In recent years, a surge in online trading applications has introduced new financial instruments, such as short selling, to ordinary people. But what is the driving force behind this trend?
What Is Short Selling?
With 18 years of experience in the financial markets, the BBC reports on Peter Roscoe, who candidly shares his journey on his YouTube channel, where he talks about his trading wins and losses.
Lately, he has observed a growing trend in the proliferation of online trading apps, which are equipping newcomers with innovative tools to engage in trading.
Mr Roscoe has noticed that short selling, in particular, has seen a noticeable rise in popularity.
Shorting a stock is different from the typical trading approach, involving the borrowing and immediate sale of a stock with the anticipation of its value decreasing. If this prediction pans out, you can repurchase the stock at a lower price and pocket the difference.
Defenders of short selling argue that it serves a vital role in the financial markets, contributing to the discovery of an asset’s true value and, at times, uncovering fraudulent activities.
Nonetheless, it’s a high-risk trading strategy that, until recently, was something that only professionals could do.
However, with the emergence of online trading platforms, amateur investors can now do it in seconds – something Mr Roscoe has expressed his concerns over.
“I get messages all the time. ‘Hey, I want to try this day trading shorting thing.’ In the comment section, emails – minimum one a day. And I always say, ‘Look, are you employed? Don’t do it.”
“Unless you can commit four to five hours a day, Monday through Friday, and watch the market, just watch these tickers go up and down for six months, you’ve got no chance. And by the way, after that, there’s a good probability you’ll still fail.”
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“The rise has been phenomenal”
Despite warnings from individuals like Mr Roscoe, many have plunged into short selling, and the widespread adoption of online trading applications.
Dan Moczulski, UK managing director of E-Toro, has seen shorting on its platform rise dramatically over the past three years. But why?
“The rise has been phenomenal,” says Mr Moczulski.
He says the Covid pandemic played a key part. “A lot of people were working from home, and so it allowed them to look at different ways of making money.”
He also thinks the culture around money has changed in the UK since the pandemic.
“People didn’t talk about their finances – maybe it was just house prices that people would talk about at a dinner party. Now people are very happy to share their own stock portfolio, they’re happy to share their wins and their losses, which is something that just didn’t happen five years ago.”
Furthermore, social media is now full of big-name short sellers and amateur traders loudly pointing out what stocks they think are destined to fall.
A New Kind of Trader
With this rise, a new kind of trader has won newfound prominence. That’s the activist short seller: a trader who doesn’t just bet against companies hoping their share price will fall, but who does so by publishing detailed research with brash headlines.
One of the most prominent is Carson Block from the firm Muddy Waters. Many times, firms like his will accuse companies of outright dishonesty, betting that their stock will fall when they outline their concerns.
“The gap in the market that we fill is to say, hey, this management has been bamboozling you investors or misleading you,” says Mr Block.
“And here’s what’s really going on. And this is why we’re short. So from that perspective, what we are, as activist short sellers, are providers of transparency to the market.”
Activist short sellers are divisive. By talking down companies, some accuse them of distorting the market.
“A lot of people think that the day that we publish and something goes down a lot that we’re high-fiving each other and standing on desks,” says Mr Block.
“No. The more something drops on day one, the more I think ‘OK – they’re going to come after me, I haven’t heard the last of this’. So there’s really very little celebration on the days where it’s going well.”
All-in-all, it’s a very stressful way to make money.
“It’s a profession that has burned most of its practitioners out within a few years, and I’ve been doing it 13 years, and it’s definitely putting miles on me,” says Mr Block.
Peter Roscoe agrees.
“If we would go on my first 100 shorts, I’d probably say I won 30% of them and lost 70%. You are going to be wrong quite a lot of times”, explains Mr Roscoe.
So, even for a seasoned trader like Mr Roscoe, that’s only a 30% success rate. No wonder he advises amateurs against diving head-first into short selling on online trading apps.
The paramount consideration is that traders are well-informed about the endeavour they are undertaking. Should they choose to enter the trading arena, it is essential that they dedicate ample time to hone their skills in short selling and the broader realm of finance.
