4 ms·

This is ridiculous. The SEC should add a new rule to the game: no more than 100% of a stock can be shorted. I think it’s fair enough, and it should have been al

This is ridiculous. The SEC should add a new rule to the game: no more than 100% of a stock can be shorted. I think it’s fair enough, and it should have been already illegal since a long time. Why the wall street guys can ‘chat’ whenever they want but normal people can’t?

perl4ever 6y ago
One of Matt Levine's footnotes from a recent column, about short interest being over 100%: "This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine."
- mangoman 6y ago
  But what happens when they all need to cover? regardless of who lent to who, all the parties who borrowed are looking to now buy the same 90 shares? I don't know the answer and am asking. I also wonder what happens when a cycle happens?
  - cambalache 6y ago
    The 90 shares presumably have to be bought and sold twice or more, heavily incrementing the price for the last buyer.
  - bewaretheirs 6y ago
    They have to buy the shares on the open market, and have to raise their bids until sellers appear. The ramp up in price -- and the consequences for the shorts -- is known as a "short squeeze".
    - deleted 6y ago
      [deleted]
brmgb 6y ago
Or we could simply ban short. This has been discussed regularly since they were allowed in the 30s. Shorts have pretty much no legitimate use after all. They are only useful to speculate and speculation itself is mostly a useless by-product of the way markets operate. People like to argue that speculation helps with price discovery and brings liquidity. I would answer that the marginal improvement it brings would be pointless if markets were solely focused on their original goal: allowing people to trade voting shares into companies they want to invest in. The premium speculators are allowed to extract on the economy for what they do speaks volumes about how rotten the whole system is. Let's never forget that by its own rules the whole thing should have crashed and burned during the 2008 crisis.
- mrlala 6y ago
  But all stock trading is mostly bullshit speculation. So I would say "long" have pretty much no legitimate use either. Everything done now is so far away from "investing" that it's literally insane.
- jajawtd 6y ago
  It should all be banned because its a pyramid scheme and a scam. A concept that would only work in a video game. They had 100 years and the economy is still a scam. You literally can not just wake up and invest in some industry you like. 95% is snake oil and the other 5% volatile due to manipulation. Somebody should find the amount of tickers issued, meaning every company that ever appeared on the stock market, then how many of these companies made it to dividend (the entire point of investing).
- gridder 6y ago
  I totally agree with your vision. My proposal was a compromise. Yours is plan A.
- solarkraft 6y ago
  There are definitely good things about shorting, like giving an incentive to expose frauds through careful research (see Nikola). On the other hand it also incentivizes making companies fail, thus destroying value. I'd be interested in an analysis of which side outweighs the other.

perl4ever 6y ago

One of Matt Levine's footnotes from a recent column, about short interest being over 100%: "This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine."

mangoman 6y ago
But what happens when they all need to cover? regardless of who lent to who, all the parties who borrowed are looking to now buy the same 90 shares? I don't know the answer and am asking. I also wonder what happens when a cycle happens?
- cambalache 6y ago
  The 90 shares presumably have to be bought and sold twice or more, heavily incrementing the price for the last buyer.
- bewaretheirs 6y ago
  They have to buy the shares on the open market, and have to raise their bids until sellers appear. The ramp up in price -- and the consequences for the shorts -- is known as a "short squeeze".
  - deleted 6y ago
    [deleted]

brmgb 6y ago

Or we could simply ban short. This has been discussed regularly since they were allowed in the 30s. Shorts have pretty much no legitimate use after all. They are only useful to speculate and speculation itself is mostly a useless by-product of the way markets operate. People like to argue that speculation helps with price discovery and brings liquidity. I would answer that the marginal improvement it brings would be pointless if markets were solely focused on their original goal: allowing people to trade voting shares into companies they want to invest in. The premium speculators are allowed to extract on the economy for what they do speaks volumes about how rotten the whole system is. Let's never forget that by its own rules the whole thing should have crashed and burned during the 2008 crisis.

mrlala 6y ago
But all stock trading is mostly bullshit speculation. So I would say "long" have pretty much no legitimate use either. Everything done now is so far away from "investing" that it's literally insane.
jajawtd 6y ago
It should all be banned because its a pyramid scheme and a scam. A concept that would only work in a video game. They had 100 years and the economy is still a scam. You literally can not just wake up and invest in some industry you like. 95% is snake oil and the other 5% volatile due to manipulation. Somebody should find the amount of tickers issued, meaning every company that ever appeared on the stock market, then how many of these companies made it to dividend (the entire point of investing).
gridder 6y ago
I totally agree with your vision. My proposal was a compromise. Yours is plan A.
solarkraft 6y ago
There are definitely good things about shorting, like giving an incentive to expose frauds through careful research (see Nikola). On the other hand it also incentivizes making companies fail, thus destroying value. I'd be interested in an analysis of which side outweighs the other.