Bear raid definition
An illicit trading strategy through which a group of investors intentionally decreases stock prices
What is a bear raid?
A bear raid is performed by a group of investors holding a short position on a particular stock, usually of a company faced with certain difficulties. Their objective is to decrease the price to make a profit by selling high and buying low. Investors may spread negative rumours and execute continuous short sell trades, to affect the stock price negatively.
Bear raid meaning
The short-selling as a trading strategy is not illegal, but the grouping of investors for the purpose of shorting a stock is considered to be illegal practice under SEC rules.
SEC limits the bear raids trading opportunities by defining certain rules and procedures. One of them is the so-called uptick rule. It limits the execution of short sales or, more precisely, it defines when this type of transaction can be executed. Traders can short a stock only after an upward movement in stock price. The short price can be executed at a price above the last traded price. The rule was initially set in 1938 but was abandoned in 2007 by SEC. SEC implement a modified version of the uptick rule in 2010 after the last financial crisis.
Bear raid explained
Let's say that the current stock price of company A is $34, and the company faces specific issues that may have a temporary negative effect. A couple of different investors identify an opportunity for fast profits and initiate the process of shortening the stock. For simplicity, they have shortened the stock, ie sell the stock at $34. They expect that the stock price will decrease. Through different rumours and negative news regarding the company, they are pressuring the price drop. The price decreases down to $22. At this price, investors purchase the needed quantity of stocks to close their short positions. Since they have sold the stock at a price of $34 and bought the stock at a price of $22, they have earned a $12 profit per stock.