The likes of State Street, Vanguard, Blackrock essentially buy into everything and anything that looks like it could make a positive return. Overall their positions are held long term. If you are a big player investment fund manager and have deep pockets the immediate price movements are of little consequence if your investment thesis is correct. If you are an index tracking fund manager - you don't even need a thesis - the index decides for you.
They can then lend their shares out to others to short (including internal short-term traders) and charge some fees for doing so. The long position is required to take a short position. Somebody has to own the shares first - only then can these shares be lent out and sold by the shorter. This allows the traders to play around short term - price action, sentiment, news, hype. The traders can go long or short as they see fit.
Seems a bit nuts that the same institution can be both long and short at the same time. But it just means make money long-term (investment) and make money short term (price/market action). Overall - they can make more money which is obviously what they try to do. In fact, while earning fees lending out shares, it helps sustain lower share price for a while, so the long-term investment units can accumulate shares.
There's a bit of a theme here from some that when State Street or whoever appears on the share registry - watch out - you are about to be targeted by short selling. Well yeah - now they CAN offer shares for shorting whereas before they could not. But the reality is that they have bought into the company and taken a net long position. The shorting that follows is a consequence - because they make the shares available for shorting. What I am saying is that they did not buy their X% in the company just to be able to short. They bought in because they expect a positive return on that holding. The shorting is a "by-product" of the positive investment outlook in the company - and allows their traders to short while the investors stay long (the shorter has to return the borrowed shares at some point).
A hedge fund may come along and want a net short position. They borrow shares from State Street (after stumping up collateral and signing the legals/contracts/IOUs), and the hedge fund takes a genuine overall short position. If things go well for the company and the shares go up - the hedge fund loses on the short - buys back shares on the market to close the position and State Street takes back the shares owing. So maybe we should blame the hedge funds more than State Street. In this scenario the hedge fund is the player - and State Street just provides a facility whereby the player can play. We don't blame the ASX for providing a marketplace. So why blame/dislike State Street (and the others) for providing a marketplace for shorters. It seems sucky that shorting can drive down price and we naturally want to attribute blame because the shares aren't moving where we want. But it's just a contest - is the shorter correct or is the shareholder correct about the future price. Lots of shenaningans while all this is going on, so it's our job to see the signal within all the noise.
In case it's not obvious - State Street is illustrative-only in the above, and can be substituted with any institution that makes shares available to shorters.
