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A Wikipedia Conspiracy and the Wall Street Meltdown
PatrickByrne writes "This is The Register's world-class investigative piece concerning one aspect of the meltdown on Wall Street ('naked short selling') and how the criminals engaged a journalist to distort Wikipedia to confuse the discourse. The article explicitly and formally accuses a well-known US financial journalist, Gary Weiss, of lying about his efforts to distort a Wikipedia page under assumed names, and accuses the Powers That Be in Wikipedia (right up to and including Jimbo Wales) of complicity in protecting Weiss. This is not another story about a 15-year-old farm kid in Iowa pretending to be a professor. This is like the worst Chomskian view of Elites manipulating mass opinion. But it is all documented." We discussed the alleged Wikipedia manipulation when The Register first wrote about it last December. The submitter is the CEO of Overstock.com and a major player in this drama from the beginning.
Politics on a wiki is downright bad and lie-heavy.
Dry scienc-y and math-y stuff is most likely right.
For Politick, I go to Faux-News for my daily News(R) and CNN for my other News(D).
Comment removed based on user account deletion
see e.g. http://web.archive.org/web/20061017204807/www.blogmaverick.com/2005/12/23/this-will-make-a-good-movie-someday-overstock-com/
Excellent, Minitrue is working as planned. We can now commence with phase three or our diabolical plan.
I am becoming gerund, destroyer of verbs.
This is the funniest, hippiest statement I've heard in a while. Criminals engaged a financial journalist to modify some wikipedia articles. If they are the Elites, you got a real fucking crazy view on society, mate..
TheRegister really is going downhill. It always was a tabloid read at best but this is just sad.
In the wake of the SEC's crackdown, the mainstream financial press has acknowledged that widespread and deliberate naked shorting can artificially deflate stock prices, flooding the market with what amounts to counterfeit shares.
How is this different from the trillions of dollars in fake money that are created every year in borrowing/lending arrangements?
Bad idea. So I can take as much short interest as I want up to infinity and that would be legally ok? Hmm, if that were the case, I could drive every stock down to zero then not worry about having to locate stock, because of the abundance available due to those getting margin calls.
A much better solution is to actually monitor the naked shorting occurring in the marketplace and enforce prohibition of the tactic. Stay tuned - the music has stopped on Wall Street and everyone is looking for chairs. Those who haven't paid off their powerful politicos enough will see the finger pointed directly at them. I'd think this is coming up pretty soon (unless they've all paid enough money into the political extortion fund... err, coffers).
Naked shorting is dirty, crappy stuff and those that engage in the practice should rightfully be put in jail. Unlike "normal" shorting, it does absolutely nothing for a society or market other than enrich the criminals perpetrating the crime. It puts small businesses (like overstock.com) out of business. It's just getting real attention now because ironically, the largest perpetrators of naked shorting (read: financials) are now becoming victim of their own practices.
(It should be noted that I'm a capitalistic heathen most of the time, but this naked shorting really is dirty pool)
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Elephants are an expanding computing market.
For those that are interested in exactly what naked shorting is, here is an EXCELLENT explanation of what it is and why it's bad. I believe this is Patrick speaking on the topic. I highly recommend it for anyone interested in the topic, stocks in general, or the financial crisis we're paying $700B for, if you're willing to spend an hour or so learning about it. It gets into the nuts and bolts technicalities and doesn't question the viewer's intelligence. (I'm not affiliated with it in any way, but was simply impressed with it when I watched it a year or two ago)
http://www.businessjive.com/
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Encyclopedias aren't for current events, nything related to current events on Wikipedia can be safely ignored.
sic transit gloria mundi
It's a good thing that they are protecting Weis. We all have an agenda. If we get rid of anonymity, wiki writers will have to start worrying about lunatics tracking them down because of a "biased article".
Smart people know that you can't use wikipedia as a solid source of information.
Whether or not a view is expressed in a Wiki article depends on two things:
1. How many computer literate people hold the view
2. How determined the people with the view are.
Wikipedia is a good starting place for learning about something. But, after you have that start it's extremely important to verify everything.
Naked shorting is dirty, crappy stuff and those that engage in the practice should rightfully be put in jail.
Fuck you! If I want to sit around in my underwear in my own home I should be allowed to do so without fear of being put in jail!
These posts express my own personal views, not those of my employer
Please read the article, because there's no mention of 'Chomskian' or 'Elites' in there. In fact, it's a really great piece of investigative journalism. However, it seems the person submitting it to Slashdot, and the editor, were creaming their pants so hard that they couldn't resist a liberal heaping of sensationalism.
If anything it's Slashdot that's going downhill!
Wrong. He wrote the entire article himself. Look at the article history. Gary Weiss is Mantanmoreland, Lastexit, and 70.23.245.232 And yet, believe it or not, those who attempted to restore some reason to this madness were the ones who were permanently banned from Wikipedia (myself included).
Naked shorting is dirty, crappy stuff and those that engage in the practice should rightfully be put in jail.
Fuck you! If I want to sit around in my underwear in my own home I should be allowed to do so without fear of being put in jail!
Given that you're posting on Slashdot, odds are you've got plenty of company.
The higher the technology, the sharper that two-edged sword.
This case is direct evidence for Chomskian media theory. (As if there wasn't enough already -- Chomsky has compiled literally thousands of incidents)
Why do you think the press would be any different than Wikipedia? Because it is permanent? Nobody cares about yesterday's news anyway. Because you need to be hired to join? Getting hired is easy -- essentially any interested party can join. Because journalists have integrity? I won't accuse all journalists of being disingenuous, but this particular journalist was caught manipulating both wikipedia and the mainstream media.
Certainly, if you let a fox in your hen house, you should expect your dinner to get eaten -- whether the metaphorical hen house is Wikipedia or the mainstream media.
After all, I am strangely colored.
haha! I am literally "naked shorting" right now myself - so I guess I agree with you.
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No Wikipedia Review link??? Disgrace! http://wikipediareview.com/?showtopic=20558 ^ Where the info originally came from.
Naked shorting, as essentially leveraged speculation on downward price movements, does serve as a useful counter to the massive, and often highly leveraged (i.e. bank-created money) speculation on upward price movements that created the bubble that got us into this mess in the first place.
The Economist provides a nice tongue-in-cheek fake newspaper article from the future, in which regulators ban naked longs to avoid that sort of speculative market manipulation.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
"Hmm, if that were the case, I could drive every stock down to zero then not worry about having to locate stock, because of the abundance available due to those getting margin calls"
Don't forget short sellers must issue dividends to the people that buy their shorts. So if you massively shorted a profitable company to manipulate its price you would have a huge liability when the company issued a dividend.
If you'd try it, I for one would buy all those shares at discount price, and live on the dividend you'd graciously issue to me every quarter until you accepted to cover your short at a fair price.
The joke would be on you.
Your entire post is an Ad Hominem argument. It says nothing about the truth or otherwise of the accusations against Gary Weiss and others.
The real "Libtards" are the Libertarians!
In every market you've got supply and demand. They balance at the asset price.
Then comes naked short selling. The naked short sellers don't need to borrow shares before they sell them. So unscrupulous agents start creating supply out of thin air. What happens next? As every fool knows, an increase in supply causes the price to drop. Unscrupulous parties continue to naked short the stock, saturating demand through successive price floors. As the price drops, stop-loss orders are activated, exacerbating the decline. Momentum traders will also short the stock. Pretty soon the share price has crashed, the company faces bankruptcy, but the perpetrators can easily cover their position at bottom dollar making millions. All of this is perfectly legal under SEC's rules regarding short sales, REG SHO.
Naked short sales completely destroy the relationship between supply and demand. It allows well connected insiders to make millions or even billions by ruining the market for everybody else.
Yeah, I read TFA. It's rubbish.
Really? Wiki-freaking-pedia was handmaiden to the whole financial meltdown, by whitewashing articles about naked shorting?
And they have some emails to prove that some guy didn't like some other guy, and edited some articles about him, and the admins tried to keep him anonymous, and the other guy's company went bankrupt because of it, the end!
Really, every article I read in The Register about the Great Wikispiracy just feeds stereotypes about British journalism, which is a real shame because those page three girls are really sweet.
A huge proportion of leveraged speculation is with uncollateralized loans. You don't think hedge funds are all backing up their lines of credit with tracts of land as collateral, do you?
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
(It should be noted that I'm a capitalistic heathen most of the time, but this naked shorting really is dirty pool)
So basically you're a capitalist who believes stealing is still wrong no matter what they call it? go figure I didn't know there were any of you left.
Judd,
I have seen this story for a while now. I my mind however, you blew your credibility with this post
You do know that a Judge wrote an opinion in which he described Merkey as inhabiting his own alternate reality, don't you? If Merkey told me on a mid-summer's day that the sky was blue, I would not believe it without looking for myself.
The real "Libtards" are the Libertarians!
Shorting of all kinds should be banned. It is an abuse of the property rights that form the foundation of capitalism. As Adam Smith pointed out, it is only by accident that capitalism and free markets leverage self-interest to the benefit of others, and it is only under a narrow set of rules and conditions that they do so at all. Where these rules are broken, where markets are inefficient or failing, where the right to own something is abused - as in the instance of shorting, where individuals are deliberately investing in failure - the system does not generate net benefit for all. The system, in such instances, is broken. Shorting is no different than buying an insurance policy on a building you think is likely to collapse or catch fire: that investment does nothing to foster economic growth or redistribute wealth in a maximally productive way; it is an abuse of market inefficiency (in this case, lack of market information and transparency). Cashing in on market inefficiency is the antithesis of capitalism.
A-Bomb
Gary Weiss, Patrick M. Byrne. Showing the clear and overwhelming bias in favour of Weiss and against Byrne.
No kidding!!! What do you say at this point?
A traditional short stock sale requires that you find someone who will loan you their shares in a stock you believe to be over valued. You then sell those shares to someone. When it comes time to return the shares you borrowed, you buy at the lower price that you expected and return them to the person you borrowed from. You get to keep the difference in price.
A naked short means you never borrowed the shares in the first place. You agreed to sell someone some shares and you have a certain amount of time to actually deliver the shares. The idea is that you will find someone to borrow from in the period during which you have to settle the transaction.
Problems arise when the settlement never occurs because the short seller can't find anyone willing to lend the stock and they are faced with buying on the open market at the current price. So they just don't bother to follow through because the cost will end up being, theoritically, infinite. When Broker B finds that Broker A hasn't delivered the stock, they can technically go out and buy on the market and have the bill sent to Broker A. But they rarely do this because what goes around comes around and they will eventually find themselves in the situation where one of their customers initiated the naked short. Whenever the shares aren't settled it's called a failure-to-deliver (FTD) and on any given day the value of the sales that aren't delivered is measured in the tens of billions of dollars.
Because of the FTD, buyers end up thinking they own stock that they don't. And brokers list the stock in the buyer's portfolio and tell the companies that the buyer is an owner of the stock. Companies can end up with more people thinking they own shares than actual shares exist. Leading to devaluation of the stock, limiting the ability of the company to raise funds by selling more stock, and affecting corporate voting.
Another problem is that companies with a small amount of stock in circulation and a fairly low market cap can find that on a daily basis there are more shares offered for sale than actually exist because short sellers are selling without ever finding a person to loan them the shares in the first place. Due to the massive amount of sales being offered the price plummets, defrauding honest investors of value.
Evidence was collected that pretty unambiguously identifies Gary Weiss as the person behind two Wikipedia accounts which were pushing a point of view on the "Naked Short Selling" article, including a shift in editing hours which corresponded exactly with the period of time that Weiss was in India on his honeymoon, shifting from US east coast time to India time and then back again when Weiss returned to the US. There was general consensus on the identification once that evidence (from the normal, public edit logs) was collected, analyzed, and published.
None of the other Wikipedians involved is involved in the Financial industry or any form of serious investor. Nor did anyone have any particular interest in the topic before the fight broke out on-wiki and off.
It is factually true that Overstock.com CEO Patrick Byrne opposes naked short selling and publically blames it for low stock prices. It's factually true that he and at least one Overstock employee openly and then pseudonymously started a content war on Wikipedia on the article about it. It's generally concluded that the "other side" of this fight primarily was led by Gary Weiss, under two Wikipedia accounts now linked fairly unambiguously to him, though there hasn't been a public admission that I know of. Weiss had a conflict of interest in this matter, as a journalist covering the topic area.
Weiss never had Wikipedia administrator status, and thus the actions which Byrne blames for "censorship" were done by the other Wikipedia participants, mostly actual site administrators, who did not have conflicts of interest over the topic area. Byrne and his employee's accounts were permanently blocked from editing, and hundreds of known "sockpuppet" accounts created and used by them were also blocked. They were blocked because they threatened numerous Wikipedia volunteers, exposed alledged real names (sometimes wrong, sometimes right) of pseudonymous volunteers and personal information both of pseudonymous and openly identified individuals. Threatening phone calls were made to volunteers and their employers, viruses and various web tracking mechanisms were placed onto Byrne's website to try and help ID his alledged persecutors, and illegal access to some of the volunteers computers was made by Byrne and/or his employee. At least one other volunteer in California was subjected to threats and behavior that rose to the level of felony stalking here, though I was unable to get them to file police reports.
Byrne believes that this was all OK, because it did turn out that Weiss was credibly the person behind the two Wikipedia accounts. I for one believe that Byrne's behavior rises to the level of criminal, and that he displays behavior patterns most commonly associated with sociopaths in his online interactions.
His having been correct about Weiss does not change the fact that he is a scary, dangerous person who has little regard for other people's safety or feelings.
making the process transparent
Like circling the wagons around Mantanmoreland?
Transparency means, among other things:
Hiding behind pseudonyms is, by definition, not transparent, and is an invitation to opaque Mantanmoreland-like sock puppetry.
Judd Bagley openly associates with the editors who tried to subject me to police harassment. Given that, the intentions he has in outing editors should be clear.
And if you knew who the identities of the people who were doing this to you, you could point the police back at them.
"I don't know, therefore Aliens" Wafflebox1
As if naked shorters hold on to "their" stocks long enough to issue dividends.
Infuriate left and right
Shorting of all kinds should be banned. It is an abuse of the property rights that form the foundation of capitalism.
Naked shorting is an abuse, I go along with that because you can do it without any investment at all, and people can naked short more stock than actually exists. But plain short selling requires you to borrow those stocks, they must actually exist, they can't be loaned multiple times invisibly, and you have presumably put up some collateral of some kind or no one would loan you the stocks, even if it is just your reputation.
Infuriate left and right
As if companies still issued dividends anyway.
If corporations are people, aren't stockholders guilty of slavery?
I don't understand why the parent was modded troll. He's telling the truth.
Wikipedia is an absolute gift on matters of knowledge in most ways, but its very strength in things like science and math articles are its very weakness in political pages... anyone, including trolls, can edit them. It's kind of hard to write a troll on, say, polynomials. It's all too common to do it to politicians.
And he's right about the US media becoming like the British media. There are no "neutral" media outlets anymore, if indeed they ever existed in the first place. Much as the UK has red papers and Tory papers, US news outlets now all have a bias of some kind. Fox is well known for tending to the right, CNN trended left in the early 90's (that one was a shame, as they were the only truly unbiased news outlet in America during the late 80's). NBC has gone so blatantly to the left that we call it's cable outlet "MSDNC".
Life is hard, and the world is cruel
Now I at least know why people jumped down my throat when I said that I thought short-selling should be abolished because it made the market unstable. The only sort of short selling I knew about WAS naked short selling. And in my case it was just a belief that it discouraged self correction of prices. I didn't know that the brokers actually didn't fulfill the orders (shouldn't that be illegal by the way?)!
http://wikipediareview.com/?showtopic=20558 ^ This is kinda old news. The censors keep removing the link futilely, banning isn't going to help you honest ;)
What the hell? Really? That's what's going on?
I thought that if you sold short and failed to produce the share, you had to pay all sorts of penalties. Which is why you had to go out and purchase it on the open market.
In fact, I recall an episode of Hustle where con men created a company, pissed off a brokerage that shorted their shares, had some other people purchase all the shares and refuse to sell them, which essentially trapped that brokerage into, in theory, paying penalties to them forever because it could never actually purchase the shares. (Both of their behaviors were technically illegal, but the con men were able to extort money from the brokerage simply because, duh, brokerages that do illegal trades get in all sorts of trouble, whereas con men just vanish into thin air.) Supposedly this was a very old con.
So I always thought naked shorts, while extremely dangerous, and stupid to allow, couldn't actually result in badness except for the people who sold them, who might have to buy them at absurd prices. Although your point about depressing the stock price is valid.
I can't imagine how you can legally fail to produce the stock when you said you would. How the hell would shorts even work if they were somehow optional? Why would anyone pay money for them if, when the time came and the price of the stock had gone up (aka, you 'won' the bet) the other guy could just go 'Oh, nevermind, let's call it off.'?
If corporations are people, aren't stockholders guilty of slavery?
Gee, Judd. I wonder why that could be. Might have had something to do with the fact that your definition of "reason to this madness" consisted of abusively using multiple accounts to push your agenda, and launching vicious personal attacks against your opponents.
Come on, Judd. You've got to know you can't actually expect to come to a forum as well-traveled as Slashdot and get away with presenting half the facts like that.
I love how well prepared you are for this argument. Do you do anything else than hanging around on Wikipedia, fighting trolls and sockpuppet, and watching places like slashdot, in case the peasants try to fight back?
Now the facts are: Naked shorting has cost the US economy billions and billions of dollars. That may have been "POV" in Wkispeak (when I read some "Wikipedians" it really reminds me of Orwell), today it has been dramatically proven to be true. For a long, long time Wikipedia failed completely to create a neutral article about the subject, instead it allowed an interested and well-connected (within Wikipedia) party to manipulate the article. Shit happens. We could hope that Wikipedia learns from its failures, but the chances seem slim.
Maybe not, but in order to cover their shorts and make money, they would need to find sellers who are willing to sell at an artificially low price. They would run out of stupid sellers pretty quickly. Only the stupidest sellers would want to sell at a price lower than the dividend potential or the company. The fair price of a stock is always proportional to its expected long term dividend potential.
There is money to be made on the back of short sellers who manipulate prices. It is pretty damn easy to buy their under priced securities and only sell them back at a fair price. There is not much incentive to sell when you are getting dividend potential worth more than the value of the stocks. And if short sellers can't find enough dumb sellers, they will only be able to cover at a loss or wait in hope of a price drop while issuing dividends until they are forced to cover by a margin call.
The BADSITES pseudo-policy, which for a time led Wikipedia editors to be threatened with being blocked or banned for daring to link to antisocialmedia.net or Wikipedia Review (among other things), was a sterling example of Wikipedia's concept of "openness".
--Dan
Web Tips
I'm tempted to apply the Wikipedia {{fact}} template to ask you to document some of your statements. Are your claims that Byrne/Bagley tried to put viruses on people's computers based on the known incident of his use of a tracking image in an HTML file to find somebody's IP address through server logs... something that's hardly rocket science or even advanced computer science... it's an attribute of any image on an external server that might be found in an HTML file on the Web or e-mail... calling it a "virus" or "spyware" is a gross exaggeration.
--Dan
Web Tips
I disagree. This is /. after all. If there is one thing I don't want to see it is pictures of this particular activity.
Come to think of it, I don't even want to imagine it.
Unfortunately I have a vivid imagination. Damn you /.!!!
"So long and thanks for all the fish."
Bollocks. This is just straightforward lying. That has eff all to do with Chomsky and Hermann's analysis of how the media is distorted. On the contrary their theories mostly emphasize unconscious distortion and selection practiced out of the "highest motives" by those selected and self-selected to man the positions of power in our current system. You should read Chomsky and Hermann's original work so that you (or the original article author who is also talking out of his rear-end) do not present misrepresentations of that work. Failing that you could read a short summary such as the following .
Without the ability to take on short positions, then we cannot have an efficient market, which depends on the ability of all participants to immediately take advantage of any mis-pricing in a security, whether it is too high or too low. Without being able to short something, then the only people that could take advantage of an over-pricing would be people that already own a stock, and they are far fewer in number than the market as a whole, so the whole dynamic would change. Under-pricings would disappear immediately, but even quite obvious over-pricings would linger on for far longer simply because very few people could capitalize on them and bring them back into line. You'd be open to all sorts of abuse and price manipulation on the long side of things because longs couldn't get "picked off" by shorts if they were trying to manipulate prices.
FWIW, a market can likely never be perfectly efficient without naked shorting, but in practice the more liquid markets are very close to efficient because it's always possible to find a lender of the share, so eliminating naked shorts still leaves us pretty close to efficient.
It all depends if you believe that there should be a fair market that quickly finds fair value. Some people think that in itself is a benefit for all of us; without it, I suspect we'd have far less investment overall, which would likely be devastating to the economy. Think about it - if there was a good likelihood that a significant over-pricing was present in every stock on the market because shorting was disallowed, would you be as likely to buy stock at all? I wouldn't, since I'd know that it's extremely likely I'd be overpaying for the thing.
Yes, investing in failure seems to be dirty, and it is indeed cynical, but since the stock market is all about betting (bah to you "investors" that think otherwise - you may be making a long term bet with a different risk profile, but you're still gambling with your money), why should we not be allowed to take the other side of that bet at market value if we wish?
This is a post copied from Overstock's Investor Village forum. Byrne is solicting drive by modding to keep his story over the fold. Who is manipulating who?
=====COPIED============
The Most important favor I have ever made of you folks - Slashdot
Hey Sports Fans.
I don't often ask for your help, but I am asking for it now: rec this post and spread the word on what I describe below. I submitted to SlashDot.com Cade Metz's story from TheRegister. It was accepted. Right now it is on the home page ("A Wikipedia Conspiracy and the Wall Street Meltdown") of Slashdot.com.
The significance of that is that plenty of mainstream press looks at what does well on Slashdot, and then write about it. Ultimately, I think control of the Wikipedia page gave the miscreants the high ground from which to shape the discourse in the mainstream press, which is why it took so long for them to write about this issue long after the data had become incontrovertible. That means to break through the cover-up we had to follow the thread all the way back to Wikipedia, expose them there, then expose their hijacking of Wikipedia, then get the mainstream press to see that. It has all been done but the last step. Cade Metz's story is out. We need the mainstream press to notice it and write about it.
So go to Slashdot, read the story, and if you approve of the story, then vote for it (assuming you are registered). The more votes it gets, the longer it stays on Slashdot, and the more independent and mainstream journalists will start noticing and digging into this.
Patrick
Admittedly that comes from Patrick Byrne's web site.
An excerpt from here.
And from here:
Also a paper (PDF) from the Cato Institute.
And back to Byrne.
I personally don't think naked shorts represent the cause or even a cause of the current situation,
Yes, it is illegal. And I've not exactly done the research myself, just took what I've read and tried to summarize it. I posted a bunch of links here.
Dividends aren't common as they used to be. But dividends by a company whose share price is collapsing? Not a chance. Companies issue dividends when they have excess capital, not when their capital is being vaporized. And if companies have loans secured by stock then they certainly can and will go bankrupt simply by a rapid drop in share price.
What is wrong with your assumption is that few individual investors actually take possession of the shares that they 'buy'. Ninety percent -or more- of shares of stock are held in the 'street name' of the brokerage firm and never pass to the person who actually 'buys' them. Broker 'A' never deals with Broker 'B' anymore in any type of transaction. All trades and sales are done electronically between firms from brokerage inventory of shares that they hold, not the client. The 'closing' date of a transaction is always seven business days after execution, which is why you may be confused by daily trading figures and arrive at the mistaken conclusion that more shares are being traded than actually exist. A share of stock could trade hands innumerable times within the seven days after the originating 'sale', but before its original closing date, giving the 'impression' that there are more shares afloat than have actually been issued.
Another thing you overlook, is that very few individual investors have the liquidity to qualify for naked short sales of stock, even if they have a margin account with a firm. In most cases, a broker will be prohibited from executing a naked short sale until the client deposits sufficient funds into the account to cover the purchase of the shares from inventory or from the street. You can't just call up a broker and say; "I want to open an account and short sell IBM for 20,000 shares.", the 'account representative' would fall off their chair laughing at you before they hung up the phone. Additionally, few firms are willing to allow clients to become leveraged in put options on a stock without sufficient liquid assets to cover any loss. Much of the naked shorting is being done by firms, through their traders, is an attempt to acquire the stock at lower prices than they could if they were dealing with covered put options and these actions are as close to market manipulation as the law allows.
Sig this!
Dividend yielding majors are rarely the subject of these attacks. New companies with small market caps are typically the victims. The major exception is the recent financial crisis where banks are supposedly falling victim to these acts. It is much easier to naked short a financial institution if they've (for example) slashed or eliminated their dividend to conserve cash - this is exactly what's happening now and why the shorts are attacking financials. (Or so the theory goes)
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Your argument seems to hinge upon the notion that without shorting stocks would be overpriced, and that thanks to shorting they are not. I refer you to every financial bubble in the last century as proof that stocks are quite capable of becoming overpriced despite the best efforts of shorting to keep them 'fair'.
Shorting is just one component in an unhealthy trading system that has little to do with directing investment capital to those ventures with the greatest likelihood of being productive and profitable. Rather, the financial system has degenerated into a collection of gambling rings where high rollers lose and win fortunes trying to game the system.
The stock market was conceived in an era that long predated instant communication and the ubiquitous availability of information. It was originally intended to make capital available to enterprise, though of course there has always been a gambling element to it. But today, with instantaneous communication and information availability, there is no need for a trading market for those who simply wish to invest and divest capital in companies they believe to have strong prospects for profitability. The day trading and manipulation of stock prices and markets are now artifacts of an obsolete, dysfunctional system.
Had the financial markets collapsed in the recent crisis, and if the trading floors were to close permanently, then they would be easily replaced by direct investment with individual companies by individual and institutional investors with an actual interest in the productivity and profitability of the companies in question. In the end, our economy would probably be better off. And even if the system were slightly less efficient, the difference would simply be paid for out of the pockets of wealthy investors who currently clean up to the tune of $500 billion or more each year. Companies and their employees in the working and middle class would almost certainly be unaffected, or actually be better off in the final analysis.
There is simply too much money to be made to ever hope that we could close the world's financial markets to all but legitimate, long-term investment, but 99% of the people in the world would almost certainly be better off for it.
A-Bomb
How about making margin investing illegal or at least very costly?
I understand that there were 30-1 margin ratios in these subprime packages. Why would anyone be surprised at a blowup?
You are welcome on my lawn.
The 'closing' date of a transaction is always seven business days after execution,
It's 3 days, currently. Used to be 7.
Hey, check it out! Here's someone that still believes in a "self-correcting" market!
Who wants to bet he believes America is a free country, too?
You are welcome on my lawn.
Yeah, that's what bank regulations were supposed to be about. They were supposed to limit the amount of leverage or "margin ratio" as you call them. The government has clearly failed here.
want to read something scary? read this:
http://paul.kedrosky.com/archives/2008/10/03/quote_of_the_da_6.html
In fact it is so good I'm going to post it right here:
"Here is the quote of the day:
"...we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place."
Translated into English, this testimony from back in 2000 was from someone asking that major brokerage firms be permitted to increase leverage subject to oversight of their wondrous mathematical risk models. The request was agreed to four years later, in 2004, and it helped lead to the meltdown in independent brokers this year.
The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him."
CNN trended left in the early 90's
...Yet remains right wing to those outside the US. Like all of your popular media, CNN falls far short, in questioning government and policy, of what ordinary attention to public interest, and common ethics, would require.
FOX, as we all know, is Murdoch, who murdered mainstream journalistic discourse in Australia and the UK long before he started attacking it in the USA.
None of this is new. Real journalism doesn't get air time in the conglomerates. You still have NPR... for now.
you had me at #!
While true, your comment doesn't address the potential for naked shorters to cause mischief. By selling stock that they don't really have, they artificially increase supply, and if done on a large enough scale, the price drops.
Of course, the shorter didn't change any fundamentals of the company, so you would expect the price to rebound as the shorters are forced to cover their position. But take human nature into account. The sudden price drop can trigger panic selling-- basically the naked shorter is making a bet on their ability to trigger a panic.
The short position wins when the naked shorter buys up the stock at the artificially low price to cover their position. Small companies are the usual victims, since their price is manipulated more easily.
Yes and such attacks are often accompanies by fear, uncertainty, and doubt spread in the press by a group of journalists, whose articles curiously seem to mirror the short positions of major hedge funds. This places companies in a quandary. If they response to each incident of biased journalism they look weak and defensive, but if they keep silent then misinformation is unchallenged.
Also, one point I"m not sure readers appreciate is how much many algorithmic systems and ordinary investors as well rely on technical analysis, that looks at patterns in price movement as a guide to future price changes. Naked short selling can readily "poison" such the technical picture of a stock and make it appear much weaker than it otherwise would. I've seen it happen in a number of stock I follow. Don't ever assume that the market trades on fundamentals.
Well, sort of. Now (as in, since a few weeks ago) it is altogether banned, but historically it has been allowed in limited form. Particularly market makers have usually been allowed to naked short if they are unable to borrow shares, because they are responsible for maintaining liquidity and they were assumed to be legitimate enough to settle up when shares were finally available. And price manipulation by a market maker should normally be very easy to spot, so it was not considered a huge risk to allow it (there were a couple cases where market makers got busted for abusive naked shorting, though).
It probably makes sense to ban it altogether, though, as the marginal increase in efficiency is probably not worth the general sense that there's a loophole for exploitation in the market, whether or not people are actually abusing it.
"Mom, I found this guy who will pay an outrageous price for a 2003 Saab 9-5 in good condition, like the one in the driveway that you're not using since you got your BMW. I can get another one just like it at a lower price, but I can't get it until next Wednesday. If I give you a hundred bucks, can I sell yours to this guy and replace it next Wednesday?"
Which illustrates the point that shorting of borrowed shares can't be eliminated unless you make transferring shares between people illegal, because for a sufficiently liquid asset you're always going to be able to find someone willing to lend you what they've got for the right price, and this lending does not have to happen through any official channel, they just need to be able to sign the stuff over to you and negotiate a repayment plan on the side. The only reason this doesn't happen in practice with cars is that a) finding "the same" car to replace the borrowed one is not necessarily easy, whereas with a stock most shares are equivalent, and b) it's quite a bit more difficult to transfer ownership and possession of a car than a share of stock.
Wow, this sounds suspiciously like a pyramid scheme. You oversell at the top so the ones at the bottom receive devalued returns. When did Amway take over the financial market?
So wrong, let me count the ways ...
1) Parent baselessly (and falsely) assumes that a drop in the share price will not affect the profitability or solvency of the company.
2) Parent laughably believes that companies with plummeting share prices have lots of capital to issue dividends.
3) Parent apparently believes in some exogenous, universally quantifiable "fair price" of a stock that exists independent of its supply and demand.
4) Parent believes that investors have perfect information and that they could distinguish between a stock price that is legitimately falling and a stock price and one that is the product of manipulation.
5) Parent apparently believes that shareholders who sells below the mythical "fair price" of a stock are "stupid" regardless of the profitability of the trade, the future trajectory of the stock price, or even anticipated future trajectory.
Time for a reality check. The parent suggests that he would respond to naked short market manipulation by buying tons of stocks. But would he?
First, I'll make the very generous assumption that he has a "rational" bank with a similar "understanding" of economics that is willing to extend arbitrary credit to finance his splurge on tanking stocks.
So I assume he could, even though he can't. But would he?
I doubt it. By the parent's own reasoning the stock price really can't deviate at all from the "fair price." Before issuing the order he would cast judgment thusly:
"The free market does not lie! The fall in price must reflect a change in the underlying value of the company. Of course if I knew the asset was trading below it's God-Given Fair Price, I would immediately enforce that price by my own hand. Heavens! I'd leverage to infinity if I thought somebody was making a mockery of the Free Market!"
So I got an insightful mod on this post. It has me pondering.
I mean - sure, thanks for the nod. But I was kind of expecting a "funny." I'm not sure what "insightful" is saying. Is that, in itself, the joke? It boggles my mind that someone might have been taking the quip seriously.
We have polls claiming a large percentage of people get their news from comedy shows. That's a bit of a sting on our mainstream journalism. But it's always given me this uneasy feeling that it's more of a statement on said people.
That this is all coming from a meme started by The Colbert Report just seems like poetic justice.
3 percent can be deadly when combined with massive leverage.
And even if swaps are bets against the performance of the underlying, they still end up worthless if the counterparty has taken on so much leveraged risk in these things that a 3% decline in the underlying leaves them unable to pay you what you are due from your swaps.
Think of it like insurance: usually an insurance company has to show that it can reasonably meet its obligations if something bad happens, so when you buy insurance, you have a reasonable certainty that if the insured event hits you, you're going to get your money. Nobody would buy insurance without that expectation - a million dollar life insurance policy is worthless if the company you've bought it from doesn't have a million dollars. Or at least nobody should buy insurance without some sort of guarantee of payment; this is why the insurance industry is highly regulated, with all sorts of minimum holding requirements and fun stuff like that.
Well, the companies that were peddling these swaps were selling a lot more bad-credit insurance than they could afford to pay, and for some inexplicable reason this was allowed. But the people buying this insurance, when they did their risk assessment, assumed that they would be paid by these insurance policies if the defaults started to roll in. They thought they had hedged against the risk of default. But they hadn't, because they didn't factor in the right amount of counterparty risk, and these counterparties were so leveraged due to the fact that things had been going well (when any quantity rises for long enough, people will allow you to borrow way too much money based on the future gains of that quantity, which is why we have bubbles) that a disaster was just waiting to happen. Then people started to default on their loans. And then there was blood in the streets, all because someone had the brilliant idea to let any old asshole get into the insurance business (in a roundabout way, of course - they didn't actually call it insurance) without having enough money to be in that business.
At least that's my take on this thing. It's got nothing to do with shorting, naked or otherwise, and everything to do with the creation of an entire industry based on a complicated and unregulated derivative that is almost impossible to properly value and allows insane amounts of leverage.
1. Well, AFAIK a simple change worked perfectly for other countries, and in fact it's how the stock market has always worked in most places that aren't the USA. It's similar to what in computer programming you'd call "distributed transactions" or the ACID principle: the swap between shares and money happens simultaneously, and either both succeed or both fail.
In non-nerd terms: you don't get the money until you actually deliver the shares.
It's mostly a USA problem that you can sell IOUs. And the fallout is exactly the same that those of us programming databases already knew would happen when a non-transacted program goes wrong: Refco alone apparently left ridiculous ammounts of fake shares in the economy.
With the change of the swap being simultaneous, pretty much that disappears: you don't actually get the money for 1000 Sedona shares until you can actually deliver 1000 Sedona shares, and the buyer doesn't own an extra 1000 shares in the meantime. You can game on the delay, but in the end any transaction you can't deliver can be basically rolled back, leaving the economy to where it was before. Grandma gets her money back, sorry, couldn't buy Sedona stock after all. The broker didn't make any money in the end. Sedona doesn't end up with ten times more shares on the market than it issued.
Now I'm not saying it can't be gamed, but you can't sell what you don't have. You can promise to sell what you don't have, but at no point does it become something that looks like genuine extra shares.
2. Most of the world's economy works perfectly well that way.
It never ceases to amaze me the way the USA insists that any of their quirks are grrreat (and according to some, even _vital_) for a working system, and eliminating them would spell doom and gloom for everyone. Especially when perfectly good examples exist of countries and economies which work perfectly well without those quirks.
And yes, people still buy stock, even when it's impossible for it to be counterfeit. (Since your argument seems to be that without naked shorting you wouldn't buy stock for fear of it being overvalued.) I don't know about you, but I'd be _more_ inclined to buy stock in the next Sedona, if I know that there can't be a Refco flooding the market with FTDs and devaluing my portfolio to penny-stock.
3. It loks to me like shorting generally, whether legitimate or fraudulent ("naked",) does _nothing_ to prevent stock becoming overvalued, or even an outright bubble. You don't short stocks when they're _rising_, so it will do nothing whatsoever to prevent their becoming overvalued. It just accelerates the fall once they go a bit over the top. So instead of preventing a bubble, it just makes the crash harder at the end of it.
In fact, from where I stand, it looks to me like it might even encourage a bubble. Traders can essentially ride a company both ways, and make money from both its rise _and_ its fall. There is very little to discourage helping it become way over-valued, when it just means you'll make more money on its way down too.
What that means for the private investor isn't that someone is helpful and keeps you from buying overvalued stock which may fall later. It means that someone else is encouraging stocks to become overvalued in the first place and then helping _your_ shares fall faster when they fall, and making some money out of it. Essentially that mechanism means he can make some money by making you lose more. Exactly why _that_ would be more incentive to invest, is beyond me.
A polar bear is a cartesian bear after a coordinate transform.
then they would be easily replaced by direct investment with individual companies by individual and institutional investors with an actual interest in the productivity and profitability of the companies in question.
And your evidence for this is what? As a direct investor in a few companies, and as somebody who works a lot with venture-funded startups, it sounds entirely implausible to me.
even if the system were slightly less efficient, the difference would simply be paid for out of the pockets of wealthy investors who currently clean up to the tune of $500 billion or more each year. Companies and their employees in the working and middle class would almost certainly be unaffected, or actually be better off in the final analysis.
There you're entirely wrong.
If your proposed system is less efficient (and I think it would be much more than "slightly"), then I see two obvious effects. First, there is less capital available. Second, that capital is less liquid.
Less capital available means fewer people who want loans to expand their businesses get them, meaning lower economic growth. And those who do get those loans have to pay a higher price for them. That means a greater proportion of the value created goes to the people with the capital, the opposite effect you'd expect.
The lower liquidity gets you other problems. First, if people can't easily get their money out, they'll be less likely to put it in, further driving down growth and raising the cost of capital. Second, you can't really reward most employees with stock, as then they can't sell, or at best can sell to a very limited group. Third, investors who need cash won't be able to get it just by selling shares on the open market, so they'll be more likely to press the company to pay dividends, keeping them cash-poor and limiting opportunity for growth.
The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him."
I'll just point out that Goldman has done reasonably well in all this, and that's probably because they did have good risk models. Warren Buffett recently invested in them, and he's one of the sharpest value investors out there.
Paulson's statement was broadly correct: what matters is the risk, not purely the leverage, and a fixed ratio for everybody did indeed give a less efficient use of capital.
Where things fell down wasn't the theory, it was the practice. The SEC, which has been a sharp and disciplined regulator for ages, apparently went out to lunch during the Bush administration, and specifically never followed up on this.
For a nice take on the SEC's abdication check out the "This American Life" episode "Enforcers". Not only does it have a great piece on the people tricking Nigerian scammers for fun, but the bit on the lameness of the SEC is very well done.
No dividends paid by the short sellers. They borrowed the shares, sold them on the open market, money deposited from the proceeds in their accounts (with a minus sign next to it on their statements). Then, when the price falls, of the underlying stock, they buy back the number of shares borrowed, That's the idea, of a short sale, anyway.
Now, when they sold the borrowed shares, if a dividend becomes due, then the buyer gets the dividend from the company issuing the shares. The holders of record are the recipients of dividends and those dividends are paid by the company, not by the previous owners of the stock.
Buyers of shares have no idea they are even participating in a 'short'. Why not? Well, for one thing, the law says you can only initiate a 'short' on an uptick in the underlying stock, meaning: The stock price is on a rise. So, another anonymous buyer of the security is participating in a rising market in that stock. I am dealing in Option contracts that represent the price movement, over time, of a security, not the securities themselves. The market maker simply prices the loaned shares, based on the next transaction in the stock after my order, I never actually see them. The Optiions market runs on the principle that you best against a market only when the most recent transaction in the stock or Index was higher than the previous, and you bet in favor of a rising market only when the most recent transaction was a downward movement in price.
I did Options in the 80s and early 90s, and back then (and still) the term 'naked' was slang for 'uncovered'. I was betting against certain stocks and the market, as a whole, at times. I did not own the S&P 500 Index, so if I sold a 'call' on the S&P, that transaction was naked. The most I stood to gain was the strike price on the Option, which represented, loosely speaking, the price movement up, or down, of 100 shares of the underlying security. As the contract reached expiration it was time to either close out the deal, or, if the stock or Index rose suddenly, to buy back the calls. If the Option was sold as 'covered', it meant I had the underlying stock, and if I wasn't paying attention, a person holding calls on the stock could 'exercise' the call, and I had no choice but to deliver the real shares.
Let's say there is 7 weeks to go on XYZ stock, and the last transaction in the Market, for sale of XYZ was 'up' 12 cents at $100.12, and I decide to sell a 'call' on the stock of XYZ at a $97.50 strike price. I am betting that the stock will be worth, equal to or less than, $97.50 in 7 weeks. So I sell, say 10 calls, representing 1,000 shares of XYZ and pocket $300 per contract ($3000). The most I can gain is my $3000 [If the stock does indeed head south in time]. I'm on a margin account, and as long as I have enough credit i can ride out what I hope are temporary upticks in the XYZ. But if it keeps rising, the price of each is rising out there also, and it's rising fast because holders of those calls, who bought them at lower prices are seeing price reaction based on the XYZ movement in the open market AND the fact that Time is running out for a turnaround in XYZ. If XYZ options are at 8 bucks and I get cute, the holders of the calls can 'exercise them, and all of a sudden I need to come up with 1,000 shares of XYX at over $100 apiece. My $3k deposit, from the sale of the options, is dwarfed by a $100k+ obligation. This is not for everybody, that's for sure.
But I never sold 'covered' options, only 'naked' ones. It was speculative and dangerous, because the maximum profit was the amount collected on the sale of an option, and the potential loss was, theoretically, sky-high if not infinite. In the 'naked' scene you had to pay very careful attention to both price movement in
Since we brought in fiat currency and fractional reserve banking?
Me thinks,
We accuse the worker/drone bees of many harmful blinding stings, but fail to suspect the C*O "Market Queens" and many "Politically Correct" (PC for PTB) things done globally.
The injuries (suffering, deaths, wars) are unintentional gapping economic wounds caused by dumb negligent sharks in a greedy feeding frenzy.
This is common when the shark masters (Unaccountable Leaders) gleefully anticipate the gladiatorial sacrifice of troublesome Slaves (Unrepresented Public) and are rewarded with $700B to fail USAgain.
Godddd bless them one and all.
Unaccountable leaders are masters, and unrepresented people are slaves. How do US and EU fare?
Bullshit! GS survived because they have Paulson as the treasury secretary. Paulson let other companies fail from the CDS manipulation, but when the target became GS the government stepped in and banned short-selling (among a lot of other things). It's nice to have your ex-CEO as the most financially powerful person in the world. Even other bankers made note of who the bailout really helps.
Buffet invested in them for 2 reasons. Based on what Buffet has said it sounds like the government tapped him and begged him to get in the market to instill some confidence. So for his troubles GS (and GE for that matter) is giving him a 10% dividend! Even with those terms Buffet himself said it was risky and I have to paraphrase here...'if a government bailout doesn't get done, GE and GS will be the 2 largest investment mistakes I've ever made.'
Hmm, sounds like The Producers a classic Mel Brooks comedy. For people who haven't seen it here's the gist, timid accountant Leo Bloom explains to shifty Broadway producer Max Bialistock how he could make money on a flop play. Basically, all he has to do is oversell shares in the play by a huge amount, then when they play tanks, no one will expect their shares of the profits.
Then, much as in the current derivatives market, hilarity ensues.
Oh, also, frighteningly prescient was an episode of Really Weird Tales (an SCTV movie that's hard to find now) about a small town making money on no money down home sales. Why the whole town got rich selling houses to each other! Then those people got rich by reselling the houses to other people in the town. Until, finally, well I won't spoil the ending but it kind of has been spoiled by Congress....
Actually, no one explains it better than my favorite blog, Dr. Housing Bubble
"MIT betrayed all of its basic principles."
Dr. Byrne has tried to make people aware of this and the conversation was hijacked. Why is this discourse been excluded from mainstream media until we have a crisis that Dr. Byrne foretold. With the reality of this coming out, one can't help but question the motives of those who suppressed the truth.
Your analogy makes me think you never had kids. Any prudent mom whose son tried to give her that spiel would respond "You're grounded". We should have said the same thing to Long Term Capital Management -- and many others.
The more worrysome problem there, though, is that the USA system (and probably a few others) works on IOUs that are indistinguishable from real shares even to those who own them. In your car analogy, essentially you'd sell the car, but when mom looks in her garrage, she still sees the car there.
But analogies aren't even necessary, let's look at the real thing. Let's say we have the following actors: Mr Investor who owns 1000 shares of IBM, Mr Broker who does the shorting, and Aunt Emma who's gotten into her head to invest her savings into IBM stock. Now the initial stages of shorting look like this:
1. Normal shorting.
Mr Broker borrows the 1000 shares from Mr Investor, and replaces them with IOUs. Then he sells the 1000 shares to Aunt Emma.
Hopefully temporary outcome: Mr Investor now owns 1000 IOUs for IBM shares, Aunt Emma owns 1000 IBM shares.
2. Naked shorting.
Mr Broker doesn't bother even locating Mr Investor, and just sells Aunt Emma some 1000 IOUs.
Hopefully temporary outcome: Aunt Emma now owns 1000 IOUs for IBM shares, Mr Investor still owns his 1000 IBM shares.
The problem, the way I understand it, is that in both cases, the IOUs are indistinguishable from the real thing by anyone outside the DTCC. (The big hub where those transactions take place.) In both cases, both Aunt Emma and Mr Investor can look at their portfolio at any given time, and they _both_ will see that they own 1000 IBM shares. Genuine shares, not IOUs.
In both cases, 1000 shares just became 2000 shares. And the effect can further cascade, as Aunt Emma's shares can be loaned by somebody else, creating another 1000 IOUs that are indistinguishable from real shares. And so on. At some point 10 different people can show up and demand vote with their 1000 shares each, but they're all the same 1000 shares, duplicated in that process. And someone can look and see the extra shares around artifficially inflating the supply on the stock market.
Basically to go back to your analogy, after all, temporarily Mom _and_ this guy own the same car as if it were two different cars. And the car can be further duplicated down the line like that, until the whole bloody neighbourhood owns a car each... and they're all the same car: mom's 2003 Saab.
I wouldn't have a problem with it, if the IOUs were clearly marked as IOUs, and not as real shares. Then either Aunt Emma or Mr Investor can look at their portfolio and go, "ah, I'm still owed 1000 shares by that guy." But they don't. They both see that they have 1000 shares.
I think understand the reasoning behind hiding those details. After all, Aunt Emma paid for her shares, might as well hide the details, delays and imperfections in the system, and just pretend that she owns the shares already. The actual transfer will happen in the background, all will balance out, and she doesn't need to worry her head with all that. Ain't life grand, when the system just makes things work in the background, and you don't even have to know when the actual transfer happened or how?
Well, yes, except when it fails. The more obvious way is when you still have the IOUs, but the person owing them to you just went out of business. Refco's fallout apparently left hideous numbers of IOUs out on the market, and nobody except the DTCC can tell which are real shares and which are IOUs. As long as the two are exactly the same for everyone else, it doesn't even matter if it was normal shorting (and Mr Investor is left holding the IOUs thinking they're real shares) or naked shorting (Aunt Emma is.) In both cases, some duplicate shares are left on the market, and are screwing not only the companies, but also the individual investors. But then there's obviously also the situation where the system is gamed and IOUs are just left around to accumulate, at either end, pretending they're real shares.
I just can't see how or why that kind of a system is even legal.
A polar bear is a cartesian bear after a coordinate transform.
True, and I was mostly talking about the big financials. I have friends who are currency traders and they are doing fine, accept that their leverage has been cut back quite a bit. Currency trading usually relies on that leverage, but they are making it work.
Worrying about a GD style meltdown at this point is a little late. Where was Bernanke when FNM and FRE were going to town buying up subprime loans? Where were they when CA, FL, and others had house prices going up 20%/year b/c of not just lax lending standard, but no lending standards at all? Wait, money was being made to the tune of Billions of dollars for all their buddies so it's okay to look away. I'm no economic genius, but it wasn't hard to see years ago what the end was going to be.
You're correct there. I stand corrected. The dividend is paid by the short seller to the firm that loaned them the stock to sell. I'd forgotten that, but a short seller is working on a short time period, in terms of the deadline for closing out the short sale. I never paid a dividend out because I was timing things. and I was using the options mechanism, so I was participating ONLY in the movement of the stock price, up or down, from the point at which the stock was valued on the Market at the time of the sale or purchase of an option.
What we don't often consider is this, in options: On the date of payment of a dividend on a stock (the ex-dividend date), the price of the stock, technically drops by the exact amount of the dividend. These dividend dates are already factored into the price of the call and put options, BUT, if the stock is moving in price, against the interests of the seller, then the buyer may exercise the options earlier (right before the dividend date). However, the value of the options contract also drops on the ex-dividend date.
when I was working with options we were always cognizant of dividends, not because they cost much, they have little effect, actually on option prices, but because they impact the psychology and 'plans' on the buyers' end. What it all means is that I was never paying dividends to anybody, when using options to participate in the movement of stocks or Indexes, but i would 'shop' for options that included upcoming ex-dividends in their pricing, of course. Like i mentioned yesterday, it all required paying a lot of attention to factors besides my feeling, or beliefs, about underlying values of the company being considered for a short. That goes for before-the-decision to purchase or sell, and every day of the time period where i was on the hook for various options.
I would have to look into straight short sales of stocks, as opposed to Options, in order to find differences in the rules and mechanisms for pricing. I preferred options because of the huge leverage. On a short term deal (options contract, with an expiration date) it was a lot cheaper to spend $150-400 or so to participate in the rise or fall of 100 shares, that it would have been to borrow, or buy, the underlying shares at 100 times the value of one share. very risky, but a much wider risk/reward ratio, also. And at a far cheaper point of entry into the market in the stock.
Again, as far as dividends and interest rates, and anything else that could affect the stock's value... those factors are priced in to the current 'bid/ask' on the option contract, and the effect of that pricing-in (the 'cost' in other words) was compared to my own fair market assumptions. A wide gap meant do not consider, whereas a smaller gap meant: more attractive.
Options are really the way to go, if one already holds stocks, individually or in mutual funds, etc. Because the prices of the options contracts are so closely tied to the underlying values, an investor can use them in two very straightforward ways: To take advantage of a rise in the value of their holdings, without having to close out their positions in the held stocks, OR, to use the option as insurance, by paying a premium, upon purchase for the option, (That premium being the 'most' one stands to lose) that only loses value if the underlying stocks rise. Of course the offset in the lost premium might negate the 'paper' profit in the rise in value of the person's holdings, but the holdings, if not sold, have in fact risen. So, it's like insurance that way.
I love Warren Buffet, too. But he does not look at the market and simply buy into the market 'dips', as was inferred by the person I responded to yesterday. he's knows far better than to do that, because many of us realize that sometimes, these 'dips' are trying to tell us something, and buying into them, based on some sort of broker-advocated 'dogma' can be fata