Call/Buy Options, Shorting, etc

[racqueteer]

I'm not sure this is entirely off-topic, but I'm also not sure where it belongs; so...

Here's the thing:  If stocks, funds, etc, are investments, and THAT is what the intent of "the market" IS, then why is speculating with stuff you don't actually OWN ok?  If you want to speculate and put your own money at risk, then I see no problem, but why should 'buying and selling' promissory notes be ok?  It simply puts big investors in charge of the market and allows them to sway the outcome.  If INDIVIDUALS pool their money to have a similar impact, that's collusion and illegal.  IF, otoh, they pool their money under the auspices of an agent to do exactly the same thing, then THAT'S ok!?  Any system with that many contradictions is fatally flawed, imo.  If you don't own it; then you can't 'sell' it.  If you don't have the money to buy it; it doesn't belong to you.  Seems straightforward to me.  What am I missing here and why is it 'better' the other way around?  Inquiring minds want to know...

[yogibearbull]

As for derivatives, toothpaste is out of the tube and it is hard to put it back.

Remember that futures markets were the only markets available for most commodities. These have coexisted with stock and bond markets and may even be older. Interesting thing about futures is that long and short positions have almost equal significance.

Use of futures, and then options, for stocks was only in 20th century but that is done. However, margin and shorting for stocks existed even before that.

Derivatives is a broad term captures all this activity well.

I think that intermarket coordination and regulation of derivatives are still quite elementary and that where efforts should be directed. 

In terms of market system failures,

1929 and 1930s were the failures of margin and shorting. 5% margin turned out to be highly inappropriate for stocks.

1987 was failure of portfolio insurance. That produced cascades of automatic selling as markets fell.

2008-09 was failure of intermarket coordination. When trading was halted in stock exchanges, it continued in futures exchanges.

I am sure there will be a catchy phrase later for the current app-trading frenzy but, sadly, a huge market failure has to occur first.

[chang]

racqueteer: Personally I have no appetite to borrow money to buy (leverage) or sell (shorting). But from a theoretical standpoint, I'm not sure these are inherently bad. Shorting can help to keep the market efficient by nudging stocks in a bubble back towards their "fair" value. That helps invested capital flow to where it will be most productive, which is the tide that lifts all boats.

[steadyeddy]

I personally am "long only" in my investments. If everyone is long only, the liquidity of the investments might not be as high as if people go "short" as well. I see the derivative business as a liquidity enhancer for the market.

Anything in moderation is healthy... but occasionally things get out of moderation and everyone pays a price for that.

Quite frankly, the removal of transaction costs for trading acts like a lubricant to feed the frenzy of stock trading not to mention the available free time/money in the covid induced isolation/social distancing.

[Chahta]

Fund managers do the same thing at times.

Smart money (them) uses dumb money (us) to achieve their goals most of the time. The only reason we make money is because we are along for the ride. If the GME shorts caused the Robinhood investors to lose, would we even know about it?

[steadyeddy]

Jan 31, 2021 12:33:11 GMT Chahta said:

Fund managers do the same thing at times.

Smart money (them) uses dumb money (us) to achieve their goals most of the time. The only reason we make money is because we are along for the ride. If the GME shorts caused the Robinhood investors to lose, would we even know about it?

So true. GME news is prominent because the small guys (via social media) taught the big guys a lesson. Hedge funds have been robbing the small guys for a long time.

This GME episode (which is not yet complete) is making everyone understand how the system works including the fact that Robinhood itself (being owned and funded by hedge funds) may not be focusing on the best interests of the small guy.

WSB phenomenon is likely to accelerate through other social media and as long as the 'short position' information on weak stocks is available this will continue. Until SEC puts some kind of barriers on it.

[yogibearbull]

There are news reports that the number of 10,000-50,000 share block trades in GME point to some large investors piggybacking on retail trades. So, in the end, it may just turnout to be a war among hedge funds with the winners exploiting app-trading data. Insider insights?

It is unclear if margin & trading restrictions are being applied uniformly for retail & institutional investors. Some of it is related to the trade clearing mechanism via DTCC that may affect small brokers more than large brokers.