Member-only story
Let me first establish my bona fides. Here’s an excerpt from an article I posted on financial site Seeking Alpha more than ten years ago:
The time has come to ban all naked short-side derivatives. The only way to take a net short position on an asset should be traditional short selling. Everything else creates too much moral hazard.
Some short sellers are scumbags. They short stocks then publish hit pieces about them, driving the price down, where the shorts can cover. There’s nothing wrong with what these noisy shorts do in principle. If a stock is terrible, shorting it makes sense, and telling others that the stock is terrible is a service to them. If you accuse one of these shorting “analysts” of bad behavior, that rationale is their first (and only) defense. Yet, any analyst who is short (or long) a stock they are writing about has a conflict of interest that demands a more judicial style of criticism, and for some short-sellers, such fastidious journalism does not get the job of driving down the price done.
Thing is, that’s just some short sellers. Most short sales are simply bets by people who believe that a stock is overpriced. Stocks can get overpriced in lots of ways. Maybe there’s too much enthusiasm for the company or its industry. Or maybe the company’s price has run up and longs are “playing with the house’s money,” or don’t want to take a tax hit on a sale. For whatever reason, people tend to hold onto shares too long, and so there naturally emerges a group of other people who will drive the price down…