Running discussion on SP, page-8141

I am inclined to understand the process as one in which the original owner of the shares cannot lose. They effectively agree to 'sell' their shares temporarily with the proviso that the buyer MUST 'sell' them back to the original owner at the same price after a certain time, or on demand. They cannot lose in other words. They also get paid a 'rental fee' for the process, so they can only win. They thus make a profit for nothing. This is always a good deal for them in other words.

The shorter takes the risk that by trading at sub-normal pricing he can drive the trading price down and buy more shares back for a lower price than he paid. He does this by trading some of the rented shares at a lower price, encouraging others to also sell low, which he then tries to buy low. By doing a rinse and repeat selling a small number of shares low over and over he is able to undermine confidence in the stock and encourage a general reduction in the share price. He hopes to net-buy more shares at a lower price than he is paying for the shares he rented, including the cost of rent and trading. When he stops his assault on the SP it rises again and he sells the ones he has bought low at a higher price and makes a worthwhile profit that covers his costs, and returns the shares to the original owner, on time, and keeps the profit. This relies on frequent trading at small incremental benefits that add up over time. His trading costs are low or even zero, so this is something that an automated trading system facilitates well. If all goes according to his plan he will win. If there are too many rival shorters out there they will battle it out and some will win while others lose. If the company's value increases generally (its product becomes successful) then his efforts may fail and he will lose significantly. No matter. He has many other irons in the fire.

Who is the ultimate loser in all this? The small holder who cannot see what is going on behind the curtain and lacks the confidence to sit tight. These holders are hopeful that shares they buy at value 'X' will rise later to "X+y" so they can make a profit. They are betting on their ability to recognise and predict a good company to bet on (the horse). When it works they are happy to make a reasonable profit. This is generally based on businesses that make a product that is generally wanted and will become popular and profitable in the wider market. One could say it is providing a public good, and that such investors are helping to fund the creation of such a public good. These investors reason that this is how the sharemarket works overall, and that they are making a fair profit that everyone benefits from. They often do not sufficiently factor in that there are also scavengers and predators out there that rely on their presence for their own existence. Shorting is but one strategy such predators employ. Little fish gobble up all those tiny edibles, but there are always bigger and bigger fish, just fewer of them.