The fluctuations in the stock price of Tesla Inc, combined with the public statements of its iconic founder Elon Musk, give the impression of a business under pressure – perhaps understandably given the weight of expectation its peak market cap lent it. During recent weeks Musk has come to lament one group in particular as a source of his and the company’s woes, the role of short sellers.
Short sellers – those who borrow shares and then sell them in advance, effectively betting that the value of a share price will drop – have become a more noticeable feature of the financial markets since the financial crisis of 2008. While there is nothing wrong with short selling – predicting a business will do badly can be a lucrative shout if correct, as many short sellers anticipated well in advance of the collapse of the British PLC Carillion last year – the emergence of what is known as “activist” short sellers has caused consternation in many board rooms. Here, rather than predicting failure and waiting for events to play out, the short-sellers take a more active role in seeking to ensure the price drops.
It is in this realm that behaviour risks straying into grey areas of price manipulation, and it is here that executives – Musk included – most often find themselves second guessing what tactics are being deployed against them for those seeking to gain from their misfortune. It is common now to see dossiers of “evidence” being circulated by often anonymous groups, blog and forum posts and aggressive PR campaigns to receptive media to propagate suspicions about the performance of a business. Why stay anonymous? Because the targets seldom agree with what is alleged against them, and either through their own legal means or invoking investigative regulators will seek to have the perpetrators unmasked and punished to redeem their reputation and share price (you can read more about some of the tactics employed in our guide to short sellers).
Whether Tesla is being targeted with underhand tactics as Musk believes, or the short sellers are simply betting the business will not perform how the market expects, shorting will continue to cause headaches to management fearing an invisible malicious hand until they start investigating to see if there are legally objectionable tactics in play to try to win the bet.