4 ms·
Brokerages would be in a lot of trouble if literally nobody was willing to sell at any price. When someone sells short, they must borrow shares; usually a brok
by betterunix2 6y ago
Brokerages would be in a lot of trouble if literally nobody was willing to sell at any price. When someone sells short, they must borrow shares; usually a brokerage will facilitate this by borrowing shares from another customer, who can receive some interest payments. If nobody was willing to sell at any price, the short seller would be unable to close their position before going bankrupt; but the other customer, who was long, would still be owed shares. In this case the brokerage must assume the short position, for a potentially enormous loss, and would have to continue paying interest to whoever the shares were borrowed from.
Most brokerages would not allow a short position with such poor liquidity -- they would force the position to be closed to avoid taking on that kind of risk. Forced buying is exactly what is happening right now, as the price rises short sellers wind up with margin calls and are forced to buy at whatever price they can get (or they must deposit other cash or securities to offset the losses in their margin accounts). That drives the price higher and triggers more margin calls and more buying, until eventually all the shorts have been forced to close their positions. Brokerages will likely raise the margin requirements for a symbol like this to avoid a situation where a short sellers end up bankrupt with negative account values after closing the position (which means the brokerage will take a loss). Note that raising margin requirements will accelerate a short squeeze, since it creates more margin calls, but brokerages would rather get the positions closed sooner than later.
- kangnkodos 6y agoThere's always about the same amount of money bidding above and below the current price. The market maker keeps it in balance, by matching buy bids and sell bids which are close to the middle of the range. This matching process sets the price and makes sure that there is always liquidity. The price may shoot way up, or plunge, but this process almost always works, so there's almost always liquidity.
- betterunix2 6y agoIt is not hard to find low-liquidity symbols, though typically these are smaller companies or unusual products of some sort. I have seen brokerages declare some symbols to be restricted in some way (higher margin requirements, or not eligible for margin at all) because of poor liquidity. Market makers do not always swoop in to provide liquidity and may not be willing or able to trade large enough numbers of shares to satisfy investors during extreme circumstances (e.g. during a crash or a short squeeze).
- mcv 6y agoEven if short-sellers are forced to buy 140% of the existing stock, while much of the stock is in the hands of people who refuse to buy? There's way too many buyers and too few sellers. And the buyers are forced to buy.