Hello Hawaii60: [somewhat OT]
Please explain by what mechanism short sellers could drive the price down.
A short seller needs an uptick to sell short. I am not sure, but a repeat tick at the same price counts as an uptick, too, if the same tick was an uptick originally. That still does not violate the principle you cannot sell a stock short on a downtick. If there is a net selling run downward, the short sellers cannot participate. On the long side, those buying can keep buying on upticks or downticks. I am not sure, but market makers may be able to sell as the price is going down. For the public investor, the only momentum pony is up. Selling holdings can effectively push pricing lower, but the short sellers are not allowed to sell short with such downticks. If I recall that rule was promulgated in the '20's to reduce some of the unfair manipulations big money was doing at the expense of the public in general.
Short selling now is not a momentum activity, it is an investment activity, simply the converse transaction of buying lower and selling higher. In general successful short investors tend to have done more investigation than occurs with the typical investor. It is almost a circular argument. You had better know what you are doing when you sell short because you are counting on market equilibrium to rationalize the stock price lower at some future point. There is no downward price pressure on stocks from short selling. Only those long the stock can push the price down by being willing to sell the stock at lower prices. The enormous rise in short interest in the '70's, '80's, and part of the '90's was a tax dodge to avoid taxes by shorting at the box. Since the tax law change for individuals short positions have not dramatically fallen. That suggests institutions are using short selling. The biggest invisible activity is the complex positions hedge funds take, which have grown enormously in the last decade. I would guess they possibly account for much of the quantity of short positions, but there is no way of telling. I doubt that regular mutual funds short to much extent to hedge their positions. They could be better managed if they did, as well as prudent use of options, too.
Best regards,
m
OT = off topic |
