Short selling has been in the news quite a bit recently as a result of this whole “meme stock” debacle. With the army of Reddit traders creating short squeezes in GameStop, AMC Theaters, and a few other companies the practice of short selling in general is being questioned.
This is partly because the media is framing this as a David vs. Goliath story. A group of underground Reddit traders bully the big bad hedge funds of the world by creating a short squeeze that sends share prices soaring.
Hooray for the little guy!
This storyline isn’t entirely accurate though. Melvin Capital made a lot of news for being short, but many other professionals and hedge funds made a lot of money benefiting from the short squeeze by being long. There’s a report that Blackrock pulled in $2.4 billion on the trade.
Nevertheless, David vs. Goliath is an easy story for people to get behind. And since it’s easy to root against a villain, short selling is coming under fire because that’s the side Goliath was on.
Short selling as a practice captures the financial spotlight every few years – usually during times of market turbulence. It’s often used as a scapegoat for corrections, which nearly always leads to calls for some type of short selling ban or suspension. That argument doesn’t have much merit, but the discussion attracts strong opinions anyway. Elon Musk, for example, is notoriously in favor of outlawing short selling.
I’ll explain my take on short selling in this post.