Short Selling Harms The Secondary Market
The practice of short selling has gotten to an absurd level on the secondary ticket market. The Super Bowl XLIX fiasco may be the first, but likely not the last, of when short selling almost takes down the whole system and wakes up America to what’s going on. It’s easy to blame the wholesale supplier for some of the issues, and maybe fair to do so in some regard. However, each broker needs to be able to see that by committing short selling, they are causing their own demise for short term gain.
This subject came up after the Ticket Summit keynote panel on Thursday in Las Vegas. I was approached by a very concerned young broker from West Virginia, wondering whether I supported the practice of short selling. Absolutely not, without question, I am against it.
Every true capitalist should be against short selling, which is transaction fraud, as those who are listing on the secondary do not own the product at the time that they are selling it.
Right now, I could sell a million iMac computers out of my home on EBay. Yet, I do not own one. I would take those actual sell orders, then go to the Apple Store, and purchase all of those computers. I would do so expecting that those computers would be listed and priced at the same margin profit as when I sold my first iMac.
And maybe that would happen the first time, but probably not the second, because the market corrects itself.
Once Apple figures out that they have moved a million iMac units, they have to fulfill those orders. And they have to estimate whether the market demand is higher than they originally expected. As with all retail products, of which the secondary ticket market emulates as it should, the price on the wholesale market will likely jump per unit. After all, Apple was to capitalize on the demand of shipping 1 million iMac units by preparing for the next massive iMac shipment.
This is why short-selling is nothing more than a race to the bottom for both the brokers practicing it, as well as their fellow brokers in the field competing against it. Brokers filling orders, without having a set amount of inventory numbers for what they are selling, is dangerous. Especially when they go back to the wholesale supplier to buy that additional inventory.
Consider my iMac analogy: What if Apple cannot fulfill those initial 1 million iMac unit orders? Now, as the seller, I have made promises that I cannot keep, and it causes a system meltdown of angry customers expecting iMacs against a wholesaler (Apple), who didn’t make promises to fulfill the orders in the first place.
That’s one of the key reasons that the Super Bowl XLIX market transformed into a Wild West show, now a legislative nightmare, where disgruntled secondary customers are suing and financially ruining brokers out of business.
If you don’t have the inventory in hand, you shouldn’t attempt to sell it on the secondary market.
This likely will cause a few brokers to shrug. They are used to filling orders quicker by causing a short sale to occur. But they are actually causing the market conditions to grow worse for themselves, as well as their colleagues in the secondary marketplace.
Consider the ramifications for how a climate transforms under a short-selling market. Brokers are now playing with inventory that they do not have available. They are provoking customer demand to dictate whether they will even purchase more inventory from their wholesaler. Except, the wholesaler may only have a certain amount of inventory available to offer back to the short-seller to buy. And as the secondary market demand heightens, so does the wholesale price back to the short-seller, squeezing out smaller profit margins.
This comes down to a very simple supply and demand factor.
When short-sellers push up the wholesale price, they cause their margins to lessen, without even knowing how much ticket inventory is available back on the wholesale market to fulfill those orders in the first place.
This causes each broker to be at the mercy of the other, without understanding that they are ruining the chances of both groups to make a wider profit.
Once the price starts to jump on the secondary, even those brokers who aren’t short selling begin to gobble up more of the wholesale product, believing that they can turn it over for a profit now that demand and price are higher. This causes the short-seller to have just as much of an issue as those brokers who actually hold the inventory, and causes the market to squeeze out higher priced tickets at lower profit margins.
She’s right to be worried as well. For whatever little gains that the short-sellers caused, they also are tripping the alarms of every “protectionist” who wants to close-loop the secondary market entirely through means of legislation.
A little later, I met with a contingent of colleagues, including an inventor who may change or eliminate a lot of the secondary marketplace entirely. Big changes are coming, more because of answers required now by the advent of short-sellers, and the fact that their screw ’em mentality toward their broker colleagues has pushed a chain reaction in the opposite direction.
Every broker likes to think of themselves as competitive against their colleagues, but in reality, brokers should be protective as much of the marketplace as a whole. Short selling is fraud, and if those who short-sell won’t hold themselves accountable, then those who do not should.