that as read.

[plodder]

+ 1 x Black Monday (1987)
+ 1 x dotcom bubble (2001)

[nekomatic]

If only there were more than one shop that sold potatoes.

[dyqik]

I'm willing to accept that the practise of short-selling in general may be in some cases defensible. But I can't think of many.

When you're a professor you'll be glad of short selling and lots of other similar practices, as they'll be used by the people who are generating a return which will be used to pay your pension. The social good from short selling comes from it making it easier to reduce risk, which applies way beyond pension funds.

It's not necessary to short sell to make an investment profit, in the same way that it is not necessary, or legal, to use insider information to make an investment profit. Both can be effective though.

(It's also not necessarily the case that private pensions are a good in themselves, but that's a whole set of other arguments)

One possible good that short selling can do is to provide a means for investors to flag companies that they think are being far too optimistic/are lying about forecasts, or are otherwise having bigger issues than they say they are.

[plodder]

If only there were more than one shop that sold potatoes.

Oh sure, but it’s further away and is less easy and more expensive to get to. It’s ok, I’m sure the increased liquidity will more than offset any hassle me and the shopkeeper may have, and the occasional potato famine is also entirely justified by the considerable benefits we all reap from, erm, grossly rising inequality and, erm, ecological suicide through rampant capitalism.

[bjn]

I'm willing to accept that the practise of short-selling in general may be in some cases defensible. But I can't think of many.

When you're a professor you'll be glad of short selling and lots of other similar practices, as they'll be used by the people who are generating a return which will be used to pay your pension. The social good from short selling comes from it making it easier to reduce risk, which applies way beyond pension funds.

It's not necessary to short sell to make an investment profit, in the same way that it is not necessary, or legal, to use insider information to make an investment profit. Both can be effective though.

(It's also not necessarily the case that private pensions are a good in themselves, but that's a whole set of other arguments)

One possible good that short selling can do is to provide a means for investors to flag companies that they think are being far too optimistic/are lying about forecasts, or are otherwise having bigger issues than they say they are.

IIRC the short sellers were onto Enron before the regulators were.

[plodder]

the way it should be. can’t have regulators getting there first, that’s a hurdle that stifles profitability.

[Bird on a Fire]

Imagine if I spent all day swapping potatoes with my friends? It's just embarrassing.

They should get a proper job, like growing potatoes or cooking them, not gambling on potato prices with other people's money.

[lpm]

Right. But where do you draw the line at what is potato production and what isn't? You approve of the real job of a farmer growing potatoes, but what about:

- a company that specialises in the manufacture of tractors that are suitable for potato farmers?
- a company that specialises in offering insurance on potato tractors?
- a company that specialises in offering credit to farmers to allow them to buy a potato tractor?
- a company that specialises in offering funding to companies that offer credit to potato farmers to allow them to buy a potato tractor?
- a company that specialises in raising corporate finance to fund companies that fund other companies that offer credit to potato farmers to allow them to buy a potato tractor?
- a company that specialises in analysing companies that raise finance to fund companies that fund other companies that offer credit to potato farmers to allow them to buy a potato tractor?
- a company that specialises in offering insurance on companies that raise finance to fund companies that fund other companies that offer credit to potato farmers to allow them to buy a potato tractor?
- a company that specialises in packaging up into a financial derivative the credit of companies offering insurance on companies that raise finance to fund companies that fund other companies that offer credit to potato farmers to allow them to buy a potato tractor?

[plodder]

Cut the act, lpm.

I would love to see an analysis of whether the fees, risks, bailouts, rents, lobbying, leverage, bubbles and general trough-snouting of the financial services industry actually pays for itself. Bear in mind it’s only been in its current deregulated form for about 40 years, that’s the time period I’m talking about, not Babylonian insurance.

[noggins]

Investment creates new value, while speculation only transfers value. It *feels* like the financial world has evolved to suit the speculator instead of the investor.
And its a waste.

My feelz may well be bollocks though.

[lpm]

You might not like it Plodder, for personal reasons or political reasons, but the highly sophisticated financial systems of the west mean potato farmers get immediate and cheap access to the latest potato tractor technologies, allowing them to plant, harvest and deliver potatoes at higher and higher productivity. The cost of credit has been shaved down to the tiniest margins.

This is a key problem for developing countries: known ways to improve productivity but an inability to finance the investment. The cost of credit remains huge.

In the west, we end up eating cheaper potatoes. And we get cheaper imported clothes and electronics and vaccines and everything else we want, due to the continual efficiency gains driven into the system.

[Bird on a Fire]

You might not like it Plodder, for personal reasons or political reasons, but the highly sophisticated financial systems of the west mean potato farmers get immediate and cheap access to the latest potato tractor technologies, allowing them to plant, harvest and deliver potatoes at higher and higher productivity. The cost of credit has been shaved down to the tiniest margins.

This is a key problem for developing countries: known ways to improve productivity but an inability to finance the investment. The cost of credit remains huge.

In the west, we end up eating cheaper potatoes. And we get cheaper imported clothes and electronics and vaccines and everything else we want, due to the continual efficiency gains driven into the system.

So here's a question.

If people weren't investing money in speculation - I share the both noggins's sense that there's a distinction, and also a sense that I might be missing things - mightn't that money then be invested in something more directly productive instead?

It seems to be that gambling on the market might be a quick way to return a profit on an investment, which obviously has its uses (pensions, etc). But given a choice between shorting a potato company or investing in a new potato startup (or an old potato firm attempting to restructure), only one of those things is likely to result in more jobs and more potatoes for everybody. The other results in more money, but most of that extra money goes to people who already had money in the first place.

I do have a general impression that the modern economy delivers a lot more opportunities for growth to the wealthy, which is why wealth inequality is rising. The UK has a very successful financial sector, but all its actual potato farmers are broke.

[Bird on a Fire]

I would love to see an analysis of whether the fees, risks, bailouts, rents, lobbying, leverage, bubbles and general trough-snouting of the financial services industry actually pays for itself. Bear in mind it’s only been in its current deregulated form for about 40 years, that’s the time period I’m talking about, not Babylonian insurance.

Yes, I think there's two things under attack from this reddit prank. One is market manipulation, which we all agree is a Bad Thing (though currently seems to be legal, or at least unpunishable).

The other is this complex ecosystem of speculative financial products. Delivering a return on investments has been a thing bankers have done for yonks. The newfangled system of derivatives trading and so on, with historically low levels of investment, is a recent development and - and the very least - the sector and its supporters have done a terrible job of communicating its wider benefits, beyond laughable lies like the "trickle-down" affect that saw the 2008 bailout trickling down into billionaires' hidden offshore accounts while professionals in the UK (a top-5 global economy) had to use food banks.