4 ms·

I understand how this short sale "chaining" can result in a stock being over 100% shorted without any illegal naked short selling taking place, but why wouldn't

by BadBot 6y ago

I understand how this short sale "chaining" can result in a stock being over 100% shorted without any illegal naked short selling taking place, but why wouldn't this chaining not result in a short squeeze and therefore bid up the price? I'll walk through an example and maybe someone can point out what I missed. Let's say we have a market for some stock. There are only 5 traders (Alice, Bob, Chuck, Dave, Eli) and 100 shares that are all owned by Alice. Bob borrows all 100 shares from Alice and sells them to Chuck. Dave borrows the 100 shares from Chuck and sells them to Eli. Thus, Alice and Chuck are each owed 100 shares, Bob and Dave are in debt for 100 shares, and Eli owns the 100 shares. Thus, Bob and Dave must now compete for the 100 shares owned by Eli, which then drives up the price. I don't know how the synthetic long shares mentioned fit into this.

cman1444 6y ago
I believe that this is correct. The parent comment sounds very sure of themselves but I don't think the statement "there will always be more shares held long than short" is necessarily true.
- cman1444 6y ago
  After researching a little more I've found I was incorrect. There are always more long shares than short shares. However, the "long" shares are not necessarily real shares in the company. They could be ones that have been lent out as described above.
dcolkitt 6y ago
I think the misconception is thinking that shares, once loaned, are somehow locked. In the above scenario, Alice and Chuck open their Robinhood account and see 100 shares just the same as Eli or any other long. In reality their shares are actually on loan, but they're probably not even aware of it. If and when they go to sell their positions, it will instantly execute, and the broker will recall the shares before settlement (which occurs three days after the trade's executed.) So, in fact Bob and Dave now have their pick of the litter and can buy back from either Alice, Chuck, or Eli.

by BadBot 6y ago

cman1444 6y ago

I believe that this is correct. The parent comment sounds very sure of themselves but I don't think the statement "there will always be more shares held long than short" is necessarily true.

cman1444 6y ago
After researching a little more I've found I was incorrect. There are always more long shares than short shares. However, the "long" shares are not necessarily real shares in the company. They could be ones that have been lent out as described above.

dcolkitt 6y ago

I think the misconception is thinking that shares, once loaned, are somehow locked. In the above scenario, Alice and Chuck open their Robinhood account and see 100 shares just the same as Eli or any other long. In reality their shares are actually on loan, but they're probably not even aware of it. If and when they go to sell their positions, it will instantly execute, and the broker will recall the shares before settlement (which occurs three days after the trade's executed.) So, in fact Bob and Dave now have their pick of the litter and can buy back from either Alice, Chuck, or Eli.