Misplaced Pages

This is an old revision of this page, as edited by Samiharris (talk | contribs) at 01:21, 21 March 2007. The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Short-and-distort is illegal stock market manipulation, intended to drive the price of a particular stock down.

Legal Shorting

Short-selling is a legal and legitimate stock market transaction. The short-seller believes a particular stock is overvalued, and bets that its price will go down. To do this, the short-seller borrows the shares from their broker and immediately sells them on the open market.

Later, if the share price does in fact decline, the short-seller goes onto the open market, re-purchases the shares owed to the broker and returns them, pocketing the difference in the two sales. This is called covering.

If the price instead goes up, the short-seller may have to scramble to purchase shares to return them to the broker before getting hit by a margin call. When a bunch of short-sellers are caught up in a scramble to cover their shares at once, they can add further momentum to a rising stock price. This is called a short squeeze.

Just as buying a stock and holding it long is a legitimate way to invest, conversely so is borrowing a stock and hoping its value goes down. There are several reasons for this. For one, investors whose shares are borrowed can earn some extra interest income when their brokers lend their shares to the short-sellers.

Secondly and more importantly, short-sellers who habitually trade short for a living provide the markets with more transparency and information. They will do extensive and legitimate research and due diligence on companies and industries, acting as a counter-balance to the often rosy or unrealistic predictions made by the companies themselves, or a media and a public caught up in a speculative frenzy such as the Internet bubble. Short-sellers were the first to expose to raise questions about Enron, for example.

Short-and-distort

However just as pump and dump schemes that artificially inflate the price of a stock through fraudulent and false information are illegal, so short-and-distort campaigns that release fraudulent or illegal information in an attempt to drive the price of a stock down are equally prohibited.

Examples of this could include releasing false press releases purporting to come from the company that announce disastrous results, posing as an SEC investigator on a message board, and planting multiple negative messages about a particular company under numerous aliases, attempting to create the illusions of a consensus of selling and fear.

Because short-and-distort campaigns play on fear and negativity, they are far more effective in a bear market or general stock market panic than in more normal market conditions. For this reason, short and distort campaigns are rarer than pump and dump schemes. For example, you will almost never see a spam e-mail or penny stock newsletter shill demanding you sell or get out of a particular stock. However they can be found on Internet message boards, where the shorts whispering campaigns can find its natural audience, those holding long shares.

It should not be confused with naked short-selling, which is a different if related subject.

External links

• The Short and Distort on Investopedia
• Short and Distort on Fraudguides

1. James Chanos (2002-02-06). "Anyone Could Have Seen Enron Coming". PBS Wall Street Week. Retrieved 2006-11-21. {{cite web}}: Check date values in: |date= (help)

• Proposed deletion as of 21 March 2007
• Stock market