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Short selling… Liquidity Provider or Price Destroyer?

Short selling… Liquidity Provider or Price Destroyer?

There are a lot of people on both sides of the “short selling” argument and both offer compelling analysis and arguments supporting their views. I do not write this article, as a purveyor of either side, but one who would like to present the arguments of both sides for you to decide. https://www.investopedia.com/terms/s/shortselling.asp is short selling an integral part of the market

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Traders and short selling professionals have argued this market vehicle is an important part of market liquidity benefitting all participants. They claim as a technical and data related group, they don’t target companies in any way to harm corporate market value but analyze whether market indicators such as slumping revenues, changes in sector performance and or commodity prices may negatively affect the share performance. Therefore, making it an educated and rational choice for taking a short position on a company. Once the share price has made its price decline and established a trading profit, traders will cover their short position. The short-covering creates the buying or liquidity in the market. https://www.investopedia.com/terms/s/shortcovering.asp    

Market long buyers, and corporations affected by short selling, have argued that short sellers will prey on companies by building short positions, and then using digital media or other forms of market communications, will spread unfair or unsubstantiated negative opinions about the company to depress share price. An additional industry challenge is the accusation of traders utilizing naked shorting tactics, a practice where short-sellers do not properly borrow the shares they are selling into the market. Typically, short sellers will borrow shares from institutions holding shares in the company or borrow from lending posts of the stock exchanges. Naked short selling is illegal, but many traders believe it happens regularly in the market.   https://www.investopedia.com/terms/n/nakedshorting.asp

Security commissions, Investment dealer regulator’s, and stock exchanges have adjusted short-selling rules over the years in order to adjust with market changes and ever-developing technologies.  New technologies, such as algorithm trading, social media marketing bots, and short selling activists’ groups are all new areas of concern for regulators and are leading the growing argument for better short-selling rules and policies.

Many articles have recently been written on the matter.

D’Arcy Funfer

“The big question that everyone has to ask, and or be a part of a global conversation is:  Whether short-selling brings value (liquidity) or harm (price loss) to the market, and if the answer is both, then how do all market participants be a part of this conversation to improve the overall rules and regulations to improve the situation for all? Personally, I believe both, short selling does help with market liquidity, maybe more than some would believe or even would know. However, I also believe that as a result of the abuses of some short-selling groups, it has also become a destructive force of market value. With a great deal optimism and confidence, I think, that as members of the Investment Community, we can come together with many ideas and continued dialogue, to better understand and make great ideas that can help with short selling concerns. Hopefully, this article brings some questions and some answers from the 8020 Community of investors. Your views and opinions matter, so feel free to - what say you! Comments are welcomed. It is a topic worth debating and giving some serious thought and ideas by all.”

 

CBC – Business –

Pete Evans · CBC News · Posted: Feb 11, 2019 4:00 AM ET
Canada needs to toughen short selling rules to weed out abuse, market watchers say
Critics say short sellers aren't all bad, but some use abusive practices that need to be stopped

https://www.cbc.ca/news/business/short-selling-abuse-1.5009871

Financial Post Business - Barbara Shecter - November 29, 2018 - 1:34 PM EST
Canadian regulators put short sellers on notice over abusive practices
Will also launch project into cannabis, crypto promotions 'unbalanced to such extent that they may mislead investors': CSA

https://business.financialpost.com/news/fp-street/canadian-regulators-put-companies-on-notice-over-problematic-promotions-in-sectors-such-as-cannabis-cryptocurrency

Norton Rose Fulbright Canada LLP
Canada: Special Situations Team Publishes Article On Abusive Short Selling In Globe And Mail
Last Updated: January 28 2019 - Article by Orestes Pasparakis, Walied Soliman and Joe Bricker

http://www.mondaq.com/canada/x/775278/Securities/Special+Situations+team+publishes+article+on+abusive+short+selling+in+Globe+and+Mail

Financial Post Business - Barbara Shecter - March 2, 2012 - 5:46 PM EST
Canadian regulator removes short-selling "uptick" rule
The Investment Industry Regulatory Organization of Canada is repealing restrictions on the price at which a short sale may be made on Canada's equity markets.

https://business.financialpost.com/news/fp-street/canadian-regulator-removes-short-selling-uptick-rule


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