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There isn't something "magical" about > 100% short interest. It should be stated a ratio to be less confusing, rather than a percentage. It just means that if t

There isn't something "magical" about > 100% short interest. It should be stated a ratio to be less confusing, rather than a percentage. It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares, so there will certainly be bag holders at the end of this since the shorts don't actually need to buy up "all the shares", only 54% of them in this case. Now, of course, some of those shares are locked up by funds tracking, say the Russell 2000 index, which cannot liquidate their holdings (and may even be required to buy more as GME climbs) in order to maintain it's percentage in the fund. Other shares are held by other funds or institutions, and so on. So the reality is it is difficult for the shorts to cover quickly. This isn't a problem during "normal times" because the volatility of the stock is relatively low and thus the short margin interest that you have to pay to keep borrowing the stock is a small percentage. But as the price runs up, that interest and collateral requirements grow dramatically since the broker needs to be sure you can pay up if you have to buy the shares at the current market price.

tashmahalic 6y ago
If an index fund wants to maintain the same portfolio percentage of GME when GME’s stock price rises, wouldn’t the fund sell GME, rather than buy?
- reducesuffering 6y ago
  Isn't it actually neither buy nor sell? Most common indices (by AUM) are market-cap weighted. If a total market ETF contains 0.25% of it in GME, and GME doubles in value, it's GME it holds is now 0.50%, and that's how much it should hold now, according to market-cap weight. No buying or selling. Of course there's many ETF's that aren't market-cap weighted, but the majority of funds/value is.
  - boatsie 6y ago
    That’s right, I misspoke. It could possibly require other funds that were tracking, say, the top 1000 stocks by market cap to buy, not ones tracking the regular index.
- kozd 6y ago
  Not if it's a cap-weighted index fund.
CuriousNinja 6y ago
>It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares Can someone please explain how the original 100 shares turned into 220? Does this mean that after borrowing a share and shorting it, the original owner and the one who shorted can both sell it?
- jfim 6y ago
  It's not unlike fractional reserve banking. Imagine three participants: Alice, Bob, and Charlie. Alice owns a share of Foo Corp, the only such share that exists. Bob decides to short Foo Corp, and borrows a share from Alice's broker (Alice's broker gets paid for this). At that moment, there are two shares that exist. If Alice logs into her brokerage account, she sees a share of Foo Corp, but it's really an IOU for a share of Foo Corp. If Bob logs into his account, he also sees a share of Foo Corp (that he borrowed from Alice). At that point, there are two "shares" of Foo Corp that exist. To make money on the short, Bob has to sell the share and buy it later, so he puts it in the market and sells it to Charlie. At this point, there are two shares: a share owned by Charlie and an IOU to Alice from Bob. Bob could be very confident about shorting Foo Corp, so he could also borrow a share from Charlie's broker, at which point there would be three shares in existence: an IOU to Alice, an IOU to Charlie, and the sole share that exists. Each of these participants, if they log into their brokerage account, do see a share. These phantom shares can't exist forever though: Bob is paying both Alice's and Charlie's brokers. Keep in mind that either Alice and Charlie can decide to sell their share, which Bob could then buy, at which point he could cover the remaining IOU, and everything would settle. But then, what if both Alice and Charlie just bought the share and weren't planning to sell it? Bob would be in a position where he owes two shares but there are zero to buy on the market. Normally, that doesn't happen because shares are traded often enough, but in certain scenarios (short squeeze, collusion between participants) there might be issues. At that point, Bob can decide to keep on borrowing the shares until one sells, or maybe he runs out of cash to borrow shares and closes his account. That's when things get a bit dicey. At this point, there are two "shares", one actual share and one IOU for a share. What happens is that Bob's broker is in a fail to deliver position. They're supposed to deliver a share of Foo Corp to close the IOU but there's no such share to deliver.
mapster 6y ago
You mention it should be stated as ratio then go on to discuss it as percentage.

tashmahalic 6y ago

If an index fund wants to maintain the same portfolio percentage of GME when GME’s stock price rises, wouldn’t the fund sell GME, rather than buy?

reducesuffering 6y ago
Isn't it actually neither buy nor sell? Most common indices (by AUM) are market-cap weighted. If a total market ETF contains 0.25% of it in GME, and GME doubles in value, it's GME it holds is now 0.50%, and that's how much it should hold now, according to market-cap weight. No buying or selling. Of course there's many ETF's that aren't market-cap weighted, but the majority of funds/value is.
- boatsie 6y ago
  That’s right, I misspoke. It could possibly require other funds that were tracking, say, the top 1000 stocks by market cap to buy, not ones tracking the regular index.
kozd 6y ago
Not if it's a cap-weighted index fund.

CuriousNinja 6y ago

>It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares Can someone please explain how the original 100 shares turned into 220? Does this mean that after borrowing a share and shorting it, the original owner and the one who shorted can both sell it?

jfim 6y ago
It's not unlike fractional reserve banking. Imagine three participants: Alice, Bob, and Charlie. Alice owns a share of Foo Corp, the only such share that exists. Bob decides to short Foo Corp, and borrows a share from Alice's broker (Alice's broker gets paid for this). At that moment, there are two shares that exist. If Alice logs into her brokerage account, she sees a share of Foo Corp, but it's really an IOU for a share of Foo Corp. If Bob logs into his account, he also sees a share of Foo Corp (that he borrowed from Alice). At that point, there are two "shares" of Foo Corp that exist. To make money on the short, Bob has to sell the share and buy it later, so he puts it in the market and sells it to Charlie. At this point, there are two shares: a share owned by Charlie and an IOU to Alice from Bob. Bob could be very confident about shorting Foo Corp, so he could also borrow a share from Charlie's broker, at which point there would be three shares in existence: an IOU to Alice, an IOU to Charlie, and the sole share that exists. Each of these participants, if they log into their brokerage account, do see a share. These phantom shares can't exist forever though: Bob is paying both Alice's and Charlie's brokers. Keep in mind that either Alice and Charlie can decide to sell their share, which Bob could then buy, at which point he could cover the remaining IOU, and everything would settle. But then, what if both Alice and Charlie just bought the share and weren't planning to sell it? Bob would be in a position where he owes two shares but there are zero to buy on the market. Normally, that doesn't happen because shares are traded often enough, but in certain scenarios (short squeeze, collusion between participants) there might be issues. At that point, Bob can decide to keep on borrowing the shares until one sells, or maybe he runs out of cash to borrow shares and closes his account. That's when things get a bit dicey. At this point, there are two "shares", one actual share and one IOU for a share. What happens is that Bob's broker is in a fail to deliver position. They're supposed to deliver a share of Foo Corp to close the IOU but there's no such share to deliver.

mapster 6y ago

You mention it should be stated as ratio then go on to discuss it as percentage.