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What is short selling and why does the DoJ care?

FILE PHOTO: The crest of the US Department of Justice (DOJ) is seen at their headquarters in Washington, DC
FILE PHOTO: The top of the U.S. Department of Justice (DOJ) is seen at their headquarters in Washington, DC, U.S., May 10, 2021. REUTERS/Andrew Kelly/File Photo

December 14, 2021

(Reuters) – Short selling, a bearish investment practice, has been the target of an extensive criminal investigation by the US Department of Justice.

The DoJ has issued subpoenas examining the short selling of hedge funds and their relationships with research firms that publish negative reports on certain companies, according to three people familiar with the matter. with this problem.

Short selling becomes the focus of the spotlight in 2021 as a flurry of retail investors take to social media to criticize short sellers’ lack of regulation and the devastation they can cause to with company valuation. They also used social media to urge other investors to buy stocks short during the crusade to teach the short sellers a lesson.

WHAT IS SHORT SELLING?

Investors ‘short’ stocks betting that the stock price will fall. They borrow stock to sell immediately and then wait until the price drops before buying back the stock at a lower price. They pocket the difference when returning the shares to the lender.

WHO LIVING OUT OF STOCKS AND WHY ARE THEY DOING IT?

Borrowed stock may come from a broker’s inventory, or from customers who allow brokers to lend their stock. Until the stock is returned, the short seller pays interest to the lender. If the price goes up instead of down, the lender will have a more valuable stock.

WHAT IS SHORT INSURANCE?

An investor who has sold borrowed stock must at some point buy back that stock to pay back the lender. The act of buying back shares to cover or close a trade is called short selling.

WHAT IS SHORT SIZE?

To make a profit, an investor who has sold a stock short must be able to buy it back at a lower price. Sometimes, a spike in the price of a short-sold stock can force the short seller to buy back the stock at a higher price to limit losses. When there is a large amount of demand from short sellers looking to get out of the bet and this pushes the stock price even higher, the result is what is known as a short squeeze.

Some short sellers, such as Melvin Capital, rushed to buy back the GameStop shares they had shorted when, in late January, prices spiked as retail investors flocked in. In the GameStop example, the “capture” is said to have exacerbated the stock’s returns. [USN]

SHARE THE IMPACT OF THE SHORT TERM?

It’s hard to know how much of the day’s trading is the result of short selling or long buying – when investors buy a stock in the hope that its price will go up. However, if the volume traded in a session outstrips the number of shares sold short, then that day’s price action cannot be fully explained by short selling.

SHORT-TERM SALES RISK

Short sellers can face huge losses, as there is no limit to how high the stock price can go. They will have to pay the market price to cover their bets. Another risk for short sellers is stock availability, as short sellers must return the same shares they borrowed, even if less is sold.

MEETING REPORT

Some short sellers were able to predict the price drop by examining the company’s operations and finances for flaws. But they are often criticized for making negative reports about stocks they have short sold.

Quinton Mathews, who publishes research online under the pen name Rota Fortunae, reached a legal agreement in June to pay Farmland Partners Inc “multiple” of his profits from betting on shares of the company. after admitting errors in an article that wiped $115 million off the Market Value of Farmland in 2018.

However, longtime short-seller Jim Chanos, at Kynikos Associates, was vindicated for shorting now-defunct Enron Corp stock before accounting irregularities began to surface on Wall Street late in year 2001.

THINGS WE DON’T KNOW ABOUT SHORT SELLING

While long-term investors submit quarterly reports to US regulators revealing a detailed snapshot of their stock holdings, short sellers have less stringent regulatory scrutiny. a lot of. In a review of this year’s stock-meme frenzy, the Securities and Exchange Commission staff member said, “Improving reporting on short sales will allow regulators to better track these dynamics”. Disclosure reform is currently on the agenda at the SEC.

(This story corrects the data line)

(Reporting by Sinéad Carew and Saqib Iqbal Ahmed; Editing by Dan Grebler)

https://www.oann.com/what-is-short-selling-and-why-does-the-doj-care/?utm_source=rss&utm_medium=rss&utm_campaign=what-is-short-selling-and-why-does-the-doj-care What is short selling and why does the DoJ care?

Bobby Allyn

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