Shorts and distortions: bear market stock manipulation

A less public but more sinister form of short selling may occur on Wall Street. It is called “Short and Distorted” (S&D). Investors must be aware of the dangers of S&D and know how to protect themselves.

There is nothing wrong with short selling, which is permitted by the regulations of the US Securities and Exchange Commission (SEC). However, short sellers of the “short and twist” type use misinformation and bear markets to manipulate stocks. S&D is illegal, and its corresponding pumps and dumping are also illegal, mainly used in the bull market.

Key points

  • Shorting and Distortion (S&D) refers to an unethical and illegal practice that involves shorting a stock and spreading rumors in an attempt to lower its price.
  • S&D traders use defamatory activities (usually online) to manipulate stock prices to drive down the price of target stocks.
  • Only when S&D traders have a certain degree of credibility can the plans of short sellers and twisters succeed.
  • “Short-term and twist” is the opposite of the well-known “pump and sell” strategy.

Definition of market manipulation

Short selling and short selling and distortion (S&D)

Short selling is the practice of selling borrowed stocks in the hope that the stock price will fall soon, allowing short sellers to buy back and make a profit. The SEC has classified it as a legal activity for many reasons. First, it provides more information to the market. Short sellers often conduct extensive and legal due diligence to discover facts that support their suspicion that the target company is overvalued. Second, short selling increases market liquidity because it satisfies the supply part of the supply-demand paradigm. Finally, short selling also provides investors who own stocks (holding long positions) with the ability to generate additional income by lending their stocks to short positions.

On the other hand, S&D traders manipulate the stock price by short positions in a bear market and then use smearing activities to depress the price of the target stock. This is the opposite of the “sell-off” strategy, where investors buy stocks (hold long positions) and publish false information that causes the target stock price to rise.

Generally speaking, it is easier to manipulate stocks to fall in a bear market and to rise in a bull market. “Skyrocketing and selling” may be better known than “shorting and distortion”, partly because of the inherent bullish bias in most stock markets and media coverage of the long-term US bull market. Most of the three decades.

The main goal of S&D traders is to profit by shorting the stock before publicly discrediting the stock.The theory is that investors who scare stocks will cause them to flee collective, Which caused the stock price to fall. Only when S&D traders have credibility can the plans of short sellers and twisters succeed. As a result, they often use screen names and email addresses that imply that they are associated with reputable entities, such as the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Agency (FINRA). The main purpose of their message is to convince investors that the regulator has serious concerns about the company and that they are contacting investors in the stock to show goodwill.

“Short and distorted” traders mess up the message board, which makes it difficult for investors to verify these claims. “Exit before everything collapses” and “Investors who wish to enter the class action can contact…” are typical posts, as are their predictions of a $0 stock price and a 100% loss. Any individual or entity that tries to refute their claims will be the target of their attack. In other words, the market manipulator will do everything possible to prevent the truth from appearing and keep the price of the target stock down.

Favorite movie Wall Street (1987) and Boiler Room (2000) brought these types of stock market manipulation to the forefront and helped educate investors about the risks of participating in the market.

The net effect of short circuits and distortions

When the “short and twist” strategy succeeds, investors who initially bought stocks at a high price will sell them at a low price because they mistakenly believe that the value of the stock will fall sharply. This selling pressure pushed down the stock price, allowing S&D traders to cover and lock in their earnings.

In the chaos of some well-known bankrupt companies, including Enron in 2001 or Nortel in 2009, investors are more susceptible to such manipulation of other stocks than in other circumstances. During the economic downturn, the first appearance of improper behavior can easily cause investors to run away. As a result, many innocent, legal and growing companies are at risk of being burned, and investors will follow.

Identify and prevent short circuits and distortions

Here are some tips to avoid being burned by the “short and twist” scheme:

  1. Don’t believe everything you read-verify the facts.
  2. Do your own due diligence and discuss with your agent.
  3. Pledge your stock-remove it from its street name to prevent short sellers from borrowing and selling it.
  4. The SEC requires listed companies to disclose important information that may affect their stock prices in 8K documents. Searching for 8K files on the company’s investor relations website is a good source of help verifying negative information.

The best way to protect yourself is to conduct your own research. Many stocks with great potential are ignored by Wall Street. By doing your own homework, you should feel more secure in your decision. Moreover, even if S&D attacks your stocks, you will be better able to spot their distortions and are less likely to fall victim to their false claims.

How to identify good research

Ask yourself these questions to find out the key characteristics of a good research report:

1. Is there a disclaimer?

The SEC requires everyone who provides investment information or advice to fully disclose the nature of the relationship between the information provider (research analyst) and the company that is the subject of the report. If there is no 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 companies, brokerage companies, and independent research companies. Using all these sources will provide information and opinions that can help you make better investment decisions. However, you need to evaluate the information provider’s conclusions based on the compensation (if any) received for the report.

A Wall Street analyst, in their analysis, can even be partially compensated by the performance of the stock, is it more objective than a fee-based research company that pays a fixed monthly fee without a performance bonus? The answer to this question is left to the decision of each investor, but both types of reports can usually be used to assess potential investments. The nature of the compensation will provide information to help you assess the objectivity of the report.

3. Did you provide authorship and contact information?

Generally speaking, if the author’s name and contact information are on the report, this is a good sign because it shows that the author is proud of the report and provides investors with a way to contact the author for more information.

A research report from a legal brokerage company posted the author’s name and contact information near the top of the homepage. If the author’s name is not given, investors should be very suspicious of the content of the report.

4. What are the author’s credentials?

The letters after the name do not necessarily mean that the author of the report is a better analyst, but they do indicate that the analyst conducted additional research to expand his or her financial and investment knowledge.

5. How to read the report?

If the report contains exaggerated words and exclamation marks, please pay attention. This is not to say that good analysts are boring, but good reports do not read like tabloid headlines. A reputable analyst will never use exaggerated words such as “certain thing” or “rocket”, and will never recommend that you mortgage your house to buy stocks.

Objective research reports provide reasonable theoretical evidence for buying or selling stocks. Key factors such as management expertise, competitive advantage, and cash flow were cited as evidence to support the proposal.

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

The bottom line of any recommendation is the profit model and target price. The assumptions on which the profit model is based should be clearly stated so that readers can assess whether these assumptions are reasonable. The target price should be based on valuation metrics—such as price-to-earnings ratio (P/E) or price-to-book ratio (P/B)—and also based on reasonable assumptions. If the report lacks these details, it is usually safe to assume that the report lacks a reliable basis and should be ignored.

7. Are there ongoing research reports?

Commitment to provide continuous research reports (at least one report every quarter, at least one year) shows a firm belief in the company’s basic advantages. Providing this type of reporting requires a lot of resources, so a company that provides continuous reporting shows that it has reason to believe in the long-term potential of stocks.

This is in contrast to one-off reports used to manipulate stocks. Under these circumstances, so-called research companies will suddenly release “reports” of stocks that they have never reported before. In general, these reports can be identified as attempts to manipulate stocks because they do not contain the attributes of legitimate research reports, as described above.

Bottom line

Unscrupulous S&D strategies may leave investors at a loss. Fortunately, high-quality stock reports are relatively easy to spot and need not be confused with the dramatic false claims of stock manipulators. Keep calm when analyzing stocks and avoid falling into online hype. By carefully and objectively analyzing potential investments, you can protect yourself from becoming a victim of S&D players—and make better stock choices overall.

InvestingClue does not provide tax, investment or financial services and advice. The information provided does not take into account the investment objectives, risk tolerance or financial situation of any particular investor, and may not be suitable for all investors. Past performance does not represent future performance. Investment involves risks, including possible loss of principal.


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