Share this page:
Stay connected:
Welcome to the Citywire Money Forums, where members share investment ideas and discuss everything to do with their money.

You'll need to log in or set up an account to start new discussions or reply to existing ones. See you inside!

Notification

Icon
Error

short selling
Andrew Hirst
Posted: 17 January 2018 07:45:26(UTC)
#1

Joined: 24/02/2017(UTC)
Posts: 20

Thanks: 11 times
Was thanked: 5 time(s) in 4 post(s)
I'm interested in how short selling works, I don't want to do it but I'm just trying to understand how it might affect my investments in Wizz Air right now as the word is that shorting has steadily edged the price down this year. I've read a bit about it but it seems not so simple. I'm keen to understand really the mechanics of it for future reference as well. Re Wizz- why would short sellers target a seemingly healthy rising stock to bring it down, and also how it's possible to do that presumably as a joint action between different shorters ?
Alan Selwood
Posted: 17 January 2018 14:32:51(UTC)
#2

Joined: 17/12/2011(UTC)
Posts: 2,554

Thanks: 502 times
Was thanked: 4020 time(s) in 1497 post(s)
According to one of my data sources, Wizz Air's situation is that shorting activity is "low" on the scale of low-medium-high.

I believe (I can't check these facts) that generally it is institutions that engage in short selling, mainly private equity and hedge funds, plus a few managers of aurthorised funds and investment trusts whose remit includes the ability to do short-selling, usually where they want to oversell bad companies and overbuy good ones with whatever money they have at their disposal. If they get it right, they win both ways, and believe they are 'invincible' like the Golden Eye villain, but of course if they get it wrong, they wish they hadn't had the idea at all, and want to blame somebody else, because they lose both ways.

The short selling arena involves:
Either : Selling a holding in the hope of buying it back cheaper later.
Or : Selling a holding that you don't have, in the hope of buying it back cheaper later. This latter method is, I believe, called 'naked short selling', and is frowned on, because it increases market instability.

For individuals, I think it's going to be rather tricky, because most platforms won't let you sell what you don't have.

One way round the problem, in terms of using it to profit from market falls, could be to buy a specialist ETF (exchange-traded fund) which is designed to act as a sort of counterweight, because its derivatives make it go UP when share prices go DOWN, and unfortunately DOWN when the market rises.
Typically, it is all to do with them holding 'puts' rather than short-selling, and not really helpful for individual shares.

The sort of situation where it could be useful is when YOU think the market is going to fall, but nobody else seems to agree with you! In this situation, you could retain your real shares (in case everyone else is right) but also buy one of these ETF funds that uses puts (or contracts for differences, or whatever).

Then, if the market goes up, your shares (in general) go up too, but your 'put' fund goes down. However, if the market goes down, your shares go down, but your 'put' fund goes up.

The net effect is that volatility (and dividends generated) are reduced, but at the cost of holding the 'put' fund, which of course is not a free gift - there are charges, and the expense of running such a fund will be very much higher than a FTSE100 tracker! So it's a tool, but not 100% perfect in any situation.

Since, broadly speaking, the general pattern of equity market performance is of the style 'erratic upward path with drops along the way' in most of recent history, there is no long-term case for holding puts, or shorting; it is best considered as a short-term trading method that you wish to employ that statistically is going to lose you money unless your selection and timing is better than most people's.
(Well that's why I don't attempt shorting or puts, because I am more likely than high-powered traders with sophisticated computer systems to get it wrong in spades!!).

I hope that helps, but do not rely on anything I have said above without taking professional advice that confirms the details that I have given.

5 users thanked Alan Selwood for this post.
AJW on 17/01/2018(UTC), North Star on 17/01/2018(UTC), c brown on 17/01/2018(UTC), Andrew Hirst on 19/01/2018(UTC), gillyann on 19/01/2018(UTC)
North Star
Posted: 17 January 2018 15:45:56(UTC)
#4

Joined: 22/05/2014(UTC)
Posts: 36

Thanks: 99 times
Was thanked: 38 time(s) in 19 post(s)
Is it the case that say,for example,an income fund has shares in a particular business ,sees an ongoing dividend stream so doesn't want to dispose of those shares: the shareholder is approached by a short seller to borrow those shares on the expectation of a decline in that share price and gives the share owner a slice of action if that comes about?
So the share owner still gets the ongoing dividend plus a rental fee but loses out on the capital value of those shares if in fact they go down.

Another question then arises, should the share owner see this as a warning bell and get out of that holding?

1 user thanked North Star for this post.
Andrew Hirst on 19/01/2018(UTC)
Blue S
Posted: 17 January 2018 16:44:49(UTC)
#5

Joined: 13/06/2017(UTC)
Posts: 15

Was thanked: 15 time(s) in 11 post(s)
Naked short selling can be very dangerous as it is possible to sell more shares than actually exist or more than exist in the free float.
This actually happened with regard to VW & Porsche back in 2008 and they took the Hedge Funds for billions.
See:
http://www.economist.com/node/12523898
1 user thanked Blue S for this post.
Andrew Hirst on 19/01/2018(UTC)
King Lodos
Posted: 17 January 2018 17:15:53(UTC)
#6

Joined: 05/01/2016(UTC)
Posts: 2,325

Thanks: 458 times
Was thanked: 3412 time(s) in 1356 post(s)
The way I describe short-selling is:

– I borrow a bunch of bananas from a vendor;

– I sell the bananas at the local market for £5;

– The price of bananas falls, so I buy the bunch back next week for £4;

– I return the bananas to the vendor, and pocket the £1 difference.


I think what creates downward pressure on the price of bananas is that in the first instance I'm a seller desperate to offload, and in the second, I'm trying to buy back as cheaply as possible .. Add to that some bit of knowledge I've got that makes me think prices will fall, and the chances are other people have it too – which means they'll want a bargain when they buy my bananas, and they'll probably be desperate to sell when I'm buying them back .. So at both points, I'm amplifying the decline.
2 users thanked King Lodos for this post.
Andrew Hirst on 19/01/2018(UTC), Mr Helpful on 19/01/2018(UTC)
Tim D
Posted: 17 January 2018 18:07:48(UTC)
#7

Joined: 07/06/2017(UTC)
Posts: 317

Thanks: 1177 times
Was thanked: 475 time(s) in 206 post(s)
King Lodos;55547 wrote:
The way I describe short-selling is:

– I borrow a bunch of bananas from a vendor;

– I sell the bananas at the local market for £5;

– The price of bananas falls, so I buy the bunch back next week for £4;

– I return the bananas to the vendor, and pocket the £1 difference.

I think what creates downward pressure on the price of bananas is that in the first instance I'm a seller desperate to offload, and in the second, I'm trying to buy back as cheaply as possible .. Add to that some bit of knowledge I've got that makes me think prices will fall, and the chances are other people have it too – which means they'll want a bargain when they buy my bananas, and they'll probably be desperate to sell when I'm buying them back .. So at both points, I'm amplifying the decline.


Unless you've actually set yourself up for a "short squeeze" of course: "Here comes that KL... he'll be needing to give TP back a bunch of bananas he borrowed off him last week... quick, mark the price up!".

Supposedly more of a problem with illiquid stocks... you'd probably be fine with bananas, but if it was exotic dragonfruit only one or two vendors sell... look out. Or if people end up playing the shorting game with a big enough proportion of the bananas available in the market, for that matter.
King Lodos
Posted: 17 January 2018 20:10:19(UTC)
#9

Joined: 05/01/2016(UTC)
Posts: 2,325

Thanks: 458 times
Was thanked: 3412 time(s) in 1356 post(s)
TP once spotted me a Sausage & Egg McMuffin on the way back from the Bedford regionals .. 2 days later a courier turned up with a mutilated doll's head and a court summons.

It's one reason I've never shorted Glaxo
The Spanish Inquisition
Posted: 18 January 2018 09:24:30(UTC)
#10

Joined: 02/04/2014(UTC)
Posts: 36

Thanks: 110 times
Was thanked: 54 time(s) in 20 post(s)
Look up put/call options, very popular in the US to protect gains if you believe turbulence lies ahead. I looked into these a few years back but couldn't find a provider for UK residents, a shame really because the spread betting route gives you unlimited losses if you're wrong (likely) or you get stopped out just before you are proved right....As to the bananas, I think we're slipping into speculation on that one ; ))
DJLW
Posted: 18 January 2018 09:55:37(UTC)
#11

Joined: 06/01/2014(UTC)
Posts: 24

Thanks: 22 times
Was thanked: 27 time(s) in 15 post(s)
I was once told of a major UK bank that was berating short sellers of its stock and the general unethical nature of the process, whilst simultaneously earning a fee for Lending its stock out to enable the process.
1 user thanked DJLW for this post.
Tim D on 18/01/2018(UTC)
Andrew Hirst
Posted: 19 January 2018 06:48:46(UTC)
#12

Joined: 24/02/2017(UTC)
Posts: 20

Thanks: 11 times
Was thanked: 5 time(s) in 4 post(s)
Thanks all, good food for thought there, but I'll stay away from bananas!
Andrew Hirst
Posted: 19 January 2018 07:04:12(UTC)
#3

Joined: 24/02/2017(UTC)
Posts: 20

Thanks: 11 times
Was thanked: 5 time(s) in 4 post(s)
Alan Selwood;55522 wrote:
According to one of my data sources, Wizz Air's situation is that shorting activity is "low" on the scale of low-medium-high.

I believe (I can't check these facts) that generally it is institutions that engage in short selling, mainly private equity and hedge funds, plus a few managers of aurthorised funds and investment trusts whose remit includes the ability to do short-selling, usually where they want to oversell bad companies and overbuy good ones with whatever money they have at their disposal. If they get it right, they win both ways, and believe they are 'invincible' like the Golden Eye villain, but of course if they get it wrong, they wish they hadn't had the idea at all, and want to blame somebody else, because they lose both ways.

The short selling arena involves:
Either : Selling a holding in the hope of buying it back cheaper later.
Or : Selling a holding that you don't have, in the hope of buying it back cheaper later. This latter method is, I believe, called 'naked short selling', and is frowned on, because it increases market instability.

For individuals, I think it's going to be rather tricky, because most platforms won't let you sell what you don't have.

One way round the problem, in terms of using it to profit from market falls, could be to buy a specialist ETF (exchange-traded fund) which is designed to act as a sort of counterweight, because its derivatives make it go UP when share prices go DOWN, and unfortunately DOWN when the market rises.
Typically, it is all to do with them holding 'puts' rather than short-selling, and not really helpful for individual shares.

The sort of situation where it could be useful is when YOU think the market is going to fall, but nobody else seems to agree with you! In this situation, you could retain your real shares (in case everyone else is right) but also buy one of these ETF funds that uses puts (or contracts for differences, or whatever).

Then, if the market goes up, your shares (in general) go up too, but your 'put' fund goes down. However, if the market goes down, your shares go down, but your 'put' fund goes up.

The net effect is that volatility (and dividends generated) are reduced, but at the cost of holding the 'put' fund, which of course is not a free gift - there are charges, and the expense of running such a fund will be very much higher than a FTSE100 tracker! So it's a tool, but not 100% perfect in any situation.

Since, broadly speaking, the general pattern of equity market performance is of the style 'erratic upward path with drops along the way' in most of recent history, there is no long-term case for holding puts, or shorting; it is best considered as a short-term trading method that you wish to employ that statistically is going to lose you money unless your selection and timing is better than most people's.
(Well that's why I don't attempt shorting or puts, because I am more likely than high-powered traders with sophisticated computer systems to get it wrong in spades!!).

I hope that helps, but do not rely on anything I have said above without taking professional advice that confirms the details that I have given.



Thank you Alan, that's a very useful answer
Andrew Hirst
Posted: 19 January 2018 07:06:04(UTC)
#8

Joined: 24/02/2017(UTC)
Posts: 20

Thanks: 11 times
Was thanked: 5 time(s) in 4 post(s)
King Lodos;55547 wrote:
The way I describe short-selling is:

– I borrow a bunch of bananas from a vendor;

– I sell the bananas at the local market for £5;

– The price of bananas falls, so I buy the bunch back next week for £4;

– I return the bananas to the vendor, and pocket the £1 difference.


I think what creates downward pressure on the price of bananas is that in the first instance I'm a seller desperate to offload, and in the second, I'm trying to buy back as cheaply as possible .. Add to that some bit of knowledge I've got that makes me think prices will fall, and the chances are other people have it too – which means they'll want a bargain when they buy my bananas, and they'll probably be desperate to sell when I'm buying them back .. So at both points, I'm amplifying the decline.


A great answer KL, put so simply that even I get it, you get my Man of the Match vote!
1 user thanked Andrew Hirst for this post.
King Lodos on 24/01/2018(UTC)
andy mac
Posted: 24 January 2018 10:51:08(UTC)
#14

Joined: 12/02/2016(UTC)
Posts: 179

Thanks: 97 times
Was thanked: 142 time(s) in 83 post(s)
I can get my mind round shorting but as I was cycling in a gale this morning I wondered what happen when the shorted shares are suspended or go bust
I cant wait to find out
Alan Selwood
Posted: 24 January 2018 10:56:48(UTC)
#15

Joined: 17/12/2011(UTC)
Posts: 2,554

Thanks: 502 times
Was thanked: 4020 time(s) in 1497 post(s)
Total loss for the one who did the shorting?

Total loss for the one currently owning the shares?

Dealing fee retained by whoever arranged the short transaction......!


What a statistician might call an unsymmetrical risk/reward ratio?
1 user thanked Alan Selwood for this post.
andy mac on 24/01/2018(UTC)
c brown
Posted: 24 January 2018 11:56:13(UTC)
#16

Joined: 14/02/2013(UTC)
Posts: 327

Thanks: 1432 times
Was thanked: 200 time(s) in 100 post(s)
IQE. It must be being shorted.
Captain Slugwash
Posted: 24 January 2018 13:07:34(UTC)
#18

Joined: 19/07/2017(UTC)
Posts: 64

Thanks: 128 times
Was thanked: 90 time(s) in 42 post(s)
There is not much I like about the EU, but I was totally supportive of the ban on short selling back in 2012 in certain European markets.

I am against State intervention in nearly all aspects of life as far as personal choice goes, but shorting strikes me as not being a victimless pursuit.
1 user thanked Captain Slugwash for this post.
Chris Howland on 24/01/2018(UTC)
Nigel G
Posted: 24 January 2018 14:02:52(UTC)
#17

Joined: 03/07/2014(UTC)
Posts: 32

Thanks: 15 times
Was thanked: 40 time(s) in 19 post(s)
c brown;55867 wrote:
IQE. It must be being shorted.

https://shorttracker.co.uk/company/GB0009619924/
1 user thanked Nigel G for this post.
c brown on 24/01/2018(UTC)
MartinCh
Posted: 24 January 2018 14:04:25(UTC)
#19

Joined: 20/01/2018(UTC)
Posts: 1

The key point about short selling is that the shorter will pay to borrow the stock, otherwise why would the owner lend the stock in the first place? So you borrow the stock for a fixed period and pay the owner for the privilege.

Companies like Blackrock etc. who run FTSE 100 ETFs make money this way - they don't care what happens to the price as long as they track the index.

The ideal stock to short is one that is held by large numbers of retail investors who will hold on to the stock because thay are convinced it's worth at least what they paid for it (or its historic high). E.g. I read that 13% of Carillion was held by customers of Hargreaves Lansdown. The shorters will argue that the owners are deluded and they are doing everyone a favour by exposing the 'true' value of the stock. It's a bit like a housing market when nobody will sell because they are waiting for the market to turn. Eventually someone will sell for -20% and the market will get moving again. The shorters call this 'providing liquidity'.

King Lodos
Posted: 24 January 2018 14:48:06(UTC)
#20

Joined: 05/01/2016(UTC)
Posts: 2,325

Thanks: 458 times
Was thanked: 3412 time(s) in 1356 post(s)
I think short selling – overall – makes markets more efficient .. If a market participant knows something that should exert a downward pressure on a valuation, it's another way to price in information.

Bitcoin futures (which I believe allow shorting) may explain why the wind's been taken out of Bitcoin's sail: previously, it was much easier to draw people in who'd only exert an upward pressure .. Now you can have non-Bitcoin owners betting against it from a neutral position.

Then there's quantitative arbitrage .. If small companies regularly outperform large by more than they should, then funds can set up short large-cap, long small-cap hedge funds, until the anomaly's ironed out

1 user thanked King Lodos for this post.
North Star on 24/01/2018(UTC)
Tim D
Posted: 24 January 2018 20:53:47(UTC)
#21

Joined: 07/06/2017(UTC)
Posts: 317

Thanks: 1177 times
Was thanked: 475 time(s) in 206 post(s)
King Lodos;55878 wrote:
Bitcoin futures (which I believe allow shorting) may explain why the wind's been taken out of Bitcoin's sail: previously, it was much easier to draw people in who'd only exert an upward pressure .. Now you can have non-Bitcoin owners betting against it from a neutral position.


Alternative theory: availability of shorts just means the insiders manipulating the price can profit on the downward legs too.

(See https://twitter.com/Atar...atus/955967881019314176 , http://www.tetherreport.com/ , https://twitter.com/Bitfinexed etc for more).
2 Pages12Next page
+ Reply to discussion

Markets

Other markets