The big money seems to come from shorting individual stocks, where an investor might call a company’s stock and then sell it on the secondary market. It’s like the stock market on Facebook — an investor can choose for a short to buy a stock at its lower price and then sell it at its higher price for a profit. Shorting stocks can pay huge amounts of money.
I was one of the long-term investors on the Facebook team, and the best trader I ever worked with was Paul Graham. He worked out of the firm of Bain Capital, where he’d been in charge of managing the IPO of the firm, called Fannie Mae. But Paul Graham, who I think was in his late eighties when he died, was very, very good at short-selling stocks.
When Facebook bought it, he said, “Don’t worry, this is an unusual market!” And he was right. When he called it up in 2005, it was down 30 percent, but as soon as the stock did well, he was able to short-sell it. He’d pay a premium price, $8, for every short-sell order.
And he and his partner sold it that summer for $200 million — about $200 million in today’s dollars. How much was that? The stock had more than doubled in that six-month period.
Well, it’s a lot to ask for a trader who’s the best at short-selling. You have to know what’s going to happen with these large stocks. You need to know how each one can go down or stay up. You also need to know what the odds are of something really bad happening. It’s the kind of risk tolerance that is unusual for the vast majority of people.
And if you’re a high-frequency trader, that’s a big part of what you do — because so much of the risk in any market comes from errors in the math of price discovery. High-frequency traders will buy up stocks that they think are going to go down in price. They’ll sell them for the most profitable price. And that’s why they’re called “high-frequency traders.”
For example, say I’m shorting General Electric. The average price it’s had in the past four months, the last four months: $24. If the market goes down 60 percent, that’s not bad. But if it goes down 40 percent, it’s a lot worse. So I could buy stocks that I thought
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