4 ms·

How does the common sense definition of "naked short" differ from the technical one?

dalbasal 6y ago
"Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.
- nabla9 6y ago
  >Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible. That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short. Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops?sref=1kJVNqnU#footnote-3 https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga... >There is no special limit on shorting at 100% of shares outstanding! 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.
  - fastball 6y ago
    I think the point is this: Yes you can have > 100% short interest without naked shorts. But are the circumstances that lead to such a situation (regardless of nudity) economically useful, or is it just allowing parasitism to exist in our system without good reason?
    - nabla9 6y ago
      There is nothing magical about 100%. If it's useful in 99% then it's useful in 101%. Short squeezes and other things happen also before 100% of stocks are shorted. Shorts relative to float seems more important.
      - fastball 6y ago
        No, there is something magical about derivatives that in general provide questionable value.
        kevinmchugh 6y ago
        Are shorts a derivative? Futures are derivatives and seem obviously useful.
        fastball 6y ago
        Technically no, but shorts serve the same purpose as put options, just without the intermediary piece of paper. You're betting on future value without actually possessing the thing that may (or may not) be valuable in the future. I would argue this is a meaningless distinction in context. And I wouldn't say futures are "obviously useful". They are "useful" in the sense that if you bet on the future and bet correctly, you win, but does the overall economy win? Or is it just a layer that creates more winners and losers without those winners actually providing more value than they otherwise would've? Futures are effectively a zero sum game, and I don't think we should in general encourage those. Futures and shorts are basically just gambling. Would you say gambling (when applied to sports / etc) is economically useful? What we should be encouraging is positive sum games / win-wins.
- kevinmchugh 6y ago
  This seems to be a common misconception that's driven a lot of confusion this past week.

"Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.

nabla9 6y ago
>Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible. That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short. Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops?sref=1kJVNqnU#footnote-3 https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga... >There is no special limit on shorting at 100% of shares outstanding! 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.
- fastball 6y ago
  I think the point is this: Yes you can have > 100% short interest without naked shorts. But are the circumstances that lead to such a situation (regardless of nudity) economically useful, or is it just allowing parasitism to exist in our system without good reason?
  - nabla9 6y ago
    There is nothing magical about 100%. If it's useful in 99% then it's useful in 101%. Short squeezes and other things happen also before 100% of stocks are shorted. Shorts relative to float seems more important.
    - fastball 6y ago
      No, there is something magical about derivatives that in general provide questionable value.
      - kevinmchugh 6y ago
        Are shorts a derivative? Futures are derivatives and seem obviously useful.
        fastball 6y ago
        Technically no, but shorts serve the same purpose as put options, just without the intermediary piece of paper. You're betting on future value without actually possessing the thing that may (or may not) be valuable in the future. I would argue this is a meaningless distinction in context. And I wouldn't say futures are "obviously useful". They are "useful" in the sense that if you bet on the future and bet correctly, you win, but does the overall economy win? Or is it just a layer that creates more winners and losers without those winners actually providing more value than they otherwise would've? Futures are effectively a zero sum game, and I don't think we should in general encourage those. Futures and shorts are basically just gambling. Would you say gambling (when applied to sports / etc) is economically useful? What we should be encouraging is positive sum games / win-wins.
kevinmchugh 6y ago
This seems to be a common misconception that's driven a lot of confusion this past week.