I recently wrote a post about the practice of short selling. Commenter Gregory in Seattle added some valuable insights (see here and here) on how it works, based on his knowledge as licensed broker.

It turns out that there is a lot of short selling going on for Facebook stock and this article gives more information about how it works and the supply-demand tradeoffs. I was particularly interested in the wide range of premiums that those who own stock charge for lending it out to the short sellers. Although I do not directly trade in stocks, I find this stuff quite fascinating in a kind of geeky way.

The precipitous drop in its stock price following the IPO is raising suspicions of shenanigans in which, as usual, rich and powerful investors benefit at the expense of ordinary ones.

All of these stories suggest that Wall Street is increasingly turning into a giant favor-and-front-running factory, where the big banks and broker-dealers that channel vast streams of crucial non-public information (about the markets generally and their clients specifically) are also trading for their own accounts, and sharing information with a select group of “preferred investors,” who in turn help the TBTF [too big to fail] banks move markets in this or that desired direction by jumping on or off various pigpiles at the right times.

Sooner or later, people are going to clue into the fact that one or two big banks, acting in concert with a choice assortment of unscrupulous “preferred investors,” can at least temporarily prop up or topple just about anything they want, from Greece to Bear Stearns to Lehman Brothers. And if you can move markets and bet on them at the same time, it’s impossible to not make tons of money, which incidentally is made at everyone else’s expense.

Let the investigations and lawsuits commence!