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Shorting a stock involves first borrowing it from someone, and them immediately selling it. Everyone who is short stock does not own it! Naked shorting is sell

Shorting a stock involves first borrowing it from someone, and them immediately selling it. Everyone who is short stock does not own it! Naked shorting is selling stock you have not even borrowed to create a short position. The scenario you describe did not require naked shorting in order to exist. To keep things simple, imagine a corporation that has 100 outstanding shares on the public market. Bob owns them all. Mark wants to short them, so he borrows all 100 from Bob and sells them to Mary. At this point, Bob is "owed" stock from Mark, and Mark owes Bob stock. Mary owns all 100 shares of stock. No one shorted anything naked. Now say that Craig wants to short this company as well. He borrows 100 shares from Mary, and sells them to Sally. At this point, in addition to the above positions of Bob and Mark, Craig is short 100 shares of stock, which he owes to Mary. Sally owns all 100 shares of stock. Looking from the perspective of any one person, they are not short more shares than there exist in the company. No one shorted anything naked. And yet, on the macro level, there are 200 short positions, and one person owns the 100 shares of the company. No one shorted anything naked. And yet, the situation you described arose. Should the need arise for Craig and Mark to return the stock they borrowed (someone calls in their shorts), they will probably need to pay a lot to convince the people who own the actual stock to sell to them, especially if the owners are aware of the macro situation.

dhimes 8y ago
So are you disputing the claim that there was in fact naked shorting of Overstock? Or just that having more short positions than stocks existing requires naked shorting?
- jessaustin 8y ago
  Obviously, it's a general point about the nature of short selling. However, since thread parent made such a big deal out of it, which is analogous to breathlessly informing us that "banks don't keep all deposits in their vaults!", it does somewhat undercut thread parent's entire comment. Even though lots of people like Tesla, it's not an injustice for other people (or the same people, I guess?) to short it.
  - dhimes 8y ago
    It wasn't at all obvious to me that koliber knew that naked shorting was, in fact, suspected (at least initially) in the Overstock situation. Documents were sealed, but partially leaked, which is why I asked. And while I enjoyed reading koliber's very clear explanation, I am confused as to whether or not it applies specifically to Overstock, which is what the thread parent was addressing.
    - koliber 8y ago
      I am not aware of the Overstock case in detail. I was making a point that just because the short position is larger than outstanding stock does not mean the naked shorting was taking place. It is entirely possible, but we can no make that conclusion based on the fact that there were more shorts than longs.
      - dhimes 8y ago
        Thanks for following up here.
defen 8y ago
> Should the need arise for Craig and Mark to return the stock they borrowed (someone calls in their shorts), they will probably need to pay a lot to convince the people who own the actual stock to sell to them, especially if the owners are aware of the macro situation. In your scenario there are only 100 shares available! If Craig and Mark get margin called, how are Sally and Bob each going to end up with 100 shares?
- sokoloff 8y ago
  The price will rise until Bob or Sally is willing to sell their shares, meaning they don't end up with shares; they end up with cash. There exists a price for which Sally or Bob are willing to sell their shares. If Craig needs to offer $100K per share, Bob or Sally is likely to take it.
stephengillie 8y ago
Shorting is like - renting a $30,000 car from a rental company, and then selling it on the open market, because you expect that the price for that car will drop by more than $14,600 next year. During the year, you have to pay $40/day, so you pay the rental company $14,600 to rent the car for the year. At the end of the year, you buy an identical car and return it to the rental company. This is possible because cars are fungible in this example. If the car's market price goes down to $10,000, then $30,000 profit less $24,600 costs gives $5600 in revenue for the short. If the car's market price goes down only to $20,000, then $30,000 profit less $34,600 costs gives $4600 in loss for the short. ----- Naked shorting sounds like gaslighting - putting lots of ads in the paper that advertise this car for $5000, hoping to lower the price...and answering the phone that it's definitely available, even though someone already put a deposit down on it.

dhimes 8y ago

So are you disputing the claim that there was in fact naked shorting of Overstock? Or just that having more short positions than stocks existing requires naked shorting?

jessaustin 8y ago
Obviously, it's a general point about the nature of short selling. However, since thread parent made such a big deal out of it, which is analogous to breathlessly informing us that "banks don't keep all deposits in their vaults!", it does somewhat undercut thread parent's entire comment. Even though lots of people like Tesla, it's not an injustice for other people (or the same people, I guess?) to short it.
- dhimes 8y ago
  It wasn't at all obvious to me that koliber knew that naked shorting was, in fact, suspected (at least initially) in the Overstock situation. Documents were sealed, but partially leaked, which is why I asked. And while I enjoyed reading koliber's very clear explanation, I am confused as to whether or not it applies specifically to Overstock, which is what the thread parent was addressing.
  - koliber 8y ago
    I am not aware of the Overstock case in detail. I was making a point that just because the short position is larger than outstanding stock does not mean the naked shorting was taking place. It is entirely possible, but we can no make that conclusion based on the fact that there were more shorts than longs.
    - dhimes 8y ago
      Thanks for following up here.

defen 8y ago

> Should the need arise for Craig and Mark to return the stock they borrowed (someone calls in their shorts), they will probably need to pay a lot to convince the people who own the actual stock to sell to them, especially if the owners are aware of the macro situation. In your scenario there are only 100 shares available! If Craig and Mark get margin called, how are Sally and Bob each going to end up with 100 shares?

sokoloff 8y ago
The price will rise until Bob or Sally is willing to sell their shares, meaning they don't end up with shares; they end up with cash. There exists a price for which Sally or Bob are willing to sell their shares. If Craig needs to offer $100K per share, Bob or Sally is likely to take it.

stephengillie 8y ago

Shorting is like - renting a $30,000 car from a rental company, and then selling it on the open market, because you expect that the price for that car will drop by more than $14,600 next year. During the year, you have to pay $40/day, so you pay the rental company $14,600 to rent the car for the year. At the end of the year, you buy an identical car and return it to the rental company. This is possible because cars are fungible in this example. If the car's market price goes down to $10,000, then $30,000 profit less $24,600 costs gives $5600 in revenue for the short. If the car's market price goes down only to $20,000, then $30,000 profit less $34,600 costs gives $4600 in loss for the short. ----- Naked shorting sounds like gaslighting - putting lots of ads in the paper that advertise this car for $5000, hoping to lower the price...and answering the phone that it's definitely available, even though someone already put a deposit down on it.