No longer a dirty word: Retail investors discover ‘shorting’ stocks

The young trader must have known he would ruffle some feathers when he posted to the 56,300 members of Facebook page ASX Stock Tips Group: “How the people who talked sh-t on me shorting ZIP feel now?”

Within minutes of the March 15 post, other members of the group started criticising the post that in their eyes was in poor form because of the losses suffered by many members of the group following the buy now, pay later company’s dramatic share price drop. “Weird flex, but okay,” said one. “Hahaha pretty sh-t I’m down 20k. All good hooooold,” said another.

But some group members also fessed up on the post that they too had considered shorting shares in various companies or even had active short positions themselves. Others asked how it was possible and if they too could also short shares.

A little over a year ago “short selling” was a dirty word with Australia’s growing cohort of social media engaged retail investors.

Back then, these investors – many of whom were banking on the share prices of their investments rising to build their wealth – were openly discussing ways to bring down the institutional investors who were betting that shares in favoured companies, for example, GameStop, would fall.

But in recent months, things have started to change. After two frothy years the market has taken a turn for the worse and retail investors have begun to ask on Reddit, Facebook and Twitter about how to short a company.

Traditional short-selling is expensive and complicated for a retail investor. It involves borrowing shares that are then sold in the hope they can be bought back at a lower price and pocketing the difference. And you need to use a decent number of shares to make it financially worth it.

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So instead, investors are now exploring new ways to make money on share price falls and are using the term “shorts” to describe these methods. This includes using risky financial products, known as contracts for difference (CFDs), to bet on a share price falling. It also includes exploring the benefits of exchange-traded funds’ “bear market” products (known as Inverse ETFs) which are constructed by using various derivatives to profit from a decline in the value of an underlying benchmark.

Angel Zhong, a senior lecturer at RMIT University whose research specialties include retail investor trading trends, says Google search data shows that “CFDs”, “short” sales and “options” received more than a 50 per cent increase in discussion on wildly popular Reddit forum ASX_Bets this year.

“The recent Gamestop trading frenzy has further attracted retail investors’ attention and shifted investing culture to short-selling and the underlying strategy of making a profit by betting on the decline of asset values,” Zhong says.

Reddit’s ASX_Bets community has 90,600 members. The majority of members are long on shares and want share prices to go up. But the group’s moderators say some traders are beginning to explore how to make money on the downside or share price movements or how to hedge their bets.

“When it comes to money in falling markets. It’s hard to say that retail investors don’t have a right to make money in all markets,” says one of the group’s moderators, The_lordofruin. “The rich and powerful do, why not us? We’re busy making hay when the sun shines, why not grab the cow sh-t when it appears and at least make it fertilizer.”

The moderators also note that the interest is a reflection of the current state of the market, which while being far from a bear market is still not as hot as it once was.

“The reality is that when the markets are hyperinflated as they have been through this epic bull run, downside is inevitable. Any retail investor who recognises this and realises they can profit from it is simply becoming a better trader,” says one of the group’s other moderators, Taken82. The group’s third moderator, McF—ing, says shorting is an integral part of price discovery. “If some company can put out a report saying a stock is undervalued by half, while holding a position, why should I have a problem with someone doing the opposite?”

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Sebastian Arevalo, a 23-year-old law student from Perth, began taking short positions at the beginning of the pandemic.

“There was a lot of hype around … shorting companies that were up to these crazy highs that would likely be affected by COVID,” he says.

His first short –New York-listed Delta Airlines – gave him “shorting fever”, but it soon caught up to him. He attempted to short Flight Centre, but the stock went into a trading halt and forced his trading account into liquidation. He says he’s learnt from his early shorts and, after quitting his part-time job at Woolies, invests as his main income source.

Scott North, 32, is an active member of ASX Stock Tips Group Facebook page and has also shorted stocks as part of his investment strategy. The Sydneysider posted earlier in the Facebook group about shorting tech darling Brainchip.

“I thought it was overvalued, the tech sector as a whole was selling off and it had such a retail following and very little insto support”, says North, who trades his own capital full time. But North says he’s also, at other times, bet that Brainchip’s share price would go up. “Two weeks ago I went long Brainchip and held for a week.”

North uses CFDs to bet on the share price of a stock falling but he’s alive to the risks of these products which allow investors to magnify their bets by up to 20 times the actual value. Using CFDs to short stocks was particularly popular during the global financial crisis in 2008 and 2009 when the market rout caused retail and professional investors to look for ways to make money off the market bloodbath.

But while these instruments can provide big windfalls if a bet pays off, they can also see an investor losing more money than they put up on the original punt if the bet is wrong. “Most shorts are leveraged, so I think not everyone should use them – but people who understand markets should,” North says.

Alex Vynokur, the chief executive of exchange traded fund specialists BetaShares, says most retail investors are looking for ‘long positions’ or longer-term investment products rather than short funds.

“The net flows across the Australian market overall is in excess of $3 billion in total and only $70 million is in short funds,” he says.

“And those are people who are really looking to mostly protect their portfolios against downside, well basically against further downside.”

CFD providers also note that the rate of investment in short positions, while growing compared to two years earlier, is also a lot smaller than those clients who look to place long punts on share price movements.

IG Markets, which is headquartered in London but has a large Australian presence, has found traders are discovering that CFDs offer more than just leverage.

“We are now starting to see younger retail investors recognise other aspects of a CFD product. They offer traders the flexibility to go long and short, to access and trade multi-asset classes, and the ability to offset potential losses through hedging of their portfolio,” says Kevin Algeo, IG chief executive for Asia Pacific and Africa.

This increase is also tied to market or geopolitical or economic events, Algeo adds. “We tend to see shorting increase on equity CFDs during event periods, such as reporting season. When it comes to macro events, we tend to see an increase of shorts on broad-based indices such as the ASX, the Nasdaq or the S&P Indices.

A spokesperson for another major provider of CFDs and a significant advertiser of the shorting capabilities of the financial instrument, CMC Markets, says: “Interest in downside positions varies from time to time and is dependent on several factors including market volatility, which has generated more interest in recent times.”

The corporate watchdog is aware of the change in mood in the social media forums that discuss stock tips.

“Research shows that there’s very much a long bias for retail investors whether its shares or CFDs,” says Calissa Aldridge, senior executive leader market supervision at the Australian Securities and Investments Commission (ASIC).

“But we’ve also seen the social media chatting about shorting, and we’ve noticed an uptick in advertising by the CFD issuers on how you can short to take advantage of the falling market,” she says.

But Aldridge says while ASIC’s recent intervention in the CFD market to limit the amount of leverage available to retail investors – for shares it has reduced from as much as 500 times the amount invested to just 20 times – curbed investor losses, hundreds of millions of dollars is still torched each quarter on CFDs sold by Australian issuers.

“CFDs, when appropriately used, are actually a legitimate tool for managing risks,” she says. “They are still very, very risky products,” she adds.

with Anthony Segaert

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