Targeting Short Sellers: what they do is “icky and un-American.”
Short sellers like Andrew Left, founder of Citron Research, serve a real purpose in the markets and in society. His analysis helped reveal what’s going on at Valeant Pharmaceuticals and brought media focus on how the company conspired not only to manipulate up its reported sales and earnings but also drug prices for consumers. But short sellers are nuts.
Short sellers are fighting a system that is totally rigged in every way against them. They’ve chosen to make money when share prices fall. They’ve chosen to make money in the most painful way possible. Self-flagellation comes to mind. Because the entire system is rigged to make share prices rise, no matter what. And when they rise, short sellers get their heads handed to them.
NYSE Group President Tom Farley, who should be neutral about share prices and should be primarily concerned about the functioning of the market, hammered home just how rigged that fight is.
“It feels kind of icky and un-American, betting against a company,” he told lawmakers in Washington yesterday. Even those engaging in rampant hype, lies, and worse, I presume. According to Bloomberg:
He added that because short-selling can actually improve markets, public companies don’t necessarily want to ban it outright – instead they want to see more stringent disclosure. “They say, ‘Let’s have a little more transparency,”’ said Farley.
This urge for “transparency” is ironic. No one complains how Warren Buffett does it.
Through Berkshire Hathaway, he quietly buys enough shares of a company to gain ownership in the single-digit percentage range. This buying activity drives up the price. His brokerage firm knows, word spreads, and those in the know also buy the shares. Then the stake is disclosed in an SEC filing. Instantly, shares jump further. “Buffett Buys x% of…” the media scream. With his avuncular face on CNBC and other TV shows, he gets to promote what a great company this is, how he believes in the management, yada-yada-yada. Shares jump further.
Then he quietly buys some more shares, a small amount this time. When the SEC filing becomes public, the whole media circus starts all over again, and shares jump some more.
No one complains about that. Spreading hype to drive up share prices is standard practice. No one sues an author or publication for pointing out the five reasons why the share price should double – even if all five reasons are fabricated nonsense. In fact, companies love it, market participants love it, and analysts on Wall Street are very good at it.
But if a website with enough clout gives one fundamental reason why shares should fall, and that reason cannot be proven in a rock-solid manner, the company often goes aggressively after the author or the publication. Even if the analysis is based on rock-solid evidence, the disclosure attracts cubic acres of vitriol. And the mere threat of a lawsuit can shut down an honest voice.
The NYSE serves the companies that list their shares on its exchanges, and it makes money from investors who trade these shares. Without these companies, it would have no business. So it needs to attract companies to list on its exchanges. And these companies do everything in the book to get their share prices to rise – see Valeant.
Short sellers make money by selling shares that they borrowed from the broker, and by buying them back later at a lower price to return them to the broker. They get to keep the price difference minus fees. Their gains are limited to less than 100% even if shares go to zero (there are expenses involved). Their losses however are theoretically unlimited when shares skyrocket.
The Nasdaq had a similar beef with short sellers.
“The company should be aware of who holds the long and short positions,” Nasdaq CEO Adena Friedman told Bloomberg Television in May. Currently, “investors have an advantage over the company,” she said. In a report, the Nasdaq argued that short sellers don’t have to publicly reveal their bets, and that they therefore can use strategies to drive prices down in stealth.
Short sellers blame the exchanges. Jon Carnes, president of Eos Global Holdings and famous for betting against Chinese companies, told Bloomberg in an email:
“If the exchanges support disclosure of short seller identities and holdings then they should also support the disclosure of the names of the exchange staff who approved the listing of each fraud as well as how much money the exchange profited from the listing of each fraud.”
Buffett doesn’t disclose his share purchases either when he undertakes them (unless he buys the whole company or a very large portion of it). He discloses his position and reasoning afterwards, with the goal of driving up the price after he bought the shares.
Short sellers with a big megaphone do the same. They disclose their position and their reasoning afterwards to drive down the price. Their reasoning is usually some fundamental problem that the company has not disclosed and that investors should know about but were kept in the dark about because it would have hurt share prices.
Buffett and short sellers, both, hope to make money as markets react to their disclosures. The public disclosure of their bets is what makes their bets successful.
The “icky and un-American” comment by NYSE president Farley didn’t sit well with short sellers, and should cause a bout of indignation among regular investors who want balanced markets where both positive and negative news have an equal chance of surfacing, instead of one being incessantly and institutionally hyped while the other is vigorously suppressed to keep investors in the dark. If short sellers are further handicapped – or arrested, as they might be in China during market downturns – the last vestige of market discipline goes up in smoke.
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