ethically short essay

8/17/2019 Ethically Short Essay

1/10

Running head: Ethically Short: The Ethics Behind Short Selling Strategies

“Short selling is benefcial to the markets not only in

the technical aspects o providing liquidity or a hedgeagainst long positions, but also as an important

bulwark against hyperbole, irrational exuberance, and

corporate raud”

James Chanos, President, Kynikos Associates1

1 Ece!t retrie"ed #rom Bianchi and $re%&s !a!er on the Ethics o# Short Selling'

()A*+E*$ES

EASTER* *AARE*E C-..E/E

Ethically Short T0E ET0(CS BE0(*$ S0-RT SE..(*/

STRATE/(ES


2/10

Ethically Short: The Ethics Behind Short Selling Strategies 1

Introduction

The turning o# a ne% century sa% increased "aluation in the stock market like

ne"er e#ore' The American dream %as ecoming a reality2 !eo!le made more

money than e"er e#ore, home sales s!iked, and in"estments gre% 3i'e' 451ks,

(RAs, !ersonal !ort#olios6' (t a!!eared that dad&s old adage o# 7uying lo%, selling

high8 %as really %orking out %ell #or American in"estors2 etter yet, the %orld&s

in"estors' (t ne"er da%ned that a 9nancial crisis could occur, %hy %ould it

E"erything %as going %ell, %e %ere ;ying 7high8 as one analyst !ut it' But the

unthinkale ha!!ened, and !eo!le lost li#e sa"ings, com!anies %ent ankru!t,

suse


3/10

Ethically Short: The Ethics Behind Short Selling Strategies

in#ormation, he might %ant to take a short !osition in the stock' (# his sus!icions

!ro"e correct, he %ould ha"e made a !ro9t, and i# not then he %ould ha"e lost

money' Thus, the s!eculati"e !osition is #air and market #riendly, !roducing a

erosum result'

Purchase greement ! Sale o Stock

The idea o# uying a stock and %aiting #or it to lose "alue, thus !roducing a !ro9t

#or the s!eculati"e !osition holder, is #oreign to most !eo!le' The key di=erence

is that in the traditional longonly !osition 3uy lo%Dsell high6, the in"estor is

ho!ing #or the !rice to rise, %hich %ould signi#y one o# t%o things: 9rst, that the

com!any is !ro9tale and, secondly, the !ossiility o# #raudulent acti"ities taken

!lace to olster stock !rice 3i'e' .ehman Brothers, and Bear Sterns eem!li#y

#raudulent acti"ities at the cor!orate le"el, in that their earnings and di"idends

%ere unchanged ust days e#ore their colla!se6' (n the shortonly !osition,

in"estors are s!eculating a decline in asset "alue, and ecause o# this !arado,

short sellers are ale to orro% #rom longterm in"estor !osition in order to 7uy8

into their !osition' -ne can only o!en a short !osition i# there are long !osition

in"estors %illing to loan the shares, at a #ee o#course' $uring the transaction, the

short seller recei"es the stock #rom the original shareholder 3long !osition

in"estor6, in return #or cash e


4/10

Ethically Short: The Ethics Behind Short Selling Strategies F

ack the stocks is less than %hat he sold it #or, he !ockets the di=erence and

returns the stocks ack to the original in"estor'

Purposes o Short Selling

The strategy o# selling a security short has t%o !ur!oses: 9rst, to s!eculate,

%hich is #ro%ned u!on i# s!eculati"e acti"ities ecome ecessi"e and !redatory,

and secondly to hedge' $uring the 9nancial crisis, in"estors targeted

o"erle"eraged 9rms and deemed them as the !er#ect short seller&s 7!aradise8'

These 9rms %ere on the rink o# colla!se, and i# so, the asset "alue %ould

decrease and short sellers %ould make a lot o# money' The short selling that

occurred during the /reat @inancial Crisis is and should e #ro%ned u!on, aleit,

the !ayouts %ere massi"e, es!ecially since >all Street had !artici!ated in

#raudulent acti"ities and deser"ed it' The a"erage %orker, homeo%ner, cou!le,

and elloy did not'

-n the other hand, a short !osition used in hedging is a %ise in"estment

strategy' >hen a short seller hedges a !osition, he is using a 7tool to o=set an

o!!osing e!osure %ithin any legal structure or entity8 3Bianchi and $re% 516'

@or instance, i# an in"estor elie"ed that oil !rices are going u!, he %ould uy a

long !osition in oil stocks 3uy lo%Dsell high6 and short oil #utures in order to

!rotect his in"estment i# oil !rices go do%n rather than u!' (n this %ay, the

in"estor mitigates !otential loss due to e!osure' (# hedging and !ro!er

s!eculations occur in the market, it %ill !ro"ide #or a more li


5/10

Ethically Short: The Ethics Behind Short Selling Strategies 4

then gi"e the in#ormed in"estors an o!!ortunity to uy in at a lo%er !rice rather

than the higher !rice' @or eam!le, (# in"estor A ought GH stock at I5 !er

share and a year later the stock is trading at I155 it %ould e %ise #or in"estor A

to sell the stock' (# in"estor A sells the stock then his e!osure to any short

!ositions are eliminated and he, himsel# is ale to short the stock i# he elie"es it

to e o"er"alued' *o% consider in"estor B %ho %ants to uy the stock ut thinks

it is o"er"alued2 he 9nds that I is the #airmarket "alue #or the stock' The stock

!rice is too high #or in"estor B, %ho %ill most likely kee! his ca!ital in a #airly

liooldridge and $ickinson 31MM46

illustrated that short sellers, much to the contrary o# !o!ular elie#, enhanced

market li


6/10


#air market "alue' They are in a sense, en#orcing against o"er"alued assets and

the illi


7/10

Ethically Short: The Ethics Behind Short Selling Strategies N

sellers #easted on the #olly o# the 9rms' These 9rms kne% that a small nominal

change in in"estment #actors could ha"e ankru!ted them, %hether it %as

interest rates, de#ault rates, C$S !ayout e"ents, etc''''

(n contrast, short sellers !ro"ided the much necessary relie# that the markets

needed during a time o# great !anic' According to Bianchi and $re% 3516, short

seller eha"ior di=ered #rom the !reconcei"ed notion that many had, in that

during 7!eriods o# #alling stock !rices8 short sellers %ere on the uy side o# the

e


8/10


!osition side 3uy lo%Dsell high6' This mani!ulation is highly #raudulent' This

acti"ity mainly occurs on the -"ertheCounter Bulletin Board 3-TCBB6 and Pink

Sheet stock market, %hich lists micro ca!italiation 9rms, %hich cannot a=ord

listing %ith *HSE or *AS$A' .istings on the -TCBB and Pink Sheet markets are

not kno%n to e high in !rice !er share, and i# that %ere the case %hy %ould a

short seller s!eculate asset decrease But a long !osition in"estor has reasons

enough to !ractice the mani!ulati"e art o# O!um! and dum!&' @or eam!le, i#

stock ABC$E %as trading at I5'5 !er share and in"estor A %anted to raise the

!rice in order to make a !ro9t, he %ould in"ite his other #riends to uy massi"e


9/10


!ractices led y !oor 9scal !olicy, rather than short sellers %ho dared to look

%here none other cared to'

The art o# short selling is nothing more than the !ro"ision o# li


10/10

Ethically Short: The Ethics Behind Short Selling Strategies M

Re#erences

$ickinson, J' >' 31MM46' Short Selling and Common Stock Prices' "inancial nalyst #ournal, $%316, 5'

$re%, R' J' 3516' &n the 'thics o Short Selling( /riLth Business School'

PA/E M

ethically short essay

Documents