4 ms·

My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a p

My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a particular company and it is owned by Person A. Person B then borrows the share from Person A and sells it to Person C (this is the first short). Person C now owns 1 share and Person A doesn't have a share but is contractually obligated to receive 1 share from Person B at a certain point in time in the future. Person D then borrows the share from Person C and sells it to Person E (this is the second short). Even though there only exists 1 share the short interest in this case is 200%. Now there are obvious reasons as to why this isn't a smart thing to do as recent events with GME show but it's not necessarily illegal (as far as I know). If this is actually not true or it's illegal somebody please correct me.

cecilpl2 6y ago
This is possible, not illegal, and can be simplified even further. It's entirely possible for me to borrow a share from you, (short) sell it back to you, and then for us to repeat that process an unlimited number of times, thereby shorting an unlimited amount of stock. This would be stupid since I'd owe you more stock than exists and you could set any price you wanted for them.
- ineedasername 6y ago
  Both parties could each do it with 500 shares. Then they'd each also owe each other the same amount.
- bhk 6y ago
  With the total long position > 100% of issued shares, who gets denied voting rights?
  - dmlittle 6y ago
    Whomever is the holder record has the voting rights. If you gave your stock to someone to facilitate a short you lose your voting rights until that position is closed. You can read more about it here: https://www.investopedia.com/ask/answers/05/shortsalevotingrights.asp https://www.investopedia.com/ask/answers/05/shortsalevotingr...
    - bhk 6y ago
      > If you gave your stock to someone to facilitate a short you lose your voting rights... Individuals do not loan stock for shorting, generally. But they do sometimes have margin accounts (for unrelated reasons), and this allows the broker to loan their shares out without their knowledge. In this case, they retain a fraction or none of their voting rights, I presume?
    - KMag 6y ago
      It looks like nesting got too deep, but for bkh, you are correct. > In this case, they retain a fraction or none of their voting rights, I presume? If you have a margin account and want to vote with your shares, you need to let your broker know prior to the vote, so they can be sure and not have your shares loaned out when they're figuring out everyone's voting shares. Some time prior to 2010, I heard some heads rolled at my firm because such a request was screwed up for a major client, and they had fewer votes than expected for some important vote.
    - blackrock 6y ago
      Does your broker automatically loan out your shares? Or must you manually opt in, to allow it to be loaned out for shorting?
      - deleted 6y ago
        [deleted]
      - darumderum 6y ago
        Some of them (or most?), but not in your favor. They will keep the profit
KMag 6y ago
On a side note, if you want to vote with your shares and have a margin account, you need to let your brokerage know in advance of the shareholder meeting, so they can get those loaned shares back to you in time to vote. Otherwise, the shares showing up in your account may or may not actually be there on the day for you to vote.

cecilpl2 6y ago

This is possible, not illegal, and can be simplified even further. It's entirely possible for me to borrow a share from you, (short) sell it back to you, and then for us to repeat that process an unlimited number of times, thereby shorting an unlimited amount of stock. This would be stupid since I'd owe you more stock than exists and you could set any price you wanted for them.

ineedasername 6y ago
Both parties could each do it with 500 shares. Then they'd each also owe each other the same amount.
bhk 6y ago
With the total long position > 100% of issued shares, who gets denied voting rights?
- dmlittle 6y ago
  Whomever is the holder record has the voting rights. If you gave your stock to someone to facilitate a short you lose your voting rights until that position is closed. You can read more about it here: https://www.investopedia.com/ask/answers/05/shortsalevotingrights.asp https://www.investopedia.com/ask/answers/05/shortsalevotingr...
  - bhk 6y ago
    > If you gave your stock to someone to facilitate a short you lose your voting rights... Individuals do not loan stock for shorting, generally. But they do sometimes have margin accounts (for unrelated reasons), and this allows the broker to loan their shares out without their knowledge. In this case, they retain a fraction or none of their voting rights, I presume?
  - KMag 6y ago
    It looks like nesting got too deep, but for bkh, you are correct. > In this case, they retain a fraction or none of their voting rights, I presume? If you have a margin account and want to vote with your shares, you need to let your broker know prior to the vote, so they can be sure and not have your shares loaned out when they're figuring out everyone's voting shares. Some time prior to 2010, I heard some heads rolled at my firm because such a request was screwed up for a major client, and they had fewer votes than expected for some important vote.
  - blackrock 6y ago
    Does your broker automatically loan out your shares? Or must you manually opt in, to allow it to be loaned out for shorting?
    - deleted 6y ago
      [deleted]
    - darumderum 6y ago
      Some of them (or most?), but not in your favor. They will keep the profit

KMag 6y ago

On a side note, if you want to vote with your shares and have a margin account, you need to let your brokerage know in advance of the shareholder meeting, so they can get those loaned shares back to you in time to vote. Otherwise, the shares showing up in your account may or may not actually be there on the day for you to vote.