Why Activist Short Sellers Stir Up Controversy (2024)
Activist short sellers such as Daniel Yu of Gotham City Research, Nathan Anderson of Hindenburg Research and Carson Block of Muddy Waters Capital are getting more attention, as they increasingly use social media to push well-timed claims of weak fundamentals, improper accounting or outright fraud at publicly traded companies. These short sellers often present their findings as research, but they’re also interested parties that stand to gain if the target company’s stock drops. While some accusations by short sellers have held up and prompted regulatory or legal action in recent years, others have proved unfounded and tainted by ulterior motives.
Most traditional short selling — that is, placing a bet that a stock price will decline — is done by hedge funds and institutional investors to cushion their investments against falling stock prices or to bet that shares are overvalued. Activist shorts, by contrast, research companies to find targets that they allege have dodgy business or accounting practices, spread the word (sometimes anonymously) and, if all goes as planned, send the shares lower. It’s a risky strategy. A short seller’s potential profit is capped because the stock can’t go lower than zero, but losses could be infinite if the stock keeps moving higher, which is what’s been happening to most of the market since October 2022. Although activist shorts have been calling out companies for decades, their numbers have swelled with the rise of social media as a platform for disseminating theories and analysis.
Activist short sellers such as Daniel Yu of Gotham City Research, Nathan Anderson of Hindenburg Research and Carson Block of Muddy Waters Capital
Muddy Waters Capital
Muddy Waters Capital LLC operates as an investment research firm. The Firm provides research services in area of business fraud, accounting fraud, and fundamental problems. Muddy Waters Capital serves customers in the United States.
are getting more attention, as they increasingly use social media to push well-timed claims of weak fundamentals, improper accounting or outright fraud at publicly traded ...
Short selling is a contentious practice. First, it can hurt markets, companies, and investor sentiment. There is also the potential for market manipulation. Aggressive short selling can have a major effect on the companies being shorted.
Enter the activist short seller: after opening a short position on a stock, the aggressive short seller publicly denounces their target by making allegations, such as accounting irregularities and product deficiencies, or merely alleging the stock is overvalued.
Losses for short-sellers can be particularly heavy during a short-squeeze, which is when a heavily shorted stock unexpectedly rises in value, triggering a cascade of further price increases as more and more short-sellers are forced to buy the stock to close out their positions.
Bad news is good news to the short seller because it will help drive down stock prices and make the later repurchase more profitable. 4. Explain what is meant by a limit order.
A fundamental problem with short selling is the potential for unlimited losses. When you buy a stock (go long), you can never lose more than your invested capital. Thus, your potential gain, in theory, has no limit. For example, if you purchase a stock at $50, the most you can lose is $50.
Why Does Short Selling Have Negative Reputation? Unfortunately, short selling gets a bad name due to the practices employed by unethical speculators who have used short-selling strategies and derivatives to deflate prices and conduct bear raids on vulnerable stocks artificially.
Proponents argue that short sellers can add liquidity, reveal stocks that are priced higher than their actual worth, and help bring their prices closer to their true value.
Short selling—also known as “shorting,” “selling short” or “going short”—refers to the sale of a security or financial instrument that the seller has borrowed. The short seller believes that the borrowed security's price will decline, enabling it to be bought back at a lower price for a profit.
First proposed in late 2021 and early 2022, the rules will require investors to report their short positions to the agency, and companies that lend out shares to report that activity to the Financial Industry Regulatory Authority (FINRA), a self-regulatory body that polices brokers.
1) Profiting from company failures is immoral. 2) The practice is damaging because it artificially lowers stock prices. 3) It's a privileged investment tactic that is not available to everyday investors. 4) Short sellers manipulate the market, by conspiring.
It is widely agreed that excessive short sale activity can cause sudden price declines, which can undermine investor confidence, depress the market value of a company's shares and make it more difficult for that company to raise capital, expand and create jobs.
Short selling helps people generate profits, hedge portfolios, benefit from overvalued stock, and have increased liquidity. There may be heavy losses, difficulty in timing the market, and a need for a margin account. These are the common disadvantages of short selling.
involves the creation of false information about stocks in an attempt to affect share prices. Such practices undermine the integrity and confidence of markets, impacting the efficient allocation of resources and hindering the growth of the economy, and are rightly banned.
In the days around earnings announcements, stock prices usually rise. In general, of course, stocks tend to rise on high volume and to decline on low volume, but Lamont and Frazzini say that whether this happens because of the interpretation of the announcements or because of irrational or random traders is uncertain.
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
Key Takeaways. Short selling involves the sale of a borrowed security with the intention of buying it again at a later date at a lower price. The practice was banned by the Securities and Exchange Board of India (SEBI) between 2001 and 2008 after insider trading allegations led to a decline in stock prices.
1) Profiting from company failures is immoral. 2) The practice is damaging because it artificially lowers stock prices. 3) It's a privileged investment tactic that is not available to everyday investors. 4) Short sellers manipulate the market, by conspiring.
To sell short, the security must first be borrowed on margin and then sold in the market, to be bought back at a later date. While some critics have argued that selling short is unethical because it is a bet against growth, most economists now recognize it as an important piece of a liquid and efficient market.
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