Fascinating article, and it sounds like this guy isn't just making money doing this but is actively working to expose bad actors in the marketplace. I applaud his work, and I hope to see more of this in the future. There's a lot of just crazy fraudulent stuff happening in the market over the last decade, and I'm hoping with the music slowing down, that we'll see a lot of the frauds fall over.
That's the idea behind asset forfeiture. In theory, cops pull over bad guy, confiscate his car, use proceeds to fund their department and catch more bad guys all while saving tax payer money. In reality it leads to a lot of corruption and abuse.
and also alters incentives - crimes where there would be a lot of assets to seize might get disproportionate attention.
Asset seizures should still happen, but the seized asset is parked as gov't revenue as escrow until the crime is completely solved, and victims paid out from it (if applicable). Then whatever remains become general tax revenue, rather than funding the police directly.
> why not let the govt make money exposing bad actors?Why should the tax payer fund the cops?
Do you mind elaborating? Just trying to figure out what you meant there.
Are you talking literally about police funding and how it could have been better used for funding SEC? Or are you talking about it in a more metaphorical sense, and questioning why random tax payers are doing the job of catching instances of malicious insider trading instead of SEC doing that?
If it is the latter, then there is one solid incentive - whistleblowers get a reward between 10-30% of the monetary sanctions recovered on that case by SEC, as long as the case was successful and led to over $1mil recovered[0].
They're not making money "exposing bad actors", they're making money by betting that exposing the bad actors will move investors to sell and stay away from those bad actors within some period of time. But that's not a given outcome, and the government shouldn't speculate with taxes.
I've thought about this, and wonder if the often discussed "right to bear arms" is intended to prevent the government from having such a monopoly, by which i mean is that what people are discussing and disagreeing over, wrt the 2nd amendment?
Worth considering that the original idea was the US would have practically no standing army (a navy, maybe, but not so much an army). The freedom-protecting bits didn't necessarily mean (only) from our own government, and there's a reason the word "militia" occurs—the idea was that much of our military might, were we attacked, would come from citizen militias.
Further, the right to bear arms means nothing as far as the legality of use of force. The so-called monopoly (which basically always has exceptions, anyway—it's a tool for understanding the role of government, not a law of nature) is on the legal use of force—it's not as if folks don't illegally use force all the time, so clearly there's no monopoly on the ability to use force, but on the ability to use force legally.
The really important part of the "monopoly on violence" idea is whether a state has the power to claim such a monopoly. It's a measure of state efficacy—a state fails to be fully sovereign in its territory if it cannot claim such a monopoly, that is, if it is unable to effectively quash others' similar claims; or, if its claim to the monopoly lacks credibility. Say, if a cartel claimed the authority to regulate and dispense violence in part of the US and the federal government were unable to re-assert its claim there, that would be an indication of, at the very least, significantly eroded US sovereignty over that territory, if not the complete loss of it.
A state making lethal force in self-defense legal doesn't challenge the state's claim of sovereignty, so isn't what's usually meant by this principle.
Ah such a shame the article just missed one of the most explosive reports [1] by Hindenburg Research. It's shaken up the richest man in India and the BJP government as a consequence. The story even made it to HN's front page.
The reaction of both the Adani group and BJP's supporters to this report has been absurd. Adani trotting out the national flag in the background to respond to the complaints, and BJP supporters equating it with an "attack on India". A poor, immature look. Not something mature markets do.
It’s likely the overseas conglomerate the article says Anderson is currently investigating, whose corporate register in Mauritius he just downloaded is Adani.
I am going to play the "Devil"'s advocate here, let's suppose that the report is true and that the company has committed all sorts of fraud. What would happen to the mass of people it employs it it were to go under? I just don't believe that entire families should suffer because the CEO has been lying to investors.
If the underlying businesses are valuable then after bankruptcy, the stockholders lose, but the businesses should continue to operate under new owners. This happens all the time. (Hertz is one example.)
It doesn’t happen when the whole business was a confidence game, like FTX.
If my criminal fraudulent enterprise collapsing means no more private school for timmy and jane my children, I should be permitted to perpetuate my fraud on others?
My response is that this isn't just a "belief" kind of thing where if hindenburg doesn't release the report everything is fine. There is actually a fraud occurring, and when a fraud is occurring that means there is a "hole" like a place where people expect there to be money but there isn't. This means eventually it would have manifested at one point or another, and often the nature of these "holes" is that they become exponentially wider probably meaning the fallout is even more intense the longer it goes on
Nice demonstration of how insiders don't know shit about longer term price movements of their own stock, especially when driven by the macro environment. The only way insiders could theoretically make money using an unfair edge is trading intraday earnings releases with leverage (which only a few people are in a position to know about, and which the SEC is very good at detecting nowadays).
Insiders will buy a little stock to make a much larger position go up in value (paper wealth) due to positive press and as a gesture of confidence. And then sell the inflated stock or borrow against it later. Or hedge it
I love short sellers. They serve a vital moral purpose in financial markets, as the article describes. Here's hoping the new rate regime will serve them better.
It all depends on which side of the sale you're on.
The interesting thing about short sellers is, we only focus on the short sellers, not the people or companies that are loaning the stocks to them. When the short seller loses, they stand to make a bundle.
Heh in 2020 short sellers were devil’s incarnate and now they publish puff pieces about them. As often happens there are two sides to everything but I for one am looking forward to a more healthy investing environment (yeah right like that’s going to happen).
I’m confused how/why activist short-selling is legal but pump-and-dump scams are illegal. Isn’t it basically the same? Short sellers often get it wrong or blatantly distribute FUD.
Hindenburg has proven to be well-researched and legit though.
> Short sellers often (...) blatantly distribute FUD.
I'm going to call a [citation needed] on that. It's already very illegal to spread false information in order to profit from short-selling. In fact, I'd say that shorts are overly scrutinized in comparison to longs. Both are important for price discovery and both have the potential to cause a misallocation of capital if they spread false information in favor of their position, yet people seem to have a positivity bias that makes them more willing to forgive someone who spoke positively of an overhyped stock than someone who spoke negatively of a good stock.
Given short-sellers' importance in exposing "creative accounting" and excessive hype, I worry that the current popular sentiment against them will discourage further shorting even more than the financial incentives already do (a long has an unbounded upside with the downside capped at 100%, while a short has an unbounded downside with the upside capped at 100%).
Shorting and pump-and-dumps are not one and the same, that's why one's illegal and the other isn't.
Doing a bunch of research, publishing it and saying "I'm shorting this stock because of the research I've done, here are the market conditions that would perpetuate the drop I anticipate it will" is completely legal and helps keep markets from believing their own hype too much.
Pump and dumps are sort of the opposite of that. there's usually very little legitimate research and it's stuff that serious investors don't touch.
You are not confused you just do not like it. Hindenburg is well within their first amendment rights. And they are putting their money where their mouth is!
If pin down an exact definition of what you mean by pump and dump, the answer will probably reveal itself to you.
Regular shorting is what people mean by buying puts/selling calls or selling borrowed stock.
The pump and dump is you getting other people to buy/sell stock by lying about it.
The difference is the fraud, for Americans, false statements of fact are not (always) protected by the first amendment. Depending on the target and the harms caused the supreme court thinks there are some statements that can be made criminal. The court is moving in the direction of expanding the amount of speech that can be prosecuted in this area. If United States v. Alvarez were decided today, it might have a different outcome.
Where the statements are true, they are not just legal, they are encouraged. The more legitimate information there is, the more efficient the market is.
If you find this interesting, check out ‘King of Stonks’ (on Netflix). It’s a fun critique of corporate greed and capitalism gone wild. The story centers around an activist short seller who could be inspired by the stories in this article.
Then, on June 9, 2020, Anderson came across a tweet from Milton. His truck company, Nikola, had gone public on NASDAQ five days before: “I’ve wanted to say this my whole adult life; $NKLA is now worth more than Ford and [Fiat Chrysler]. Nipping on the heels of GM …”
Given that Ford and GM trade at very low multiple and have not done much in a long time, even decades, this is not that undoable.
I think the survivorship bias with shorting is huge. So many people and firms try and fail. The risks seem to be glossed over by the article. Seeing a few big winners like Nikola one may be under mistaken impression this is a good strategy.
Having a big win is seldom enough to beat the market. If you allocate 5% of your capital for a short and it goes bankrupt, you only increased your total capital by 5%. Making the historical 10% average (including dividends) with an index fund is less risky and more consistent, probably.
I hope it’s not too rude for HN to say that you’re missing the whole point of the article.
1. Presumably that discussion took place pre-FTX.
2. I don’t think he said “1000% in a day”, just in general.
3. The article goes into repeated, extensive detail about how short selling is financially dubious and extremely risky.
4. It goes into his childhood because it’s a profile piece.
I mean this with no offense, only because I’ve been there many times: did you feel personally attacked by this guys takes on crypto/stocks/our world at large?
The full article indeed discusses these shortcomings and does not make it appear that short selling is more effective. It portrays it almost as a form of activism
The article goes on and on about how risky shorting is and how many firms have failed.
No one thinks of shorting as a good business strategy.
That’s why when Elon Musk goes on about how shorts are these shadowy super powerful figures you know he’s completely bullshitting because shorts are among the few (only?) actors interested in downward price discovery, while the rest of the world, including governments all over, would much prefer constant price growth with the correction to be suffered by a future generation/government.
Fascinating article, and it sounds like this guy isn't just making money doing this but is actively working to expose bad actors in the marketplace. I applaud his work, and I hope to see more of this in the future. There's a lot of just crazy fraudulent stuff happening in the market over the last decade, and I'm hoping with the music slowing down, that we'll see a lot of the frauds fall over.
And that leads to - why not let the govt make money exposing bad actors? Why should the tax payer fund the cops?
That's the idea behind asset forfeiture. In theory, cops pull over bad guy, confiscate his car, use proceeds to fund their department and catch more bad guys all while saving tax payer money. In reality it leads to a lot of corruption and abuse.
https://en.wikipedia.org/wiki/Asset_forfeiture
and also alters incentives - crimes where there would be a lot of assets to seize might get disproportionate attention.
Asset seizures should still happen, but the seized asset is parked as gov't revenue as escrow until the crime is completely solved, and victims paid out from it (if applicable). Then whatever remains become general tax revenue, rather than funding the police directly.
> why not let the govt make money exposing bad actors?Why should the tax payer fund the cops?
Do you mind elaborating? Just trying to figure out what you meant there.
Are you talking literally about police funding and how it could have been better used for funding SEC? Or are you talking about it in a more metaphorical sense, and questioning why random tax payers are doing the job of catching instances of malicious insider trading instead of SEC doing that?
If it is the latter, then there is one solid incentive - whistleblowers get a reward between 10-30% of the monetary sanctions recovered on that case by SEC, as long as the case was successful and led to over $1mil recovered[0].
0. https://www.sec.gov/whistleblower/frequently-asked-questions
We've tried profit making cops, it leads to corruption:
https://en.m.wikipedia.org/wiki/Jonathan_Wild
https://www.bbc.co.uk/news/blogs-echochambers-29228851
You mean running the government like a business is a stupid idea and that profit leads to all sorts of perverse incentives? Who would have thought!?
They're not making money "exposing bad actors", they're making money by betting that exposing the bad actors will move investors to sell and stay away from those bad actors within some period of time. But that's not a given outcome, and the government shouldn't speculate with taxes.
Because the government has a monopoly on violence.
https://en.wikipedia.org/wiki/Monopoly_on_violence
I've thought about this, and wonder if the often discussed "right to bear arms" is intended to prevent the government from having such a monopoly, by which i mean is that what people are discussing and disagreeing over, wrt the 2nd amendment?
Worth considering that the original idea was the US would have practically no standing army (a navy, maybe, but not so much an army). The freedom-protecting bits didn't necessarily mean (only) from our own government, and there's a reason the word "militia" occurs—the idea was that much of our military might, were we attacked, would come from citizen militias.
Further, the right to bear arms means nothing as far as the legality of use of force. The so-called monopoly (which basically always has exceptions, anyway—it's a tool for understanding the role of government, not a law of nature) is on the legal use of force—it's not as if folks don't illegally use force all the time, so clearly there's no monopoly on the ability to use force, but on the ability to use force legally.
except the monopoly doesn't exist in states with "stand your ground" laws?
(Those states where someone can use lethal force if they're being attacked, or feel her/his life is in danger)
Right, one of many exceptions, hence my:
> > which basically always has exceptions, anyway
The really important part of the "monopoly on violence" idea is whether a state has the power to claim such a monopoly. It's a measure of state efficacy—a state fails to be fully sovereign in its territory if it cannot claim such a monopoly, that is, if it is unable to effectively quash others' similar claims; or, if its claim to the monopoly lacks credibility. Say, if a cartel claimed the authority to regulate and dispense violence in part of the US and the federal government were unable to re-assert its claim there, that would be an indication of, at the very least, significantly eroded US sovereignty over that territory, if not the complete loss of it.
A state making lethal force in self-defense legal doesn't challenge the state's claim of sovereignty, so isn't what's usually meant by this principle.
The 2nd amendment is not about hunting or target shooting. It’s about citizens‘ right to defend themselves.
That includes defense if their government goes rogue - read the Declaration of Independence.
Ah such a shame the article just missed one of the most explosive reports [1] by Hindenburg Research. It's shaken up the richest man in India and the BJP government as a consequence. The story even made it to HN's front page.
[1] https://hindenburgresearch.com/?p=2376
The reaction of both the Adani group and BJP's supporters to this report has been absurd. Adani trotting out the national flag in the background to respond to the complaints, and BJP supporters equating it with an "attack on India". A poor, immature look. Not something mature markets do.
"Patriotism is the last refuge of the scoundrel." - Samuel Johnson
Is it time to short INR?
Adani lost like $20 billion USD in one day due to that. That's insane.
Having read Bloomberg articles about Hindenburg's position, I completely get why he's short - Adani is engaging in fraud.
Yeah, it missed it because the article is from a year ago.
aargh! My internal calendar's year is still in 2022 :-|
The article was written before this.
It’s likely the overseas conglomerate the article says Anderson is currently investigating, whose corporate register in Mauritius he just downloaded is Adani.
I am going to play the "Devil"'s advocate here, let's suppose that the report is true and that the company has committed all sorts of fraud. What would happen to the mass of people it employs it it were to go under? I just don't believe that entire families should suffer because the CEO has been lying to investors.
If the underlying businesses are valuable then after bankruptcy, the stockholders lose, but the businesses should continue to operate under new owners. This happens all the time. (Hertz is one example.)
It doesn’t happen when the whole business was a confidence game, like FTX.
If my criminal fraudulent enterprise collapsing means no more private school for timmy and jane my children, I should be permitted to perpetuate my fraud on others?
[dead]
I appreciate the satanic advocacy
My response is that this isn't just a "belief" kind of thing where if hindenburg doesn't release the report everything is fine. There is actually a fraud occurring, and when a fraud is occurring that means there is a "hole" like a place where people expect there to be money but there isn't. This means eventually it would have manifested at one point or another, and often the nature of these "holes" is that they become exponentially wider probably meaning the fallout is even more intense the longer it goes on
If anyone is interested, here's a chart of Nikola insider stock trades graphed alongside the price of $NKLA: https://www.quiverquant.com/insiders/NKLA
Here's a chart of Riot insider stock trades graphed alongside the price of $RIOT: https://www.quiverquant.com/insiders/RIOT
Nice demonstration of how insiders don't know shit about longer term price movements of their own stock, especially when driven by the macro environment. The only way insiders could theoretically make money using an unfair edge is trading intraday earnings releases with leverage (which only a few people are in a position to know about, and which the SEC is very good at detecting nowadays).
> Nice demonstration of how insiders don't know shit about longer term price movements of their own stock
if insiders done know shit about their own stock - what chance does twitter investing newsletter writter have
> especially when driven by the macro environment
The headwind / tailwind of the macro environment is really the biggest factor - this should be the #1 lesson for anyone investing anything.
Insiders will buy a little stock to make a much larger position go up in value (paper wealth) due to positive press and as a gesture of confidence. And then sell the inflated stock or borrow against it later. Or hedge it
How are you assuming insiders hedge their stock?
I love short sellers. They serve a vital moral purpose in financial markets, as the article describes. Here's hoping the new rate regime will serve them better.
> moral purpose in financial markets
i wouldn't really describe it as moral, but more a corrective force to ensure efficiency in the markets. It's neutral (or amoral), rather than moral.
i feel like i’ve read (in comment sections on reddit) the opposite? that short sellers are predatory and “bad”
It all depends on which side of the sale you're on.
The interesting thing about short sellers is, we only focus on the short sellers, not the people or companies that are loaning the stocks to them. When the short seller loses, they stand to make a bundle.
[dead]
Heh in 2020 short sellers were devil’s incarnate and now they publish puff pieces about them. As often happens there are two sides to everything but I for one am looking forward to a more healthy investing environment (yeah right like that’s going to happen).
That seems to have been a momentary blip coinciding with when retail investors momentarily forgot that stocks could go anywhere but up.
The Big Short (2015) and The China Hustle (2017) both portrayed short sellers as the heroes, for example.
Which is even more hilarious because those swaps that burry and others bought actually accelerated banking collapse.
https://archive.ph/2022.01.24-140647/https://nymag.com/intel...
I’m confused how/why activist short-selling is legal but pump-and-dump scams are illegal. Isn’t it basically the same? Short sellers often get it wrong or blatantly distribute FUD.
Hindenburg has proven to be well-researched and legit though.
> Short sellers often (...) blatantly distribute FUD.
I'm going to call a [citation needed] on that. It's already very illegal to spread false information in order to profit from short-selling. In fact, I'd say that shorts are overly scrutinized in comparison to longs. Both are important for price discovery and both have the potential to cause a misallocation of capital if they spread false information in favor of their position, yet people seem to have a positivity bias that makes them more willing to forgive someone who spoke positively of an overhyped stock than someone who spoke negatively of a good stock.
Given short-sellers' importance in exposing "creative accounting" and excessive hype, I worry that the current popular sentiment against them will discourage further shorting even more than the financial incentives already do (a long has an unbounded upside with the downside capped at 100%, while a short has an unbounded downside with the upside capped at 100%).
[dead]
Shorting and pump-and-dumps are not one and the same, that's why one's illegal and the other isn't.
Doing a bunch of research, publishing it and saying "I'm shorting this stock because of the research I've done, here are the market conditions that would perpetuate the drop I anticipate it will" is completely legal and helps keep markets from believing their own hype too much.
Pump and dumps are sort of the opposite of that. there's usually very little legitimate research and it's stuff that serious investors don't touch.
If you libel a company, that's illegal. If you publish unflattering but true things, that's perfectly fine.
You are not confused you just do not like it. Hindenburg is well within their first amendment rights. And they are putting their money where their mouth is!
That’s an incorrect conclusion. I was asking a genuine question.
If pin down an exact definition of what you mean by pump and dump, the answer will probably reveal itself to you.
Regular shorting is what people mean by buying puts/selling calls or selling borrowed stock.
The pump and dump is you getting other people to buy/sell stock by lying about it.
The difference is the fraud, for Americans, false statements of fact are not (always) protected by the first amendment. Depending on the target and the harms caused the supreme court thinks there are some statements that can be made criminal. The court is moving in the direction of expanding the amount of speech that can be prosecuted in this area. If United States v. Alvarez were decided today, it might have a different outcome.
Where the statements are true, they are not just legal, they are encouraged. The more legitimate information there is, the more efficient the market is.
Short-selling is not "basically" market manipulation - but it can be:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3198384A
There's a strong argument to be made that short selling helps in price discovery.
If you find this interesting, check out ‘King of Stonks’ (on Netflix). It’s a fun critique of corporate greed and capitalism gone wild. The story centers around an activist short seller who could be inspired by the stories in this article.
(German series but the dubbing is good)
[dead]
Then, on June 9, 2020, Anderson came across a tweet from Milton. His truck company, Nikola, had gone public on NASDAQ five days before: “I’ve wanted to say this my whole adult life; $NKLA is now worth more than Ford and [Fiat Chrysler]. Nipping on the heels of GM …”
Given that Ford and GM trade at very low multiple and have not done much in a long time, even decades, this is not that undoable.
I think the survivorship bias with shorting is huge. So many people and firms try and fail. The risks seem to be glossed over by the article. Seeing a few big winners like Nikola one may be under mistaken impression this is a good strategy.
Having a big win is seldom enough to beat the market. If you allocate 5% of your capital for a short and it goes bankrupt, you only increased your total capital by 5%. Making the historical 10% average (including dividends) with an index fund is less risky and more consistent, probably.
I hope it’s not too rude for HN to say that you’re missing the whole point of the article.
1. Presumably that discussion took place pre-FTX.
2. I don’t think he said “1000% in a day”, just in general.
3. The article goes into repeated, extensive detail about how short selling is financially dubious and extremely risky.
4. It goes into his childhood because it’s a profile piece.
I mean this with no offense, only because I’ve been there many times: did you feel personally attacked by this guys takes on crypto/stocks/our world at large?
Good points, agree. Short selling needs to be weighed with risks vs. reward. Unlimited downside is a major risk. Would not recommend it.
The full article indeed discusses these shortcomings and does not make it appear that short selling is more effective. It portrays it almost as a form of activism
The article goes on and on about how risky shorting is and how many firms have failed.
No one thinks of shorting as a good business strategy.
That’s why when Elon Musk goes on about how shorts are these shadowy super powerful figures you know he’s completely bullshitting because shorts are among the few (only?) actors interested in downward price discovery, while the rest of the world, including governments all over, would much prefer constant price growth with the correction to be suffered by a future generation/government.