Really?
A naked short is illegal but this is all they have to do to make it legal?
Wow…what bullshit.
There are a lot of things that have been implemented to allow for an orderly flow of business, that are subject to possible workaround in the short-term, but will cause a significant problem if someone continuously ignores the actual regulations. I can’t remember any of them off the top of my head, but I was rather stunned when studying for a part of the CPA exam just how fluid things can be, all in the name of maintaining the flow of business. Lubricating the gears of the market has upsides for everyone when most people are honest and there are ways of eventually catching cheaters. Yes, you can sort-of naked short using this sort of bullshit, but you couldn’t do it consistently if you wanted to mtaintain your relationship with your counterparties. And without counterparties, you can’t trade anything.
It seems this only applies to the retail trader.
If you are a hedge fund wanting to short $50 million somehow the counterparties seem to care less about the particulars they’d hold you or me to.
Wasn’t GameStop shorted to 140% of their actual out-standing stock?
Where’d that other 40% come from (not to mention shorting 100% of the stock would be weird…that means all of the stock was loaned out and shorted).
Something is not right with these books.
We need a sticky for this. I feel it’s been explained 203947820935 times.
A buys a share at the IPO. Their broker lends it to B. B sells it on the market to C. C’s broker loans it to D. D sells it on the market to E. Etc etc. One share can be loaned out multiple times. The total long interest will always be 100% greater than the short interest, so if there’s 140% short interest, that means there’s 240% long interest, or 2.4 people for each share that think they own it. Only one person, the last in line, actually gets to vote the share, but the rest are in a position to benefit from the gains on the stock. All those that allow the broker to lend their shares also don’t get qualified dividend treatment on their dividend equivalents paid by the short positions. They let it happen anyway because the broker allows them to use margin to magnify their gains, or short other stocks, or use options.
I’ve seen that.
This seems ok to you?
I get the value of using margin to magnify gains but it should be more limited.
It’s the same thing that happens with currency. The amount of outstanding loans is far greater than the amount of currency that exists. But the amount of loans netted against the amount of money in deposit accounts equals 100% of the currency supply. I don’t see anything wrong with it at all.
We saw leverage run amok in 2008.
Why are we here again?
On what planet does a hedge fund (presumably savvy traders) figure a 140% short on stock makes sense?
Where is that money coming from? I’m willing to bet, without the Reddit fiasco, those hedge funds were making money. My guess is they collect in bankruptcy what they didn’t quite cover in the stock market.
It’s not one hedge fund that has that much of the short interest. The market as a whole had 140% short interest. Each individual shorter was of the quite reasonable opinion that the stock would go down in price. There were enough buyers so that the price didn’t go down enough for them to cover yet. The 140% short interest came into play when there was a coordinated effort to raise the price specifically to squeeze the short sellers. The percentage short interest really doesn’t matter. There’s nothing magic that happens to things with over 100% short interest. All it means was there were a lot of short sellers who might be facing margin calls or liquidation of their position if the price rose. There wouldn’t be a meaningful change in the dynamics between 99% short interest and 101% short interest.
What I’m talking about is not leverage at all. The borrowing exists by millions of small borrowers who need the credit for their business’s working capital. They probably don’t leverage their total asset value all that much; they just need cash to run their business - they’ll bring in some money next month to pay it off while having a physical plant worth 10 times the amount of the loan. They spend that cash with other businesses, who deposit it in their banks, and those banks lend the money out again. It doesn’t take anyone getting anywhere close to being over their head in debt for there to be more debt outstanding than there is currency. And the fundamental dynamics of short selling aren’t really all that different from lending currency.
Please help me bottom-line this:
Let’s say GameStop has 1 million shares outstanding. This we know for certain (for this question). We absolutely know how many shares of stock GameStop has issued…1 million.
At the height of the GameStop fiasco we freeze the market and have everyone report how many shares they own at that moment. Shares in their hand. If they loaned them out they don’t get to count. Only the people with shares in their hands at that moment in time. People who in the next second could sell those shares.
How many shares would we count?
A naked short sale is when a short seller doesn’t do what I described - locate the shares. By definition, if you locate the shares, it’s not a naked short sale. I don’t understand your point.
Because what keeps it from being a naked short is the technicality of locating shares, with only a “reasonable” expectation of acquiring them. The only thing that keep you legal is that the shares actually exist. What happens if you can’t in fact acquire them?
It’s called a “fail to deliver.” Your broker issues you a notice that you must buy back your position within the day or the broker will do so.
I have to admit most of how this is done, which I learned along the way during this recent episode, surprised me.
I had originally assumed it was akin to commodity trading in which you are buying contacts to provide the stock by some later date. In effect it seems to accomplish the same thing though.
They have not bought the stocks. Merely identified that they could if they had to.
I don’t understand your confusion.
Sorry…borrowed.
And yes, it is legal. At its heart it is a naked short with some window dressing to make it look ok.
Nope, by definition it’s not a naked short. If at T+2 the stock is required to be delivered and the stock can’t be delivered, it’s a fail. If the position exists in that state it could be considered naked.
I am not arguing what the current law says. I am arguing that the current law allows a bullshit dodge around naked short selling. For example, do the people who actually own the stock get paid (as is usual when borrowing stock for a short) if the person shorting only locates the stock?
Is this something you can do from home or is it only available to a certain class of investor? Will your Robinhood app let you do it?
“By definition” only means the people who wrote the law made it that way. It does not mean it is sensible or right.
I’m not 100% sure where the money I pay to locate stocks goes. If I pay to locate stock, sell short, and cover all within the same day, I won’t be charged interest on the position like I would if I held overnight. Locate fees and borrow rates are two separate things, I believe. Borrow rates don’t come into play until the trade settles.
Depends on the broker. Most retail brokers don’t pass the income earned from securities lending on to the account holder to my knowledge. Off the top of my head, I know Interactive Brokers offers a program whereby the customer can share ~50% of the proceeds generated from securities lending. There could be others.
https://ibkr.info/article/1838
This is a pretty good explanation of the plumbing behind short selling:
Generally an individual does not know that his shares have been loaned for a short sale. In a margin account, the shares are kept by the broker. The broker would know that the shares have been lent, but not necessarily the beneficial owner. They could well report a total of shares owned that exceed the shares in existence. Of course the shorts will report that they own negative shares and if those are included, it will balance out.