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The second comment in the article is interesting. Basically, ETFs are open-ended funds - you can't run out of the ETF securities because you can always create
by fraserharris 16y ago
The second comment in the article is interesting. Basically, ETFs are open-ended funds - you can't run out of the ETF securities because you can always create more. So, if the naked short is called, and there are no ETF securities on the open market to buy, the shorter can have an 'authorized participant' create more ETF securities (see link). Note that this is a very different situation than a stock, where there is a fixed amount of the securities available, which can only be created by the company issuing more stock.
See: http://en.wikipedia.org/wiki/Exchange-traded_fund http://en.wikipedia.org/wiki/Exchange-traded_fund
- borism 16y agoyes, but the naked short must have the liquidity and solvency to purchase the underlying securities needed to cover her naked short in ETF.
- cynicalkane 16y agoSame as any other stock. No reason ETFs are in any particular danger.
- joe_the_user 16y agoThe difference between naked shorting and regular shorting is that with naked shorting you only need the liquidity later. And they find out ... you don't have the money! All "financial innovations" boil down to ways of gambling with other people's money. The brokerage that can do naked shorts in a conventional way are doing it (see LTCM) and the article claims that EFTs open up this club to a wider membership.
- mattmaroon 16y agoHa. Well, not all, but yeah that's definitely pretty popular.
- cynicalkane 16y agoI have no idea what you're talking about, or why it's getting upvotes. Naked shorts are "gambling", but it's with your own money, not other peoples. Also, LCTM was not a brokerage. I have a feeling you're wrong about more things, but I'm not confident I can parse your last sentence with 100% accuracy.
- borism 16y agoIf you fail to understand the issue at hand why comment at all?
- mattmaroon 16y agoETFs are a particular danger because the shorts can vastly outnumber the shares. This won't happen in a normal stock. Say I own 95% of Google and you naked short 7%. I've now got you totally by the balls. You can cover the first 5% if you get every shareholder but me to sell out to you, but then I can charge you whatever I want for the last 2%. You have to pay because you owe someone those shares and I've got a monopoly. As a result shorts of regular stocks don't get to 11x the number of outstanding shares. That's not the case with ETFs because the naked shorters can simply create more shares. It's not possible for them to get stuck oweing more shares than they can get. (Well, it is possible if they ran into that problem with the underlying shares, but that's not realistic).
- yxhuvud 16y agoYes, ETF won't have a short covering rally that is an due to lack of availability of the position. What you failed to explain is why this is a bad thing. (It can still have short covering rallies if the price move too much.) (Also, they can definitely get stuck with more shorts than they can fill. It is called going broke..)
- borism 16y agoyou either haven't read the article or totally missed it's point (as several other commenters here)
- cynicalkane 16y agoWe're trying to figure out if the article has a point at all. Saying "you missed the point" is not helpful.
- borism 16y agoNo, we're trying to figure out who has read it and got the point. If you fail see the point in the article and risks it uncovers, then there's nothing to discuss really...
- 16y ago