Shorting is a legitimate investment strategy.
If you think bad news is coming to a company, you borrow a share of stock and “sell” it, then buy it back when the news hits.
The new family fun game, however, is to find stocks that are heavily shorted, buy them, then keep that stock off the market until investors who saw the bad things lose all their investment, and often a lot more.
In this way a garbage stock becomes f’in gold. Hedge funds had played this game for years but, a few years ago, small traders got into it. They organized themselves at discussion sites like Reddit’s WallStreetBets, they looked up short positions on sites like Fintel, they found targets and they pounced. Fortunes were made in crap like Gamestop, AMC Theaters and Bed, Bath & Beyond, bothered, and bewildered (BBBY).
The small guys thought they were fooling someone, but they weren’t. Ryan Cohen (left), who led the Gamestop charge, just got out of a bad BBBY trade by staging one of these short squeezes and leaving the little guys holding the bag.
That’s part of the problem. Many investors who play this game don’t understand that you must sell to book a profit. They see something is going “to the MOOON” but wind up on the short side because smarter people, like Cohen, got out.
Fortunately, Canadian regulators have figured out how to end the game.
It’s a simple regulation. You can’t short something unless there’s stock available for you to buy.The manipulation of shorts by holding shares from the market is manipulative. It’s just what Wall Street sharks were doing 150 years ago, only in reverse. They’d see you trying to buy a railroad and issue shares to exhaust your fortune. Keeping stock off the market is the same badger game.
A lot of small investors are going to scream bloody murder about this and try to keep it from happening here. But it’s long overdue. The purpose of a market is to allocate capital. It’s a casino, sure, but it’s not a rigged one.
If we’re ever going to reach some form of “normalcy,” part of it must be bringing trust back into our institutions, making them trustworthy. This is one small step in that direction. Sorry pajama traders, the game is ending. Now wake up and get jobs.
