The Retail Investors War On Short-Sellers Has Merit. Maybe It’s Time For Change.
It’s apparent that today’s retail investors have had just about enough of Short-Sellers. The organized retail investor groups of 2021 have declared war on short sellers and have piled into GameStop and AMC stocks to send them soaring and put any uncovered Short-Sellers in a very costly position.
How far up will the Retail investors push the stock prices? Who knows really. Their passion on this topic is being put on full display in the share prices, and the limits have not yet been set nor seen.
Short selling is a questionably legal form of stock trading in which individual traders or even very large hedge funds place “Bets” that a specific stock will drop in price. This practice is frowned upon by traditional long term and swing trade investors and viewed as nothing more than a form of legalized gambling in the Stock Market.
Let’s take a closer look at what short selling really is and why Retail Investors have declared war, shall we?
In its basic form, The Short-Seller or hedge fund “borrows” stock of a company they target to short and then sells it, they do so with full understanding that the loan (Borrowed Shares) will have to be repaid with shares purchased in the market.
Their “bet” that the stock price will drop pays off for the Short-Seller or hedge fund if, in fact, the stock does drop. The short-seller or hedge fund can cover their short position (Payback the loan) by replacing the borrowed shares at the lower price and profit from the difference.
It should be known that it’s illegal for Short-Sellers to spread false information or to start negative rumors either via publishing articles or through social media platforms. But that doesn’t change the bad perception of shorting a stock or “Short-Sellers” in general with the long term and traditional swing traders. Making it illegal for Short-Sellers to post false information wasn’t good enough. It left the door wide open for short sellers to freely post information in such a way that couldn’t be viewed legally as spreading false information, yet could be just as dubious.
When a Short-Seller post information on social media or publishes an article with negative information in regards to a specific company, its mostly viewed as a “scare tactic” to frighten other investors, mainly retail investors, into selling their shares and thus creating a price drop.
The common question by traditional investors is “Why else would the Short-Seller be posting at all?” They post to scare people because it helps their short position, It’s obvious.
Unlike traditional news sources that put the good and bad in their coverage of a company, short-sellers typically post only the reasons for their short position in a company. Which is often overdramatic and filled with gloom and doom that provides readers with no real useful insight. Articles of this nature are referred to as “Hit Piece Articles”.
Individual Short-Sellers or people hired by Short-Sellers have been known to completely flood forum boards and chat feeds of stock trading apps and websites with negative spam type postings. They do so with such force at times that it ruins the feeds for any attempts at normal conversations.
Some believe that well organized Short-Sellers have teams of people with accounts on social media, stock forums and chat feeds solely for the purpose of creating a negative view on a stock that the short-seller has a position in. Creating fear or a negative view can easily be accomplished without posting blatantly false information.
Even the likes of Elon Musk have spoken out publicly against the legality of short selling.
Is it time to revisit the legality and the tactics used in short selling?
Short selling, in general, was studied by Congress before the enacting of the Securities and Exchange Act in 1934, but at the time, Congress failed to pass judgment on its legality or on its permissibility within the market. But then in 1937, the SEC adopted a new rule, which stated market participants “could” legally sell short shares of stock, but only if it occurred on a price uptick from the previous sale. This gave a nod of a supervised and lightly regulated acceptance from the SEC.
However, even though short selling had a new “legal status”, many policymakers of the time and especially retail investors remained critical on the issue of short selling in the stock market.
Being able to borrow shares and profit from the losses of others seemed like an unethical tactic or a dubious way to financially benefit from the stock market. The general view of “investing” in the stock market had been fairly black and white up until the legalization of short selling. Investors should invest in a company that they felt was going to continue to do well, and sell their shares if they felt the company was performing poorly.
Short selling seemed to add a negative and sketchy tactic to the market that has yet to convince long term investors of having any practical “Investing” purpose. Shorting a stock is not seen as investing at all. It’s seen as a “Bet” to make quick profits on losses of long term investors.
Because of the “Days to Cover” factor, also called the “short ratio”, which basically measures the expected number of days to close out a company’s issued shorted shares, we can plainly see that a short position on a stock is not an investment at all, but rather a “bet” that comes with a time limit in which to cover.
Even in 1934, short selling was viewed as a “tolerated gambling” tactic that was reluctantly approved, rather than any practical or traditional investment strategy. The SEC may have given short selling a legal status in 1934, but since that time modern-day investing has seen some major changes. One that comes to mind straight away is the internet and social media.
With younger investors flooding into the market today, maybe it’s time to rethink the legality of short-selling in general. Is it investing or is it gambling? We also have to consider that Social media has become more than a place to share thoughts or opinions, it’s become a news source in part for many younger investors.
This alone should bring into question the 1934 legalization of short selling and the extremely light regulations that are in place versus the modern-day shady tactics used by Short-Sellers attempting to cover their bets.
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