Replies to post #12536 on Hyperdynamics Corp (HDYNQ)

[TOB]

The effect of short-selling on the markets is a hotly debated subject and nothing to do with "Economics 101", rather it is stock market dynamics which is an intricate subject and a matter of controversy among professors of economics, regulators and market participants and observers.

Often the debate is centred around naked short selling, and that too is highly controversial.

For HDY and the markets in general, short selling adds liquidity which gives buyers more shares to buy. Every sell of an HDY share has buyer and every buy of HDY has a seller.

At present, HDY is artifically diluted by in excess of 19M shares.

That the HDY price trend is the dominant factor is made clear by the nearly 100% dilution of HDY on the way up when HDY went far beyond simply selling short an issued share, rather HDY introduced and sold entirely new shares increasing the float. That was far more than "19M shares", yet the HDY share price continued to rise. When HDY later did the same thing and added more shares through dilution during the down-trend, we saw the opposite effect and the shareprice continued to decline.



This suggests market trend is the dominant factor, not the increased liquidity through the added selling, be it a short sale of an existing share or even adding new shares to sell.

Here for example is the opinion of Professor of finance Arturo Bris on SEC short selling bans.

But Bris argues short-sellers provide vital information for determining the true value of a stock. “There is a group of investors that are now excluded from the market, so their information cannot be bound into prices,” he says. “The short-selling ban has made the market less liquid and less efficient.”

He adds that if there is no negative pressure on a stock from short-selling, it will keep rising unchecked, resulting in over-valuation. “The point myself and many others have made is that short sales prevent bubbles,” he said. “There is very strong evidence showing, for instance, that one of the reasons for the real-estate bubble is that you cannot short real estate.”

Short-selling of HDY during the uptrend did not stop the bubble to $7.78 which later burst. Rather it provided "fuel" for buyers that increased liquidity and to the extent that added selling can provide some resistance, perhaps kept the HDY bubble from becoming even more extreme.

This articulates my view well, which as I say is a subject of "debate" as it's not science and certainly not market dynamics 101.

Bris accepts that short-selling introduces selling pressure into the market, only to spark exactly the same buying pressure three days later. “Short sales predict market drops,” he says. “Short-sellers have better information. They are typically well-informed investors because they are sophisticated institutions.”

I note there is the frequent argument that short-selling helps add strength to rallies when the trend reverses and many HDY investors appear to be looking forward to a "short selling squeeze".

Increased selling of HDY and the markets in general is a indication of market sentiment and often coincides with the trend.

Whether short selling guesses the HDY price movement incorrectly or correctly, it adds liquidity to those who wish to buy and can thus have a varied effect ranging from;

1. Resistance holding back a bubble,

2. To an indication of negative market sentiment which is what really controls a down-trend, investor sentiment.

3. To accelerating rallies and adding to the buy side when short sellers cover.