Stock market short selling ( what a cool way to make money )

Question

Hi
This was on BBC internet today...
There are also proposals for new guidelines on short selling, including requiring managers to regularly disclose information on important short positions to national authorities.
Short selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.
The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.
On Monday, a key committee of Euro MPs backed a directive that may lead to greater supervision of the hedge fund industry.
Finance ministers must now negotiate with the European parliament over the legislation. Talks will begin on 31 May before a final vote in July.
If I remember right...in 1971 at Merrill Lynch Pierce Fenner and Smith...this is what happened:  Keep in mind there was only one "baby bond" or baby stock house...where you could have an account for less than about $10,000...in other words, all accounts were institutional, corporate etc...not individuals unless they were fairly wealthy....certainly not joe blow from next door.  Right off the bat I gotta say I can't cover "who owns the exchanges - the deregulation of banks and the effect on trading and underwriting...hedge funds and so on....it's very different today than it used to be...
But anyway, this is a day in the life of Bob The Buy-In-Clerk at Merrill in 1971...
Bob looks at a computer printout of fanned pages with a list of failed trades...
What's a failed trade ?
You make a trade on the exchange...buying 10 shares of ATT at $10---   Being the seller.  You are a broker ( Kidder and Peabody ).  You have a customer that wanted to sell the ATT.  You do that for him.  You get a commission.  You have the shares in your vault because your customer didn't want them in his house. You sold to Merrill because THEY have a customer that wanted ATT.  Merrill will keep the shares in their vault so the customer doesn't have to keep them in his house.
Simple....BUT NOW WHAT ?  You have 5 days ( 5 business days ) to complete the trade.  5 Days for Kidder and Peabody to get a guy on a bicycle to run the 10 shares over to Merrill and hand them over through a window that looks like a bank teller's window....  ( THIS IS CALLED OVER THE COUNTER ...the window...which is where that term comes from re: trading between brokers that doesn't go through the exchanges )
If somebody goes to get the ATT from the vault at Kidder Peabody and discovers they are not there then what ?  Perhaps there was a death in the family of the customer and the shares are being broken up according to the estate settlement / last will ......like a piece of paper that says 30 shares on it needs to get broken into 3 pieces of paper that says 10 on them...This is called legal transfer...
Point being....whoops, the shares are at the bank being reprinted and the old one destroyed...( bank being the underwriter with the plates to make prints ) so you can't deliver the stuff.... After 5 days of not getting the ATT from Peabody it becomes a FAILED Trade...and Merrill is now within it's legal right to buy the shares it needs from someone else....another broker.....
If the price has gone down Merrill can buy the 10 shares and still collect ( from Peabody ) the money (difference) paid originally. Merrill keeps the difference, not their customer .......If the price has gone up Merrill still collects the difference but since you had to pay more you don't have any left over to keep for yourself....you just get the shares to your customer.....So buying and selling on failed trades ( a very common practice since it's unavoidable for legitimate reasons ) was the genesis of "selling short"......
Everyone knows you have 5 days to make a trade good.  Everyone knows that with credit from the broker and some nice deregulation..(naked short sell....you don't need to actually own the stock at all !!!  Like a miracle !!! Sell stuff you don't even have ....How cool is THAT ! ).you can make a trade (SELL ) betting the price will go down within 5 days...then buy it for less than you bought if for !   Like finding money growing on trees !!!!!
5 days was in 1971...  I have no idea how much time people have now in that market, and if it's over the counter it's not even going through the SEC dictated 5 day thing....so I'm out of luck about knowing much about what goes on nowadays....and I don't miss it a bit...
What used to be a function of making good on trades has turned into a betting system all it's own....not to make good on trades, but just to make the money tree shake....and so there's the down tick rule and up tick rule...haha....
Now the result to someone like Mr. Long Term investor like me...of short selling...and result to the Doggy Biscuit Company Inc....
I have stock in Doggy Biscuit...it's a nice company...with some cash on hand but some debt as well...it has a line of credit from a nice big bank. It's line of credit is based on it's assets ( worth )...It has a few shares of this and that on it's books ( other doggy products it has invested in )....
There is some bad news about some distribution system ( UPS goes on strike and now many companies like Doggy Biscuit can't get certain stuff to make the biscuits and has trouble delivering said biscuits...)...and some people who hear about it figure they will sell Doggy Biscuit short...yipee...almost guaranteed money off the money tree !!!!  Share prices go down....Doggy Biscuit can't understand why it's going down so fast and so far !!!  This isn't a deal breaker...the strike will end, the dogs will get the biscuits....it's just a little burp in the quarter....but Doggy Biscuit, thanks to all the many short sellers ( yippeeee  ....free money !!!! ) Doggy Biscuit tanks out losing 50% of it's worth in a couple days.  It's line of credit shrinks.  It gets called ( margin call ) on some debt and has to sell it's stock in the other doggy products at a loss....and Doggy Biscuit is on the ropes.  Mr. Long Term investor like me now has Doggy Biscuit stock worth about one half what I bought it for....I have lost tons of money on the share price....
That is the wonderful world of short selling.... lets do more of it !!!!!!!!!!
Rod

Answer 1

More cool info about the marketplace:
http://www.investopedia.com/university/futures/default.asp
Found the above link tutorial on futures market...very good tutorial...
below is a segment of one section that applies more or less to my amazement over the proposed idea of a futures market in motion pictures...
After you read it , think of the possibilities of "influencing" the marketing and success / failure of a particular movie ( with movie stars...a rich source of material for publication ---news items etc )....  and or the overall health of a studio ( distributer - independent productions etc )  It boggles the mind...The effect of piracy in certain countries etc...
How far does the futures market for the price of grain, for example ( leading to the spot market and actual delivery of commodity ) skew off into the realm  of whacky speculation when considering world wide distribution of a movie making a certain profit or not....   and who in the world could possibly oversee that kind of derrivative or settle disputes ?
Rod
portion of tutorial below
Speculators
Other market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the futures market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. Hedgers want to minimize their risk no matter what they're investing in, while speculators want to increase their risk and therefore maximize their profits.
In the futures market, a speculator buying a contract low in order to sell high in the future would most likely be buying that contract from a hedger selling a contract low in anticipation of declining prices in the future.
Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by offsetting rising and declining prices through the buying and selling of contracts.
Trader
Short
Long
The Hedger
Secure a price now to protect against future declining prices
Secure a price now to protect against future rising prices
The Speculator
Secure a price now in anticipation of declining prices
Secure a price now in anticipation of rising prices
In a fast-paced market into which information is continuously being fed, speculators and hedgers bounce off of - and benefit from - each other. The closer it gets to the time of the contract's expiration, the more solid the information entering the market will be regarding the commodity in question. Thus, all can expect a more accurate reflection of supply and demand and the corresponding price.