Zeev --
You're intellectual powers seem to be waning. Any nitwit could see that your explanation of "the way the floorless bandits make money" is seriously flawed.
Here's your basic scenario:
<< Let us assume that the size of the debenture is $10 MM, and that on the issue date the stock into which the floorless is convertible is at
$10/share. When the buyer of the floorless has a piece of paper in his
hand saying that he owns the floorless, he deposit it in his "margin"
account (he might not even have paid for that since in such PP actual
payment can be delayed until "closing". He now shorts 1 MM shares which is exactly the face value of his floorless. This shorting will "soak" buying power from that market, particularly if the issue trades only few hundred thousand shares per day. Note, that with his $10 MM that he got he now pays for the floorless (or replace the money he laid out for the floorless). Thus he has no more money committed to this stock whatsoever, but he making the 5% to 10% on the floorless as interest. >>
You imagine the buyer of the floorless shorting the stock at $10. He shorts 1 MM shares. This creates proceeds of $10 MM. So you assume that he can short the 1 MM shares -- "soak[ing] the buying power from that market" -- without driving the stock price down a penny. Not likely!
But look what happens next:
<< His shorting causes the stock to go to let say, $7.5/share. >>
Whoah! The stock stays stable at $10 while the owner of the floorless sells 1 MM shares, then as soon as the selling stops, the stock gaps down to $7.5! Surely you can't be serious?
Why does the stock gap down?
Can't be weakness in the stock because look what happens next:
<< Well, at this price (without discounts) the floorless is convertible to 1.333 MM shares, so he shorts another 333,000 shares and get credited about $2.5 MM. >>
So suddenly the price stabilizes, and the owner of the floorless sells 333 M shares at $7.5, again without moving the price. What a stock! The last time I sold 333 M shares, it impacted the price a bit. :)
<< That puts additional pressure on the stock bringing it to $5/share >>
Yikes! Another gap down, again miraculously coming just after the selling stops.
Well, no need to keep beating this dead horse. You get the point.
Actually, you probably don't but perhaps the other readers do. To say it plainly: the only way your hypothetical short-seller makes money is by (a) selling without depressing the market, then (b) enjoying a miraculous decline in prices just after the selling stops.
Now don't try to tell me that the price decline isn't miraculous, that it occurs because the short seller has "soaked up buying power." If that were true, then ANY SHORT SELLER COULD MAKE MONEY, floorless or not. He'd just sell at 10, without moving the market; enjoy a price decline to 7.5; then buy at 7.5, again without moving the market. Obviously you've never tried it or you'd know it ain't that simple.
By the way, it doesn't matter if you change the example to divide the price changes into tiny little pieces -- eighths and sixteenths. Same argument applies.
Joe |
