How does muddy waters make money

Overall, more than half of all activist short calls were in the red at the end of the year, according to Breakout Point, which tracks them. The prices on 97 stocks that were subject to a short attack are higher than they were as of the end of the day before the report, compared with 80 for which the prices are lower.

This content is from: Corner Office. April 19, Nano-X Imaging Ltd. Latest News eHealth Inc. April 8, Burford Capital Ltd. August 7, In the News. December 4, December 3, Tweets by muddywatersre. Subscribe for Updates Sign up for our mailing list and receive research reports and other related news and updates from Muddy Waters Research. Twitter News Reports. This type of independent research provides reports open to the public, rather than researching for the brokers or issuers.

MW is one of these research firms i. There is less compulsion for the research firm to give buy recommendations, but are its opinions truly unbiased? While the company does not get paid for its research, how does it make profits?

For MW, the major incentive is profiting from the short sale of stocks covered by its analysts. Short selling has long been recognized as a double-edged sword. Intending to profit from the difference between the pricing and value of stocks, ethical and legal short sellers can effectively address financial frauds. The SEC lacks resources to bring it leads on companies having problematic accounting or outright fraud.

Short sellers have both the incentive and capacity to identify questionable companies. However, potential abuse exists in this practice. Given the characteristics of a short seller and a research analyst, the argument for the combination of these two is quite convincing. Firstly, the market needs independent research firms to provide objective and unbiased reports, especially unprejudiced negative ratings. Secondly, to be independent and unbiased, the research firm has to find another way to earn profits rather than selling reports to brokers or issuers.

In other words, financial professionals need incentives to be independent research analysts. Profits from short selling satisfy the need. Thirdly, short sellers do function efficiently and effectively in identifying problematic companies and cleaning up the market. Although there is potential abuse of short selling, regulators are aware of this and have taken actions against illegalities.

Therefore, there are good reasons for the existence of short selling research firms like MW. Nevertheless, one big concern arises from the first reason above.

When research firms are allowed to short sell stocks they cover, can they really generate reports without bias? MW first made its name by successfully revealing the problems of some U. The firms has lost some public confidence when its recent allegation of fraud was rebutted. There is the possibility that MW manipulates the stock price by rating the stock negatively in order to profit from its short position. The research firm is no longer under pressure to rate positively, but it now has the financial incentive to rate negatively.

The potential profit from short selling is, on one hand, the support and incentive for independent research firms, but on the other hand, the interest may conflict with the provision of an objective rating. However, if MW produces a flawed report with bias towards profiting for itself, such market manipulative behavior is neither legal nor ethical.