Why do people run smear campaigns

Short and Distorted: Manipulation of Bear Market Stocks

A less publicized and more sinister version of short selling can take place on Wall Street. It is called “short and distorted” (S&D). It is important for investors to be aware of the dangers of S&D and how to protect themselves.

There is nothing inherently wrong with short selling, which is permitted under the Securities and Exchange Commission (SEC) regulations. However, the short and distorted sellers type uses misinformation and a bear market to manipulate stocks. S&D is illegal, as is its counterpart, the pump and dump, which are primarily used in a bull market.

The central theses

  • Short and Distort (S&D) refers to an unethical and illegal practice of shorting out a stock and then spreading rumors to bring the price down.
  • S&D traders manipulate stock prices and often run smear campaigns online to lower the price of the target stock.
  • A short-and-distorter program can only be successful if the S&D dealer has a certain level of credibility.
  • A "short and distorted" is the reverse of the more popular "pump and dump" tactic.

Short Selling vs. Short and Distort (S&D)

Short selling is the practice of selling borrowed stocks in the hopes that the stock price will soon fall so that the short seller can buy them back at a profit. The SEC made it a legal activity for several good reasons. First, it provides more information to the markets. Short sellers often conduct extensive, legitimate due diligence to uncover facts that support their suspicions that the target company is overvalued. Second, short selling increases market liquidity as it satisfies the supply component of the supply / demand paradigm. Finally, short selling also offers investors who own stocks (long positions) the opportunity to generate additional income by lending their stocks to the short positions.

S&D traders, on the other hand, manipulate stock prices in a bear market by taking short positions and then using a smear campaign to lower the price of the target stock. This is the reverse of the "pump and dump" tactic, in which an investor buys stocks (goes long) and provides false information that causes the price of the target stock to rise.

In general, it is easier to manipulate stocks to fall in a bear market and rise in a bull market. The Pump and Dump is perhaps better known as the Short and Distort, in part because of the inherent bullish bias built into most stock markets and media coverage of the expanded US bull market that is generally at play was most of three decades.

The main goal of an S&D trader is to profit by short selling a stock before the stock is publicly smeared. The theory is that scaring investors in the stock will cause them en masse flee, which causes the price of the stock to fall. A short-and-distorter program can only be successful if the S&D dealer is credible. As a result, they often use screen names and email addresses that imply that they are affiliated with reputable companies like the SEC or the Financial Industry Regulatory Authority (FINRA). The aim of their message is to convince investors that regulators have serious concerns about the company and that they are contacting investors in the stock as a gesture of goodwill.

Short and Distort traders clutter message boards, making it very difficult for an investor to verify claims. "Get out before it all comes crashing down" and "Investors wanting to enter a class action lawsuit can contact ..." are typical passages, as are their projections of $ 0 stock prices and 100% losses. Any person or organization attempting to contradict their claims will be the target of their attacks. In other words, the market manipulator will do everything in its power to keep the truth from getting out and push the price of the target stock down.

Movies like Wall street (1987) and Boiler Room (2000) have brought this type of stock market manipulation to the fore and helped educate investors about the risks of the market game.

The net effect of short and distort

When a “short and distorted” maneuver is successful, investors who initially bought stocks at higher prices sell at low prices because they mistakenly believe that the stock's value will go down significantly. This selling pressure lowers the stock price and allows S&D traders to cover and secure their profits.

During the chaos that brought about some major bankruptcies like Enron in 2001 or Nortel in 2009, investors have been more vulnerable than usual to this type of manipulation of other stocks. During a downturn, the first appearance of inappropriateness can easily lead to investors run into the mountains. As a result, many innocent, legitimate, and growing businesses are at risk of getting burned and taking investors away.

Detect and prevent short circuit and distortion

Here are some tips to avoid getting burned by a short and skewed scheme:

  1. Don't believe everything you read - check the facts.
  2. Do your own due diligence and discuss it with your broker.
  3. Mortgage your stock - take it off the street name to prevent short sellers from borrowing and selling.

The best way to protect yourself is to do your own research. Many stocks with great potential are ignored by Wall Street. Doing your own homework should make you feel much more confident about your decisions. And even if the S&Ds attack your stocks, you will be better able to spot their bias and be less susceptible to their false claims.

How to Identify Good Research

To help you identify the key features of a good research report, ask yourself these questions:

1. Is there a disclaimer?

The SEC requires that anyone who provides investment information or advice be fully disclosed of the nature of the relationship between the information provider (the research analyst) and the company that is the subject of the report. Unless there is a disclaimer, investors should ignore the report.

2. What is the nature of the relationship?

Investors can get good information from articles published by investor relations firms, brokerage houses, and independent research firms. Using all of these sources will provide you with information and perspectives that will help you make better investment decisions. However, you need to evaluate your conclusions in light of any compensation that the information provider received for the report.

Can a Wall Street analyst, who is also partially offset by the performance of the stock in their analysis, achieve his goal as a fee-based research firm that pays a monthly flat rate with no performance bonus? Each investor has to decide for himself the answer to this question. However, both types of reports are typically available to evaluate a potential investment. The type of compensation provides information that you can use to evaluate the objectivity of a report.

3. Is the author identified and contact information provided?

Generally, if the author's name and contact information are included on the report, it is a good sign as it shows that the author is proud of the report and provides an opportunity for investors to contact the author for more information.

Research reports from reputable brokerage firms post the author's name and contact information at the top of the home page. If the author's name is not provided, investors should be very skeptical of the content of the report.

4. What are the author's credentials?

Letters after a name don't necessarily mean the report's author is a better analyst, but they do indicate that the analyst conducted additional research to improve his knowledge of finance and investing.

5. How does the report read?

If the report has grandiose words and exclamation marks, be careful. That's not to say that good analysts are boring, but good reports don't read like a tabloid headline. A serious analyst would never use exaggerations like "sure things" or "rockets" and would never suggest that you mortgage your home to buy a stock.

Objective research reports provide reasoned arguments for buying or selling a stock. Key factors such as management skills, competitive advantage and cash flows are cited as evidence of the recommendation.

6. Is there a profit model and a price target with reasonable assumptions?

The bottom line for any recommendation is the profit model and price target. The assumptions on which the earnings model is based should be clearly stated so that the reader can assess whether the assumptions are reasonable. The target price should be based on valuation metrics, such as B. the price-earnings ratio (P / E) or the price-book ratio (P / B), which are also based on reasonable assumptions. In general, if a report lacks these details, it can be assumed that the report has no solid foundation and should be ignored.

7. Is there ongoing research reporting?

The commitment to provide ongoing research coverage (at least one report per quarter for at least a year) shows that there is a firm belief in the fundamental strengths of the company. Providing this type of coverage requires a lot of resources. A company that offers ongoing coverage is therefore a sign that it rightly believes in a stock's long-term potential.

This is in contrast to one-time reports that are used to manipulate stocks. In these cases, supposed research firms will suddenly publish "reports" on stocks that they have never reported on before. In general, these reports can be identified as attempting inventory manipulation as they do not contain the attributes of a legitimate research report, as discussed above.

The bottom line

Unscrupulous S&D tactics can result in investors holding hands. Fortunately, high quality stock reports are relatively easy to spot and don't need to be confused with the stock manipulator's dramatic, false claims. When analyzing any stock, stay calm and avoid getting caught up in any online hype. By carefully and objectively analyzing potential investments, you can protect yourself from falling victim to S&D players - and make better stock selections overall.