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> First one need to borrow the stock, which may be difficult for some stocks. In the US, stock loan markets are extremely deep and liquid. Finding borrow is ra
by dcolkitt 6y ago
> First one need to borrow the stock, which may be difficult for some stocks.
In the US, stock loan markets are extremely deep and liquid. Finding borrow is rarely a problem. Borrow fees may be relatively high, about 0.1% per day right now for GME. But considering that short sellers are targeting an 80%+ profit within a few weeks, that's not a real deterrent
Virtually 100% of shares held at retail brokers are available to borrow. This is especially true at discount brokers like Robinhood, where borrow fees are a primary revenue stream. Ironically the more WSB people that buy GME, the easier it becomes to borrow.
> If the stock goes up too much, the short seller needs to buy it back no matter what, for lack of margin.
This is incorrect in the vast majority of cases. Virtually every prime broker (i.e. the brokers used by hedge funds), uses portfolio margining. The prime broker calculates an aggregate "value-at-risk" for the entire portfolio, then requires the fund to post that collateral. As long as they have over that threshold, they won't trigger any margin calls. But even if they do, there's no reason they have to buy back GME specifically. They could just as easily liquidate any other position to bring down VaR in another less lucrative position.
Remember a major multistrat fund like Citadel or SAC will have something like $30 billion AUM, then lever that up by 500% or more. One of these players could short 30% of the float in GME, and it'd still only be 2% of their portfolio.
- coliveira 6y ago> could short 30% of the float in GME, and it'd still only be 2% of their portfolio That would be true if it wasn't for leverage. When using portfolio margining, the leverage is huge. So a relatively small change in the stock will result in large losses. Now, you're right that this is not going to break a fund like Citadel, but not all hedge funds are that huge.