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Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

337 points by lelf 6y ago

brutusborn 6y ago
I couldn't find any details of authorship or contact details of the "Citizens for Securities Reform". Is this pseudonymous to prevent reprisals? Does anyone have any further info?
- twic 6y ago
  Also posted under the name Gerald Klein: https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack https://seekingalpha.com/instablog/11442671-gerald-klein/309... Although it's not clear to me if Gerald Klein is the author, or is reposting a document someone else wrote.
colinng 6y ago
I always thought that shorting was a disgusting practice, and wondered, “who buys a share, and lends it out so someone can manipulate it and lower its value, and profit from it”? It never occurred to me the majority of the “lending” did not actually happen.
- Ninn 6y ago
  Just to clarify, many portfolios are created in a way that lending allowed is ON by default, as such people may not be explicitly by the actual owner, but something that the given trading platform does using your underlying assets. This is similar to how the bank may lend out your current balance and not actually hold ALL of the money that its customers has in their accounts.
  - Consultant32452 6y ago
    This is one of the things going on with Robinhood right now. If you place a limit order, they cannot lend you share out from under you. WSB people are putting limit sells at very high numbers trying to keep scarcity but RH is cancelling those limit orders.
- rmah 6y ago
  If you own stock and it's at a broker, mutual fund, in an ETF, a retirement fund... then you have probably lent out your shares to shorters.
  - mola 6y ago
    This is very upsetting. What's the point of ownership if not control?
- Dylan16807 6y ago
  Under normal circumstances, their sale has a negligible impact on price. They're betting the stock goes down, and you're betting the stock goes up, but there's no need to be hostile. And they give you a nice interest payment for the trouble.
SheinhardtWigCo 6y ago
Correct title is “Counterfeiting Stock 2.0”. The document doesn’t allege illegal activity; it describes things the author believes should be illegal. Also: > In compiling the information contained in this website, the author relied on sources — both public and private — and, for the most part, accepted the information from the source as reliable. This only works when the piece is written or published by someone willing to stake their reputation on its veracity.
- rax0m 6y ago
  Naked short selling is illegal [1] [1]: https://www.investopedia.com/terms/n/nakedshorting.asp https://www.investopedia.com/terms/n/nakedshorting.asp
  - konschubert 6y ago
    > Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems. Doesn't sound like it was properly made illegal. Should probably fix those rules.
    - JumpCrisscross 6y ago
      > Does your broker automatically loan out your shares? The “loopholes” are intentional carve outs for market makers [1]. Something you want unless you like market makers disconnecting every time the market hiccups. [1] https://www.law.cornell.edu/cfr/text/17/242.203 https://www.law.cornell.edu/cfr/text/17/242.203
      - dannyw 6y ago
        “Market makers” shouldn’t get to mess around with shares they don’t have. This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto.
        6y ago
dragosmocrii 6y ago
Holly shit, this is an exceptionally informative piece of information. It makes sense now why the GME movement, but I doubt that most who joined it actually understand the purpose. This needs to be more widespread
- jariel 6y ago
  There needs to be a lot more evidence than some random screed on the web. He barely gave a single example 'TASER' and frankly didn't really specifically indicate how that worked. With 100 companies at any time under the squeeze it should be relatively easy for him to give a lot of examples and to specifically list the trades themselves, but also point at the 'media barrage' and highlight the asymmetrical effect those 'shadow shares' have. It's a neat idea and maybe there's some truthiness to it, but there's no evidence.
  - dragosmocrii 6y ago
    I wish we knew for sure whether the information presented in the paper has some truth to it, or is just sensational conspiracy stuff. Until then it is a theory that is worthy of consideration, imo, at least for drawing personal conclusions.
  - nearbuy 6y ago
    If you check the TASER stock at the claimed time (June 2005), there's no sudden dips in stock price. The site claims that a single article which was corrected 3 days later did damage to the stock price, but I'm not seeing it in the price history.
TekMol 6y ago
I wish there was an audio version of this. I find it much easier to consume information via headphones while I do the dishes then to sit down and read it through. It is also a good opportunities to give the eyes some reast from monitor work. Any tips if one wants to learn this via listening?
- siegecraft 6y ago
  I used to use the text-to-speech feature of pocket for this use case.
- C19is20 6y ago
  Balabolka is a great TTS program (I use the portable windows version).
jariel 6y ago
This article would be more substantive with a lot more examples of the mechanism of the coordinated fraud.
- rmah 6y ago
  What fraud? There's no fraud involved in shorting.
  - jariel 6y ago
    Naked short selling is illegal and so is market manipulation i.e. coordinating an attack on a stock.
bouncycastle 6y ago
Counterfeit shares? Really? These are not really counterfeit shares, because they do not pay dividends or have any voting ability, the companies do not recognize them. More like "synthetic assets" that have the price pegged to the asset they mimic.
- jb775 6y ago
  The author likely used the term "counterfeit" since they're essentially copying the shares and redistributing them as if they represent the same value as the original, just like counterfeit money.
  - bouncycastle 6y ago
    The author likely used the term "counterfeit" to stir up a controversy. It's more like if I started lending you some rocks, and told you that each rock is always 1 Tesla share. You can always come to me and cash in that rock for whatever a Tesla share is. I'm not lending you counterfeit Tesla shares, but rocks. There's no counterfeiting going on.
    - jb775 6y ago
      The salient aspect here is what they're using them for: to drive the price down or up. If I place a bet on the direction of the price pegged to a given type of rock, then borrow millions of those rocks from you, then trade those rocks back and forth with my buddies to create the illusion of demand momentum (linked to an artificial price pattern going down or up)...I can swing the price pegged to that rock. So the rock could still be cashed in for whatever price it's pegged to, but that doesn't mean I didn't mess with that price. (would take massive amounts of capital obviously) I'm also not sure if there's any way to tell if it's only being lent out once. Since futures contracts are even more abstract than stock ownership (i.e. have the option to possibly purchase blocks of shares in the future or just scrap the contract altogether), there's probably ways to create value by taking on risk in the form of overextending the appearance that you have access to a security at a certain price. This video explains everything going on: https://www.youtube.com/watch?v=gMShFx5rThI https://www.youtube.com/watch?v=gMShFx5rThI
konschubert 6y ago
Shitty companies failing is a necessary and important mechanism of a functioning economy. Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. Short activists expose shitty companies and as such, they play an important role in the economy. Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Maybe shorting, in particular naked shorting, is not ideal. But there needs to be a way to reward people for taking shitty companies down.
- sanxiyn 6y ago
  Japan banned naked shorting (of course Japan did not ban shorting) and seems to be doing fine. US probably can ban naked shorting without much problem too.
  - konschubert 6y ago
    I am not sure Japan is doing well. (Not saying this is due to the lack of naked shorting) https://www.economist.com/finance-and-economics/2020/09/24/will-japan-see-a-new-generation-of-zombie-firms https://www.economist.com/finance-and-economics/2020/09/24/w...
  - ploika 6y ago
    The US already did ban naked shorting without much problem, over a decade ago.
- rcMgD2BwE72F 6y ago
  >Shitty companies failing is a necessary and important mechanism of a functioning economy. True >Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. The Soviet Union was not a free market economy. >Short activists expose shitty companies and as such, they play an important role in the economy. In free market economies, shitty companies fail by themselves because their competitors offer better good or services. Short activists don't help make better competitors. Companies in the Soviet Union needed more competition than short selling. >Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Who knows? Tesla wouldn't exist if short sellers had their way either.
kebman 6y ago
Can't this simply be done with leverage?
- jb775 6y ago
  I'd say the difference is that they're doing it over and over.
  - kebman 6y ago
    Sorry, I got it wrong, so I tried to delete my comment. Leverage is when you're loaned money, so you can buy more stocks than you could with just your own money, with certain automated stops as security against loss for the creditor (such as margin calls). It's a deal between you and a creditor, and the stocks purchased remain real. A naked short, on the other hand, is when a broker is exploiting the system to make it seem like there are more shares available than there actually is. Thus when people buy a non-existing share, the money is deposited for a short time, but the purchase “bounces,” which again can create slippage and volatility (fake “liquidity”), depending on how the system is set up.
woopwoop 6y ago
The author seems to be really upset about this, but I don't understand why. Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. Maybe I am misunderstanding. Basically, a short is when A borrows from B a share of corporation C with the promise to return a share of corporation C at a later time, plus some cash interest. A naked short is where instead B gives cash equal to the value of a share of corporation C minus some interest to A, with the promise that at a later time A will deliver a share of corporation C to B. The second activity seems functionally equivalent to the first, and I don't understand why I'm supposed to be outraged by either.
- sanxiyn 6y ago
  The second activity is dangerous because A can fail to deliver. I agree there's not much to be outraged by the first activity.
  - konschubert 6y ago
    When I take a loan I may also fail to deliver loan payments. I don't think we should make risk illegal, but we should make sure that banks manage tail risks right.
    - eru 6y ago
      That's what margin requirements and clearing houses are for. Even during the heights of the last few financial crises, clearinghouses did not fail. (Option writers and people trading futures are in a very similar situation to short sellers. They also have clearing houses.)
  - woopwoop 6y ago
    A can fail to deliver in the first activity, too. More generally, when you agree to have someone give you something of value at a later time, you take on some risk that they will fail to do so.
    - 6y ago
irjustin 6y ago
FYI, Naked Shorting has been made illegal since 08-09' [0] In the author's case because DTC is a blackhole system, these naked shorts can continue to exist. They also can continue to exist in self-contained as well as loop-holed systems. [0] https://www.investopedia.com/terms/n/nakedshorting.asp https://www.investopedia.com/terms/n/nakedshorting.asp
hlandau 6y ago
Question: According to this, all the actual share certificates are held in a vault at DTC. Do people have a right to "cash out" and demand physical share certificates? If so, it seems like if a large number of people suddenly started demanding share certificates, this could cause problems for DTC and show this problem for what it is. Essentially a "run on the bank".
- JumpCrisscross 6y ago
  > it seems like if a large number of people suddenly started demanding share certificates, this could cause problems for DTC No it wouldn’t. You would be delivered shares within two days as is required. Lots of institutions don’t hold their shares “in street name,” i.e. they hold them in their own. And some people still demand physical certification. (Not every issuer supports this, largely due to exchange rules.)
  - hlandau 6y ago
    If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this?
    - JumpCrisscross 6y ago
      > If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this? When a stock has 140% short interest, there are net 40% of the float of holders who have loaned out their shares. They wouldn’t have the right to certificate until they called back their shares. If literally everyone asked for delivery, you’d wind up with the naked shorts needing to pay up to some of those taking delivery to settle their positions. If everyone refuses to sell, those naked shorts would FTD, and the appropriate processes would take over. Long story short, nothing intrinsic to the DTCC creates net over or under allotment. Companies go private all the time, which is a functional case of all of a company’s shares being taken out of the DTCC.
csomar 6y ago
This article is quite biased. There are a few problems with it: 1- The stock market should not kill a healthy company. Sure, it can affect its money raising capabilities (and maybe hiring) but it should not drive it out of business. 2- Naked Short-sellers still have to pay interest and dividend on their sold shares. This would create a certain equilibrium. If you nake-shorted a company at x2 its value, you suddenly doubled its profit; and that's being paid by the short-sellers. Profit (dividend) gives a reason to investor to hold on that stock; which brings us to point 3- Naked short-selling is probably done on very short time frames that doesn't extend between quarterly dividend payments. The company is probably going under anyway.
- C4stor 6y ago
  The article also deals with the parts about actually defaming, attacking in courts and otherwise doing everything possible to actually bankrupt the company... It doesn't only cover the stock market, it covers the whole operation, which goes way beyond only the stock market.
  - threedots 6y ago
    Rules already exist around what you can and can't say as a short seller. What is it that you don't like about them? Do you think no one should be allowed to say negative things about companies? Shorts can't drive companies in the ground if that's not where they're headed anyway. First of all most short sellers are not activists. The perception that shorts causing companies to tank is because activist short sellers are right a high percentage of the time so often their reports result in a quick price adjustment. Being an activist short seller is a very high risk activity so they tend only to pull the trigger when they have high conviction. For example I'm not sure Muddy Waters has ever been wrong in calling out an accounting fraud. I have a really hard time buying the line that short sellers bring down good companies (examples?) and the fact that people do think that seems to me more of an indication of the power of corporations and their management than anything else.
    - C4stor 6y ago
jb775 6y ago
My initial thought after reading this is if all $GME shares sold by RobinHood actually exist, or if they're counterfeit copies of someone else's shares. I kind of doubt it considering all the regulation scrutiny recently.
256DEV 6y ago
I find articles like this fascinating because to me they are indicative of just how substantial the magnitude is of the "bounty of capitalism" in the public markets. On the one hand you have returns available to anyone prepared to invest consistently in the stock market across the last 30 years that are both well documented and very substantial. People like Warren Buffet & boggleheads make data-backed arguments about how well you could have done if you put money in even just broad index-tracking funds. And yet on the other hand there are two massively powerful groups with materially more leverage and informational "edge" within the system compared to all the people with a 401K. These are the executives who actually run the public corporations (and can choose their own compensation as a class via board/exec rotation & internal influence) and the financial firms that are embedded both in the firms' operation and also essentially setting/playing the rules of the meta-game as evidenced by articles like this. It feels like the fact that there are any returns left for a retail investor in public stock market investing speaks more to the quantities of wealth creation taking place than the absence of this sort of outrageous market rule capture. Two disclaimers: 1.) the slider for wealth "creation" on the public markets in the US seems fairly obviously to be being dragged from innovation to ZIRP... whole separate matter. 2.) at a whole-society level obviously the availability of public market returns is limited to a tiny sliver of the population with the means to invest, so when I say "bounty of capitalism" above I'm more referring just to the sum of financial profits as a result of the system.
- nearbuy 6y ago
  And yet hedge funds still tend to underperform the market. Warren Buffett once bet that over a 10 year period, the S&P 500 would outperform a portfolio of hedge funds (https://longbets.org/362/ https://longbets.org/362/). He won that bet.
- adriancr 6y ago
  > It feels like the fact that there are any returns left for a retail investor in public stock market investing speaks more to the quantities of wealth creation taking place than the absence of this sort of outrageous market rule capture. This is why lots of retail on forums like wsb treat the market as gambling. There is almost no edge you can get when compared to big players. And even if you make correct assumptions you can get losses out of them either by them being already priced in or via short manipulation. One example I remember last January's fake tesla brake issues the week a huge volume or calls expired.
tedunangst 6y ago
Is it time for this story to ride the merry-go-round again? https://theintercept.com/2016/09/22/the-money-is-gone/ https://theintercept.com/2016/09/22/the-money-is-gone/
emsign 6y ago
On a sidenote, I really like that site's design. Having just read about the Gemini project, I feel like we all should maybe tone down the web design a little bit.
- lisp-fan-007 6y ago
  What's the gemini project?
  - Tom4hawk 6y ago
    https://gemini.circumlunar.space/ https://gemini.circumlunar.space/
praeter 6y ago
"Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover. (Click here for more on Pulling Margin)." http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html Sounds a lot like Thursday and Friday, no?
liaukovv 6y ago
I don't quite understand how supply/demand dialectic works if one side of the trade(supply) can arbitrarily inflate, at least in the moment until liquidity costs kick in. Do economists have models to explain that?
JimWestergren 6y ago
"There are are 71 million shares of GME that have ever been issued by the company. Institutions have reported to the SEC via 13F filings [0] that they own more than 102,000,000 shares" Quote from https://old.reddit.com/r/wallstreetbets/comments/l97ykd/the_real_reason_wall_street_is_terrified_of_the/ https://old.reddit.com/r/wallstreetbets/comments/l97ykd/the_... [0]: https://fintel.io/so/us/gme https://fintel.io/so/us/gme
- bremac 6y ago
  13F filings don't include short positions. Given how shorted GME is, I don't think it's surprising that the total long positions exceeds the number of shares outstanding. To add to the confusion we're still within the 45-day filing window for the end of the last quarter, so some investors may not have filed yet either.
  - Miner49er 6y ago
    So there's way more shares held long than there is actual shares. This must lower the share price then? There's way more "supply" (people that can sell a share).
Temasik 6y ago
long $gme?
Lazare 6y ago
Very, very much a crank site. One pinch fact, two cups of confusion, and generous splash of seething rage. It's interesting in much the way the Timecube site is interesting...and is informative about financial markets in much the same way the Timecube site is as well.
- ta70 6y ago
  Non American asking: What does crank mean here?
  - detaro 6y ago
    https://en.wikipedia.org/wiki/Crank_%28person%29 https://en.wikipedia.org/wiki/Crank_%28person%29
  - Gibbon1 6y ago
    "a pejorative term used for a person who holds an unshakable belief that most of his or her contemporaries consider to be false."
  - twic 6y ago
    You've had some good answers, but i will add that the internet led to a Cambrian explosion of cranks, because now anyone can put up a webpage. There is a catalogue, although i don't think it's maintained any more: http://www.crank.net/contents.html http://www.crank.net/contents.html
- brutusborn 6y ago
  How so? Could you please explain for someone who only knows enough to see this as potentially credible? I tried to research timecube but can't see the connection.
  - Lazare 6y ago
    Complicated subject. Briefly, if you're familiar with a field, you can (generally) tell if an argument is at least trying to engage with the field, or if it exists in some disconnected parallel universe. This happens a lot more than you might think. It's a real issue in physics (see, eg, https://theness.com/neurologicablog/index.php/cranks-and-physics/ https://theness.com/neurologicablog/index.php/cranks-and-phy... or https://blogs.scientificamerican.com/cross-check/in-physics-telling-cranks-from-experts-aint-easy/ https://blogs.scientificamerican.com/cross-check/in-physics-...), but it pops up everywhere. I believe I am familiar enough with this area to say this is the work of a crank. Some key problems: 1. There's a huge body of scholarship out there about markets, how they work, how to think about them, how they may fail, how you can measure how they're failing, etc. This doesn't engage with any of that. It's not "Prof X said Y is true, but my data suggests he was wrong, see table 2", it's just "everything you think you know about Y is wrong". 2. Also, the paper is making up its own terms. That's actually a pretty good rule: Any paper that tries to discuss a topic and starts with a bunch of idiosyncratic definitions of basic terms is a huge red flag, because anyone in the field knows what those words mean already. So again, you're clearly not writing for an audience of people who could critique your argument. But if you're not looking for a critique, why are you writing at all? How can you know you're right unless the top experts in the field have tried to tear you apart and failed? Which they won't do if you don't engage with them. 3. There's no data anywhere, just assertions which (again, as someone a bit familiar with the field) seem wildly implausible. Eg: > At any given point in time more than 100 emerging companies are under attack as described above. [...] The success rate for short attacks is over ninety percent—a success being defined as putting the company into bankruptcy or driving the stock price to pennies. It is estimated that 1000 small companies have been put out of business by the shorts. So more than 100 companies are being attacked every moment of the day. There's no real definition of what an attack might be, or how you might count this, nor is there any evidence given of where the author came up with this number, or how long an attack lasts, or a list of companies under attack at the time of writing. Then we're told that these attacks succeed 90%(!) of the time, bankrupting the company(!). Again, no information why we might think such attacks succeed at all, much less 90% of the time, nor any acknowledgement of the huge body of research suggesting shorting does no such thing. Then we say "it is estimated" (by whom? when?) that 1000 companies have been so bankrupted. ...if 100+ companies are being attacked, and this has been going on for many years, and the success rate is 90%, and the result is bankruptcy, how come only 1000 companies have been bankrupted? Also, again, how come we can't seem to name any of these companies? Also, I elided a passage of the quote above, which is: > This is not to be confused with the day–to—day shorting that occurs in virtually every stock, which is purportedly about thirty percent of the daily volume. That probably sounds pretty wild too. But actually, last I heard, the actual number was more like 49%, because that's how stock markets work. You ask your broker to buy 100 shares of Apple, and he'll sell you 100 shares (short), then go buy the rest on the market. As a general rule, whenever you buy shares it shows up as a short order, and whenever you sell shares it shows up as a long order. Since any time someone buys someone else is selling, about half the order volume is short orders. Simple. But consider: The author got the number wrong (it's ~50%, not ~30%), which is a bit embarrassing. Worse, it's a number which exists. "Purportedly about thirty percent"? You don't need to use anonymous rumours. Why not "according to the SEC it's 49%"? (Some slightly old numbers here: https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf https://www.sec.gov/files/short-sale-position-and-transactio..., I believe newer ones are reported regularly, although I'm not quite sure where to look, because I'm not an expert on finance writing about fundamental market structure questions. But I do know the numbers exist, and anyone qualified to write the paper the author is wring would have them at the tips of their fingertips. And of course, the bigger issue is that number has nothing to do with what he's actually talking about. Unless of course he's talking about some other number entirely, but how would we know, because he doesn't actually explain it or cite it! That's a lot of errors to pack into such a short passage! And then consider his rant about the grandfather clause (linked from the main article, or available here: http://counterfeitingstock.com/CS2.0/CS1TheGrandfatherClause.html http://counterfeitingstock.com/CS2.0/CS1TheGrandfatherClause...) Read what's being said carefully; I would paraphrase it as: "The initial regulation grandfathered a group of transactions. Authorities claimed the size of this group was small, but I (and unnamed others) believed they were wrong. This exception was later closed; if I was correct and it covered a large number of transactions, this would have had a large impact, but it actually had a very small impact, in line with what the SEC had stated all long. Since the data suggests I was wrong, this proves the conspiracy goes much deeper than I had realised!" This is not falsifiable; if reality agrees with his predictions it means he's right, if it disagrees with his predictions it means he was even more right. If everything that happens or does not happen proves the SEC is lying then....what now? And so forth. Note that nothing says this guy (or any other "crank") is wrong; by chance if nothing else they'll occasionally be right! The problem is that science, finance, economics, software engineering, etc. are all disciplines that require many people to work together, building on the work of those that came before. If you come up with your own arguments using your own terminology and your own data, nobody will ever understand what you're trying to say, nobody will ever engage with or vet your arguments, nobody will ever have any reason to trust your arguments, etc.
GordonS 6y ago
My (basic) understanding of naked shorting is that you are agreeing to sell a share at some future date, but you don't yet own the share. Who does this actually benefit?
Pyramus 6y ago
Even though the author posits that >"At any given point in time more than 100 emerging companies are under attack as described above. [...] The success rate for short attacks is over ninety percent" he/she can only find two examples (Global Link and TASER), which is a bit odd. In any case, there is a connection to the current narrative of "short sellers are evil". But "the shorts" or "they" is one of these "us vs them" constructs that does not exist in any meaningful way. Even worse, there is a common notion on r/WSB that "the shorts" are also "the suits" and there will be some rough awakening when folks find out that Wall St made more money on $GME than Main St, and that is on the long side, before any dip in share price! By the way, this awakening might never happen and there is a scenario where we will never find out who traded what on $GME, because transparent transaction data is not publicly available. Thinking back about the 2010 flash crash [1] we still don't know with certainty what exactly happened. Grant Williams did a podcast about the current events [2] and I can only recommend it (also check out his Endgame series). There certainly are unethical sellers of stock (see e.g. Jim Cramer video where he talks about manipulation) but I have yet to see convincing evidence that unethical or fraudulent behaviour is more common on the short than long side. There was a recent poll on Fintwit to name examples where "short attacks" hurt companies, and the paucity of meaningful examples further confirmed the above point (can't find reference due to crappy Twitter search). [1] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash [2] https://ttmygh.podbean.com/e/gwp_003/ https://ttmygh.podbean.com/e/gwp_003/
darawk 6y ago
This is mostly nonsense. There is nothing wrong with there being more shares short than shares outstanding. It just seems problematic, until you think it through. Person A has 1 share of company Y. Person B borrows 1 share of company Y from person A, and then sells it into the market. This is called a short sale. But person B just sold their borrowed share. Now that share is owned by person C. Person C can now lend it back out to person D, or to person B again, and the process can repeat infinitely. The idea that short interest is constrained by shares outstanding is just a fundamental misunderstanding of how the short market works. Shorting behaves the same way that fractional reserve banking does, and there is a 'money multiplier' like leverage effect in the process. There is nothing nefarious about this, and it certainly isn't 'countfeiting'. Short sellers provide an important service to capital markets, maybe the most important service: they help to identify mismanaged or fraudulent companies. The idea that attacking short sellers is attacking wall street is completely backwards. Most of Wall Street hates short sellers, because they drive down the prices of companies and confidence in markets (in the short run, in the long run, they increase it).
- oldgradstudent 6y ago
  > Shorting behaves the same way that fractional reserve banking does Yes. Except that the fractional reserve banking system has a lender of last resort.
  - eru 6y ago
    Some fractional reserve banking systems do. Historically, systems without lender of last resort have done quite well. See eg the Canadian system of the 19th century, with no lender of last resort, and that often ended up as an emergency lender to the mis-regulated and crisis-prone American system to the south.
  - sidibe 6y ago
    And the whole "fractional" word. You can't lend someone 10 shares based on the one you bought.
    - 6y ago
zwaps 6y ago
If the op is reading: In the description of a short attack, it says in the picture that the demand curve is "infinitely elastic, it moves all the time". This is not what elasticity means here. In fact, the demand shown in the picture is not infinitely elastic.
lop 6y ago
I wonder if there is public accessibly list (or registry if this is more correct term for it) where everybody can check the involved parties of short selling (of Gamestop). There is https://fintel.io/ss/us/gme https://fintel.io/ss/us/gme or https://www.marketbeat.com/short-interest/ https://www.marketbeat.com/short-interest/ - but a I mean a more (and free) total overview for stocks traded on NYSE for example. So far I was not able an URL for it. For all EU-countries there is an official list here: https://www.esma.europa.eu/sites/default/files/library/ssr_websites_ss_procedures.pdf https://www.esma.europa.eu/sites/default/files/library/ssr_w... (and most of the links work ;- ) Is there something similar for NYSE?
RivieraKid 6y ago
Can't believe this nonsense is upvoted on HN. Short-selling helps to correct market prices of capital, which is good. It even directly helps the average retail investor because when you buy an index, you want the prices to be as close as possible to the "actual value".
- marketneutral 6y ago
  the article does not argue against short selling. it argues that there are loopholes being used to facilitate naked shorting and that the lack of transparency with naked shorts is problematic.
- MrMan 6y ago
  it is worse than the HFT hysteria ten years ago
rsp1984 6y ago
Wow, it seems like none of the top commenters here have put in at least minimal effort to read and understand this. The author does not complain about short sellers per se or about the fact that more than 100% of a stock's float can be shorted. That is all nice and fine. Instead what the author does complain about is that fact that the (supposedly regulated) mechanisms for shorting a stock are fraught with loopholes and exceptions that make it possible for brokers and the DTC to create stocks "out of thin air" for the short sellers and never neutralize. This dilutes the company's stock in the process and thereby damages the company's shareholders. It is an issue that, if true, should absolutely be brought to public and regulator's attention.
- neffy 6y ago
  Can only agree. There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short, and there aren't enough shares available. It really is that simple. While this doesn't mean a price of infinity, since price is also constrained by the available money for the purchase, in reality this then becomes a liquidity trap which is guaranteed to bankrupt the least liquid short sellers until enough positions have gone under to bring the short position down under the float size. So whilst some flexibility may make sense to resolve some of the buffering issues with settling, if that is being deliberately exploited as claimed in the article, that is a huge regulatory problem.
  - dcolkitt 6y ago
    > There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short The point of a naked short system is that short sellers never need to cover their positions. Naked shorting allows any credit worthy institution to create synthetic shares as long as they continue to pay the dividends. That’s what makes it IMO a superior system. It eliminates the disruptive problem of short squeezes. Shorts can never get recalled, because they’re simply synthetic cash flow streams. Overall we want more short selling in the market, and therefore want to remove as many constraints to short selling as possible. Short selling improves price efficiency[1], increases liquidity[2], reduces corporate fraud[3], and helps protect against speculative bubbles[4] [1] https://academic.oup.com/rfs/article-abstract/24/3/821/1590469 https://academic.oup.com/rfs/article-abstract/24/3/821/15904... [2] https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenceofShortSellingRestrictions.pdf https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenc... [3] https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [4] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2006.00868.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261....
twic 6y ago
Time to read the SEC SHO FAQ [1] again: > Question 7.1: Do naked short sale transactions create "counterfeit shares?" > Answer: Some believe that naked short sale transactions cause the number of shares trading to exceed the number of shares outstanding, which in turn allows broker-dealers to trade shares that don't exist. Others believe that the U.S. clearance and settlement system, and specifically the NSCC’s CNS, produces "phantom" or "counterfeit" securities by accounting for fails to deliver. > Naked short selling has no effect on an issuer's total shares outstanding. There is significant confusion relating to the fact that the aggregate number of positions reflected in customer accounts at broker-dealers may in fact be greater than the number of securities issued and outstanding. This is due in part to the fact that securities intermediaries, such as broker-dealers and banks, credit customer accounts prior to delivery of the securities. For most securities trading in the U.S. market, delivery subsequently occurs as expected. However, fails to deliver can occur for a variety of legitimate reasons, and flexibility is necessary in order to ensure an orderly market and to facilitate liquidity. Regulation SHO is intended to address the limited situations where fails are a potential problem. > Similarly, CNS has no effect on an issuer's total shares outstanding. With regards to the contention that the U.S. clearance and settlement system, and specifically NSCC's CNS system, creates counterfeit shares, this is not the case. CNS is essentially an accounting system that indicates delivery and receive obligations among its members (i.e., broker-dealers and banks). These obligations do not reflect ownership positions until such time as delivery of shares are actually made. Ownership positions are reflected on the records of The Depository Trust Company ("DTC"). [1] https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm
- dmichulke 6y ago
  > Naked short selling has no effect on an issuer's total shares outstanding An overspecific dementi: Surely, it has no effect on issuer's total shares outstanding but on shares outstanding. GME had 140% short interest, issuance was 100%, so there was -40% float. So there was less float than for a non-publicly traded company (which would be 0) How would you like it if I sell more than 100% of your company? Should I be allowed to in the first place? "significant confusion" indeed
codecamper 6y ago
garbage.
peter_retief 6y ago
I know of a research company that deliberately smears companies to make money from selling them short "Viceroy comes up short on Capitec" https://www.timeslive.co.za/sunday-times/business/2018-02-01-treasury-comes-out-to-bat-for-capitec-and-wants-viceroy-probed/ https://www.timeslive.co.za/sunday-times/business/2018-02-01... Lets not be coy about these companies, they are crooks.
hncommenter13 6y ago
It's trivial to prove that naked short selling doesn't exist the way the author thinks it does. a) Take my word for it. I am a former VC now working as a professional short seller (for the past eight years; my first really great short idea I found from a comment on HN). When I instruct our prime broker to short a stock, I must provide a matching locate id that corresponds to a specific block of borrowed stock. No locate id, no trade. Can't locate the stock to borrow to obtain a locate id? No trade. Get a margin account and try it yourself. b) Borrow costs. If I could short sell anything I wanted without having to borrow the stock, there wouldn't be such a thing as a borrow cost. I could short anything in as much size as I wanted for free. (And retail traders wouldn't get paid for lending their shares, which happens all the time.) c) Recalls. If naked shorting were a thing, there would be no such thing as stock borrows getting recalled. Again, take my word for it, they happen. d) Margin. Would I have to post cash collateral to our prime broker to borrow a stock if I could naked short? There's no stock I need to return, as I wouldn't have borrowed it from anyone. I mean, I guess I could still lose money short a stock and they'd want some protection against that, but I doubt we'd have Reg T margin rules if naked short selling were a thing. And nobody could make me close the short, unless the company got sold. I could just stay short forever, as I haven't borrowed anything that ever needs to be returned. So if interest rates were >0%, I could just naked short at no fee, let the cash from the short sale sit in my account collecting interest, and never have to cover the short. I'd also pay no dividends on the borrowed stock, as I presently must, as I hadn't actually borrowed it. In other words, riskless profit for everybody. Let me know if you find one of those. e) There are dozens of stocks out there that I (and lots of other people) believe will likely be worth zero one day, but it's uneconomic to make that bet as the borrow cost is 90%+. If I could naked short, I'd make a huge fortune shorting them to zero. Other people would make huge fortunes. Neither I nor other short sellers have such fortunes. If short sellers made fortunes, there'd be hundreds of short-only funds. There are barely a handful remaining. More broadly, I've worked on hundreds of shorts over the past eight years. In some cases, the company was perfectly legitimate, just overvalued by an enthusiastic market. I've also helped expose companies that were screwing people and lying to investors, in several cases resulting in SEC investigations and criminal indictments. And I've lost money when companies got bought by other companies that later wrote off the entire investment. I've also been straight up wrong on plenty of them, and exited the position when that became clear. An important function of the market is price discovery, and my job--like that of a long-oriented analyst--is to express the reasoned view that the current price is wrong. It's not a market if there's no way to express a contrary view. Nothing I say or do can keep a company from raising capital or succeeding if the bull case is more convincing than the bear case. (Again, if I could destroy companies based on shorting them--even if I had to borrow the stock--I'd never lose money. So everyone would do it.) Netflix has had short interest forever and ever, and proved all the doubters wrong. And if you don't believe that overly high prices lead to misallocated investment in nonsense projects, take a good look at the amount of money sloshign around Silicon Valley these days. The fact is, it's a lot more fun and profitable to be a venture capitalist than it is to be a short seller, and there's a lot more VCs as a result.
hikerclimb 6y ago
50% of option trading is luck. Robinho of is meant to reduce risk...
Specie33 6y ago
I believe this whole GME and AMC deal was perpetrated by the owners of those companies debt and pushed through by people who owned a mouthpiece on WSB and other platforms. Way too many coincidences. Everyone left that has been trading stocks for 2 days will be holding the bag on this and will be left with nothing as Blackrock and Burry and others have already liquidated their positions. Two basically bankrupt companies that owed debt suddenly funded/bailed out by autists? 600 mil in debt repaid by selling stock on AMC? Anyone else think like this?
- clktmr 6y ago
  Not what is happening at all. GME was trading below net cash last year, which is insane. E-commerce is growing 300% YoY and Ryan Cohen, former founder and CEO of Chew, just made a major move as an activist investor. If GME was valued by VC measures, it would be trading at $420. Most of the people on WSB believe in the value of the company and have faith in a successful turnaround.
foobar99y 6y ago
Since it seems not a lot of the top replies actually read the paper and just seem to have read the title and dismissed it, I've summarized some of the fraud claims in the paper below. The paper is NOT just claiming that regular shorts are stock manipulation. It outlines a series of tactics and loopholes in detail that involve the use of shorts among other market tools to sell people stocks that don't exist, but were counterfeited through book-keeping tricks. Their claims of counterfeiting stock involve the use of naked shorts(a.k.a where a share is sold, but never borrowed) Naked shorts must be attached to a real share within 3 - 21 days, not doing so is illegal. They outline a series of loopholes which are used to sell shorts w/o ever borrowing a real share, effectively diluting the actual stock issued by the company with extra counterfeits to drive the price down. The goal is to drive the price to 0 and bankrupt the company, so that the shorts don't have to be covered anymore, netting a large (tax-free) profit. Below is not an exhaustive list of manipulation tactics, just a selection of examples: 1. SEC rules left a loophole allowing naked shorts to be covered with naked calls. No actual instance of stock has to actually be borrowed in this case, but it's not marked as a fail-to-deliver in SEC reporting. The naked call option is not tied to any stock issued by the company, it's just an option to buy at a future date, but it can now be repeatedly borrowed out for shorts as if it were a stock. 2. The SEC keeps track of fail-to-deliver in the SHO list and has requirements of 3 days for brokers and 21 days for market makers to borrow an actual stock. Another fraud claim is that brokers/hedge funds collude to pass around naked shorts between offshore shell companies in order to indefinitely reset the 3 day SEC requirement to keep naked shorts indefinitely and keep it off of the SECs fail-to-deliver list. They also use a similar technique to allow 8 - 10 shorts to borrow the same shares and then just move them around in time to meet SEC reporting deadlines. During any audit by the SEC, the SEC calls ahead and they move all naked shorts to offshore accounts where they can't be seen and then move them back once the investigation is over. This means for every fail-to-deliver marked on the SECs books, there will be several times (10 - 20 according to the whitepaper) more counterfeit shares being sold by shorts that are not tied to any real shares. 3. The third fraud claim involves the clearing house (a.k.a a broker for brokers) the DTCC (we care about two of its subsidiaries DTC and NSCC). When a broker sells a short and fails to deliver an actual share in 3 days, before 1981 they would be forced to buy it back. After 1981, they can borrow one from the NSCC Stock borrow program. The NSCC will then go to the DTC which holds all the stock certificates and find a broker with a surplus of shares and borrow the necessary amount of shares. Now here's the fraudulent part. When the shares are borrowed only the net amount is deducted from the surplus, but no actual shares are actually removed from the individual accounts of the broker. Now both the lending broker and the borrowing broker have real shares in their account, but they're the same real shares. Since the borrowing broker has real shares now, these same shares can again be lent out by NSCC to another borrowing broker and again no shares are removed. Now 3 investors have the same shares in their account. Since transactions are done as net transactions (instead of individual stocks) between brokers, the fact that 3 investors have the same share never has to be reconciled and two counterfeit shares have been created. In regards to the GME short, even though only 71 million shares were issued by the company, currently institutions have reported to the SEC (13F filings https://fintel.io/so/us/gme https://fintel.io/so/us/gme) that they own more than 113 million shares (including 13% owned by gamestop ceo). Additionally according to the SEC's fails-to-deliver list for December, Gamestop has nearly 1.8 million shares failed-to-deliver. Most companies have anywhere from 0 to a few thousand. Going by the whitepapers estimates the number of counterfeit shares would be 10-20 times that amount, indicating that ~ 40 million shares of Gamestop would be counterfeit. In order to verify these accusations with concrete data, we would need access to the books/transactions of the DTCC. They are a private organization that is collectively owned by brokers and they are very secretive and have few disclosure requirements due to regulatory capture at the SEC.
z_notes 6y ago
I want to know who is the author? Creating this document took a significant amount of time and effort. A "whois" on the counterfeitstock.com site or inspection of the pdf document reveals nothing.

337 points by lelf 6y ago

I couldn't find any details of authorship or contact details of the "Citizens for Securities Reform". Is this pseudonymous to prevent reprisals? Does anyone have any further info?

twic 6y ago
Also posted under the name Gerald Klein: https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack https://seekingalpha.com/instablog/11442671-gerald-klein/309... Although it's not clear to me if Gerald Klein is the author, or is reposting a document someone else wrote.

colinng 6y ago

I always thought that shorting was a disgusting practice, and wondered, “who buys a share, and lends it out so someone can manipulate it and lower its value, and profit from it”? It never occurred to me the majority of the “lending” did not actually happen.

Ninn 6y ago
Just to clarify, many portfolios are created in a way that lending allowed is ON by default, as such people may not be explicitly by the actual owner, but something that the given trading platform does using your underlying assets. This is similar to how the bank may lend out your current balance and not actually hold ALL of the money that its customers has in their accounts.
- Consultant32452 6y ago
  This is one of the things going on with Robinhood right now. If you place a limit order, they cannot lend you share out from under you. WSB people are putting limit sells at very high numbers trying to keep scarcity but RH is cancelling those limit orders.
rmah 6y ago
If you own stock and it's at a broker, mutual fund, in an ETF, a retirement fund... then you have probably lent out your shares to shorters.
- mola 6y ago
  This is very upsetting. What's the point of ownership if not control?
Dylan16807 6y ago
Under normal circumstances, their sale has a negligible impact on price. They're betting the stock goes down, and you're betting the stock goes up, but there's no need to be hostile. And they give you a nice interest payment for the trouble.

SheinhardtWigCo 6y ago

Correct title is “Counterfeiting Stock 2.0”. The document doesn’t allege illegal activity; it describes things the author believes should be illegal. Also: > In compiling the information contained in this website, the author relied on sources — both public and private — and, for the most part, accepted the information from the source as reliable. This only works when the piece is written or published by someone willing to stake their reputation on its veracity.

rax0m 6y ago
Naked short selling is illegal [1] [1]: https://www.investopedia.com/terms/n/nakedshorting.asp https://www.investopedia.com/terms/n/nakedshorting.asp
- konschubert 6y ago
  > Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems. Doesn't sound like it was properly made illegal. Should probably fix those rules.
  - JumpCrisscross 6y ago
    > Does your broker automatically loan out your shares? The “loopholes” are intentional carve outs for market makers [1]. Something you want unless you like market makers disconnecting every time the market hiccups. [1] https://www.law.cornell.edu/cfr/text/17/242.203 https://www.law.cornell.edu/cfr/text/17/242.203
    - dannyw 6y ago
      “Market makers” shouldn’t get to mess around with shares they don’t have. This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto.
      - 6y ago

dragosmocrii 6y ago

Holly shit, this is an exceptionally informative piece of information. It makes sense now why the GME movement, but I doubt that most who joined it actually understand the purpose. This needs to be more widespread

jariel 6y ago
There needs to be a lot more evidence than some random screed on the web. He barely gave a single example 'TASER' and frankly didn't really specifically indicate how that worked. With 100 companies at any time under the squeeze it should be relatively easy for him to give a lot of examples and to specifically list the trades themselves, but also point at the 'media barrage' and highlight the asymmetrical effect those 'shadow shares' have. It's a neat idea and maybe there's some truthiness to it, but there's no evidence.
- dragosmocrii 6y ago
  I wish we knew for sure whether the information presented in the paper has some truth to it, or is just sensational conspiracy stuff. Until then it is a theory that is worthy of consideration, imo, at least for drawing personal conclusions.
- nearbuy 6y ago
  If you check the TASER stock at the claimed time (June 2005), there's no sudden dips in stock price. The site claims that a single article which was corrected 3 days later did damage to the stock price, but I'm not seeing it in the price history.

TekMol 6y ago

I wish there was an audio version of this. I find it much easier to consume information via headphones while I do the dishes then to sit down and read it through. It is also a good opportunities to give the eyes some reast from monitor work. Any tips if one wants to learn this via listening?

siegecraft 6y ago
I used to use the text-to-speech feature of pocket for this use case.
C19is20 6y ago
Balabolka is a great TTS program (I use the portable windows version).

jariel 6y ago

This article would be more substantive with a lot more examples of the mechanism of the coordinated fraud.

rmah 6y ago
What fraud? There's no fraud involved in shorting.
- jariel 6y ago
  Naked short selling is illegal and so is market manipulation i.e. coordinating an attack on a stock.

bouncycastle 6y ago

Counterfeit shares? Really? These are not really counterfeit shares, because they do not pay dividends or have any voting ability, the companies do not recognize them. More like "synthetic assets" that have the price pegged to the asset they mimic.

jb775 6y ago
The author likely used the term "counterfeit" since they're essentially copying the shares and redistributing them as if they represent the same value as the original, just like counterfeit money.
- bouncycastle 6y ago
  The author likely used the term "counterfeit" to stir up a controversy. It's more like if I started lending you some rocks, and told you that each rock is always 1 Tesla share. You can always come to me and cash in that rock for whatever a Tesla share is. I'm not lending you counterfeit Tesla shares, but rocks. There's no counterfeiting going on.
  - jb775 6y ago
    The salient aspect here is what they're using them for: to drive the price down or up. If I place a bet on the direction of the price pegged to a given type of rock, then borrow millions of those rocks from you, then trade those rocks back and forth with my buddies to create the illusion of demand momentum (linked to an artificial price pattern going down or up)...I can swing the price pegged to that rock. So the rock could still be cashed in for whatever price it's pegged to, but that doesn't mean I didn't mess with that price. (would take massive amounts of capital obviously) I'm also not sure if there's any way to tell if it's only being lent out once. Since futures contracts are even more abstract than stock ownership (i.e. have the option to possibly purchase blocks of shares in the future or just scrap the contract altogether), there's probably ways to create value by taking on risk in the form of overextending the appearance that you have access to a security at a certain price. This video explains everything going on: https://www.youtube.com/watch?v=gMShFx5rThI https://www.youtube.com/watch?v=gMShFx5rThI

konschubert 6y ago

Shitty companies failing is a necessary and important mechanism of a functioning economy. Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. Short activists expose shitty companies and as such, they play an important role in the economy. Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Maybe shorting, in particular naked shorting, is not ideal. But there needs to be a way to reward people for taking shitty companies down.

sanxiyn 6y ago
Japan banned naked shorting (of course Japan did not ban shorting) and seems to be doing fine. US probably can ban naked shorting without much problem too.
- konschubert 6y ago
  I am not sure Japan is doing well. (Not saying this is due to the lack of naked shorting) https://www.economist.com/finance-and-economics/2020/09/24/will-japan-see-a-new-generation-of-zombie-firms https://www.economist.com/finance-and-economics/2020/09/24/w...
- ploika 6y ago
  The US already did ban naked shorting without much problem, over a decade ago.
rcMgD2BwE72F 6y ago
>Shitty companies failing is a necessary and important mechanism of a functioning economy. True >Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. The Soviet Union was not a free market economy. >Short activists expose shitty companies and as such, they play an important role in the economy. In free market economies, shitty companies fail by themselves because their competitors offer better good or services. Short activists don't help make better competitors. Companies in the Soviet Union needed more competition than short selling. >Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Who knows? Tesla wouldn't exist if short sellers had their way either.

kebman 6y ago

Can't this simply be done with leverage?

jb775 6y ago
I'd say the difference is that they're doing it over and over.
- kebman 6y ago
  Sorry, I got it wrong, so I tried to delete my comment. Leverage is when you're loaned money, so you can buy more stocks than you could with just your own money, with certain automated stops as security against loss for the creditor (such as margin calls). It's a deal between you and a creditor, and the stocks purchased remain real. A naked short, on the other hand, is when a broker is exploiting the system to make it seem like there are more shares available than there actually is. Thus when people buy a non-existing share, the money is deposited for a short time, but the purchase “bounces,” which again can create slippage and volatility (fake “liquidity”), depending on how the system is set up.

woopwoop 6y ago

The author seems to be really upset about this, but I don't understand why. Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. Maybe I am misunderstanding. Basically, a short is when A borrows from B a share of corporation C with the promise to return a share of corporation C at a later time, plus some cash interest. A naked short is where instead B gives cash equal to the value of a share of corporation C minus some interest to A, with the promise that at a later time A will deliver a share of corporation C to B. The second activity seems functionally equivalent to the first, and I don't understand why I'm supposed to be outraged by either.

sanxiyn 6y ago
The second activity is dangerous because A can fail to deliver. I agree there's not much to be outraged by the first activity.
- konschubert 6y ago
  When I take a loan I may also fail to deliver loan payments. I don't think we should make risk illegal, but we should make sure that banks manage tail risks right.
  - eru 6y ago
    That's what margin requirements and clearing houses are for. Even during the heights of the last few financial crises, clearinghouses did not fail. (Option writers and people trading futures are in a very similar situation to short sellers. They also have clearing houses.)
- woopwoop 6y ago
  A can fail to deliver in the first activity, too. More generally, when you agree to have someone give you something of value at a later time, you take on some risk that they will fail to do so.
  - 6y ago

irjustin 6y ago

FYI, Naked Shorting has been made illegal since 08-09' [0] In the author's case because DTC is a blackhole system, these naked shorts can continue to exist. They also can continue to exist in self-contained as well as loop-holed systems. [0] https://www.investopedia.com/terms/n/nakedshorting.asp https://www.investopedia.com/terms/n/nakedshorting.asp

hlandau 6y ago

Question: According to this, all the actual share certificates are held in a vault at DTC. Do people have a right to "cash out" and demand physical share certificates? If so, it seems like if a large number of people suddenly started demanding share certificates, this could cause problems for DTC and show this problem for what it is. Essentially a "run on the bank".

JumpCrisscross 6y ago
> it seems like if a large number of people suddenly started demanding share certificates, this could cause problems for DTC No it wouldn’t. You would be delivered shares within two days as is required. Lots of institutions don’t hold their shares “in street name,” i.e. they hold them in their own. And some people still demand physical certification. (Not every issuer supports this, largely due to exchange rules.)
- hlandau 6y ago
  If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this?
  - JumpCrisscross 6y ago
    > If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this? When a stock has 140% short interest, there are net 40% of the float of holders who have loaned out their shares. They wouldn’t have the right to certificate until they called back their shares. If literally everyone asked for delivery, you’d wind up with the naked shorts needing to pay up to some of those taking delivery to settle their positions. If everyone refuses to sell, those naked shorts would FTD, and the appropriate processes would take over. Long story short, nothing intrinsic to the DTCC creates net over or under allotment. Companies go private all the time, which is a functional case of all of a company’s shares being taken out of the DTCC.

csomar 6y ago

This article is quite biased. There are a few problems with it: 1- The stock market should not kill a healthy company. Sure, it can affect its money raising capabilities (and maybe hiring) but it should not drive it out of business. 2- Naked Short-sellers still have to pay interest and dividend on their sold shares. This would create a certain equilibrium. If you nake-shorted a company at x2 its value, you suddenly doubled its profit; and that's being paid by the short-sellers. Profit (dividend) gives a reason to investor to hold on that stock; which brings us to point 3- Naked short-selling is probably done on very short time frames that doesn't extend between quarterly dividend payments. The company is probably going under anyway.

C4stor 6y ago
The article also deals with the parts about actually defaming, attacking in courts and otherwise doing everything possible to actually bankrupt the company... It doesn't only cover the stock market, it covers the whole operation, which goes way beyond only the stock market.
- threedots 6y ago
  Rules already exist around what you can and can't say as a short seller. What is it that you don't like about them? Do you think no one should be allowed to say negative things about companies? Shorts can't drive companies in the ground if that's not where they're headed anyway. First of all most short sellers are not activists. The perception that shorts causing companies to tank is because activist short sellers are right a high percentage of the time so often their reports result in a quick price adjustment. Being an activist short seller is a very high risk activity so they tend only to pull the trigger when they have high conviction. For example I'm not sure Muddy Waters has ever been wrong in calling out an accounting fraud. I have a really hard time buying the line that short sellers bring down good companies (examples?) and the fact that people do think that seems to me more of an indication of the power of corporations and their management than anything else.
  - C4stor 6y ago

jb775 6y ago

My initial thought after reading this is if all $GME shares sold by RobinHood actually exist, or if they're counterfeit copies of someone else's shares. I kind of doubt it considering all the regulation scrutiny recently.

256DEV 6y ago

I find articles like this fascinating because to me they are indicative of just how substantial the magnitude is of the "bounty of capitalism" in the public markets. On the one hand you have returns available to anyone prepared to invest consistently in the stock market across the last 30 years that are both well documented and very substantial. People like Warren Buffet & boggleheads make data-backed arguments about how well you could have done if you put money in even just broad index-tracking funds. And yet on the other hand there are two massively powerful groups with materially more leverage and informational "edge" within the system compared to all the people with a 401K. These are the executives who actually run the public corporations (and can choose their own compensation as a class via board/exec rotation & internal influence) and the financial firms that are embedded both in the firms' operation and also essentially setting/playing the rules of the meta-game as evidenced by articles like this. It feels like the fact that there are any returns left for a retail investor in public stock market investing speaks more to the quantities of wealth creation taking place than the absence of this sort of outrageous market rule capture. Two disclaimers: 1.) the slider for wealth "creation" on the public markets in the US seems fairly obviously to be being dragged from innovation to ZIRP... whole separate matter. 2.) at a whole-society level obviously the availability of public market returns is limited to a tiny sliver of the population with the means to invest, so when I say "bounty of capitalism" above I'm more referring just to the sum of financial profits as a result of the system.

nearbuy 6y ago
And yet hedge funds still tend to underperform the market. Warren Buffett once bet that over a 10 year period, the S&P 500 would outperform a portfolio of hedge funds (https://longbets.org/362/ https://longbets.org/362/). He won that bet.
adriancr 6y ago
> It feels like the fact that there are any returns left for a retail investor in public stock market investing speaks more to the quantities of wealth creation taking place than the absence of this sort of outrageous market rule capture. This is why lots of retail on forums like wsb treat the market as gambling. There is almost no edge you can get when compared to big players. And even if you make correct assumptions you can get losses out of them either by them being already priced in or via short manipulation. One example I remember last January's fake tesla brake issues the week a huge volume or calls expired.

tedunangst 6y ago

Is it time for this story to ride the merry-go-round again? https://theintercept.com/2016/09/22/the-money-is-gone/ https://theintercept.com/2016/09/22/the-money-is-gone/

emsign 6y ago

On a sidenote, I really like that site's design. Having just read about the Gemini project, I feel like we all should maybe tone down the web design a little bit.

lisp-fan-007 6y ago
What's the gemini project?
- Tom4hawk 6y ago
  https://gemini.circumlunar.space/ https://gemini.circumlunar.space/

praeter 6y ago

"Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover. (Click here for more on Pulling Margin)." http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html Sounds a lot like Thursday and Friday, no?

liaukovv 6y ago

I don't quite understand how supply/demand dialectic works if one side of the trade(supply) can arbitrarily inflate, at least in the moment until liquidity costs kick in. Do economists have models to explain that?

JimWestergren 6y ago

"There are are 71 million shares of GME that have ever been issued by the company. Institutions have reported to the SEC via 13F filings [0] that they own more than 102,000,000 shares" Quote from https://old.reddit.com/r/wallstreetbets/comments/l97ykd/the_real_reason_wall_street_is_terrified_of_the/ https://old.reddit.com/r/wallstreetbets/comments/l97ykd/the_... [0]: https://fintel.io/so/us/gme https://fintel.io/so/us/gme

bremac 6y ago
13F filings don't include short positions. Given how shorted GME is, I don't think it's surprising that the total long positions exceeds the number of shares outstanding. To add to the confusion we're still within the 45-day filing window for the end of the last quarter, so some investors may not have filed yet either.
- Miner49er 6y ago
  So there's way more shares held long than there is actual shares. This must lower the share price then? There's way more "supply" (people that can sell a share).

Temasik 6y ago

long $gme?

Lazare 6y ago

Very, very much a crank site. One pinch fact, two cups of confusion, and generous splash of seething rage. It's interesting in much the way the Timecube site is interesting...and is informative about financial markets in much the same way the Timecube site is as well.

ta70 6y ago
Non American asking: What does crank mean here?
- detaro 6y ago
  https://en.wikipedia.org/wiki/Crank_%28person%29 https://en.wikipedia.org/wiki/Crank_%28person%29
- Gibbon1 6y ago
  "a pejorative term used for a person who holds an unshakable belief that most of his or her contemporaries consider to be false."
- twic 6y ago
  You've had some good answers, but i will add that the internet led to a Cambrian explosion of cranks, because now anyone can put up a webpage. There is a catalogue, although i don't think it's maintained any more: http://www.crank.net/contents.html http://www.crank.net/contents.html
brutusborn 6y ago
How so? Could you please explain for someone who only knows enough to see this as potentially credible? I tried to research timecube but can't see the connection.
- Lazare 6y ago
  Complicated subject. Briefly, if you're familiar with a field, you can (generally) tell if an argument is at least trying to engage with the field, or if it exists in some disconnected parallel universe. This happens a lot more than you might think. It's a real issue in physics (see, eg, https://theness.com/neurologicablog/index.php/cranks-and-physics/ https://theness.com/neurologicablog/index.php/cranks-and-phy... or https://blogs.scientificamerican.com/cross-check/in-physics-telling-cranks-from-experts-aint-easy/ https://blogs.scientificamerican.com/cross-check/in-physics-...), but it pops up everywhere. I believe I am familiar enough with this area to say this is the work of a crank. Some key problems: 1. There's a huge body of scholarship out there about markets, how they work, how to think about them, how they may fail, how you can measure how they're failing, etc. This doesn't engage with any of that. It's not "Prof X said Y is true, but my data suggests he was wrong, see table 2", it's just "everything you think you know about Y is wrong". 2. Also, the paper is making up its own terms. That's actually a pretty good rule: Any paper that tries to discuss a topic and starts with a bunch of idiosyncratic definitions of basic terms is a huge red flag, because anyone in the field knows what those words mean already. So again, you're clearly not writing for an audience of people who could critique your argument. But if you're not looking for a critique, why are you writing at all? How can you know you're right unless the top experts in the field have tried to tear you apart and failed? Which they won't do if you don't engage with them. 3. There's no data anywhere, just assertions which (again, as someone a bit familiar with the field) seem wildly implausible. Eg: > At any given point in time more than 100 emerging companies are under attack as described above. [...] The success rate for short attacks is over ninety percent—a success being defined as putting the company into bankruptcy or driving the stock price to pennies. It is estimated that 1000 small companies have been put out of business by the shorts. So more than 100 companies are being attacked every moment of the day. There's no real definition of what an attack might be, or how you might count this, nor is there any evidence given of where the author came up with this number, or how long an attack lasts, or a list of companies under attack at the time of writing. Then we're told that these attacks succeed 90%(!) of the time, bankrupting the company(!). Again, no information why we might think such attacks succeed at all, much less 90% of the time, nor any acknowledgement of the huge body of research suggesting shorting does no such thing. Then we say "it is estimated" (by whom? when?) that 1000 companies have been so bankrupted. ...if 100+ companies are being attacked, and this has been going on for many years, and the success rate is 90%, and the result is bankruptcy, how come only 1000 companies have been bankrupted? Also, again, how come we can't seem to name any of these companies? Also, I elided a passage of the quote above, which is: > This is not to be confused with the day–to—day shorting that occurs in virtually every stock, which is purportedly about thirty percent of the daily volume. That probably sounds pretty wild too. But actually, last I heard, the actual number was more like 49%, because that's how stock markets work. You ask your broker to buy 100 shares of Apple, and he'll sell you 100 shares (short), then go buy the rest on the market. As a general rule, whenever you buy shares it shows up as a short order, and whenever you sell shares it shows up as a long order. Since any time someone buys someone else is selling, about half the order volume is short orders. Simple. But consider: The author got the number wrong (it's ~50%, not ~30%), which is a bit embarrassing. Worse, it's a number which exists. "Purportedly about thirty percent"? You don't need to use anonymous rumours. Why not "according to the SEC it's 49%"? (Some slightly old numbers here: https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf https://www.sec.gov/files/short-sale-position-and-transactio..., I believe newer ones are reported regularly, although I'm not quite sure where to look, because I'm not an expert on finance writing about fundamental market structure questions. But I do know the numbers exist, and anyone qualified to write the paper the author is wring would have them at the tips of their fingertips. And of course, the bigger issue is that number has nothing to do with what he's actually talking about. Unless of course he's talking about some other number entirely, but how would we know, because he doesn't actually explain it or cite it! That's a lot of errors to pack into such a short passage! And then consider his rant about the grandfather clause (linked from the main article, or available here: http://counterfeitingstock.com/CS2.0/CS1TheGrandfatherClause.html http://counterfeitingstock.com/CS2.0/CS1TheGrandfatherClause...) Read what's being said carefully; I would paraphrase it as: "The initial regulation grandfathered a group of transactions. Authorities claimed the size of this group was small, but I (and unnamed others) believed they were wrong. This exception was later closed; if I was correct and it covered a large number of transactions, this would have had a large impact, but it actually had a very small impact, in line with what the SEC had stated all long. Since the data suggests I was wrong, this proves the conspiracy goes much deeper than I had realised!" This is not falsifiable; if reality agrees with his predictions it means he's right, if it disagrees with his predictions it means he was even more right. If everything that happens or does not happen proves the SEC is lying then....what now? And so forth. Note that nothing says this guy (or any other "crank") is wrong; by chance if nothing else they'll occasionally be right! The problem is that science, finance, economics, software engineering, etc. are all disciplines that require many people to work together, building on the work of those that came before. If you come up with your own arguments using your own terminology and your own data, nobody will ever understand what you're trying to say, nobody will ever engage with or vet your arguments, nobody will ever have any reason to trust your arguments, etc.

GordonS 6y ago

My (basic) understanding of naked shorting is that you are agreeing to sell a share at some future date, but you don't yet own the share. Who does this actually benefit?

Pyramus 6y ago

Even though the author posits that >"At any given point in time more than 100 emerging companies are under attack as described above. [...] The success rate for short attacks is over ninety percent" he/she can only find two examples (Global Link and TASER), which is a bit odd. In any case, there is a connection to the current narrative of "short sellers are evil". But "the shorts" or "they" is one of these "us vs them" constructs that does not exist in any meaningful way. Even worse, there is a common notion on r/WSB that "the shorts" are also "the suits" and there will be some rough awakening when folks find out that Wall St made more money on $GME than Main St, and that is on the long side, before any dip in share price! By the way, this awakening might never happen and there is a scenario where we will never find out who traded what on $GME, because transparent transaction data is not publicly available. Thinking back about the 2010 flash crash [1] we still don't know with certainty what exactly happened. Grant Williams did a podcast about the current events [2] and I can only recommend it (also check out his Endgame series). There certainly are unethical sellers of stock (see e.g. Jim Cramer video where he talks about manipulation) but I have yet to see convincing evidence that unethical or fraudulent behaviour is more common on the short than long side. There was a recent poll on Fintwit to name examples where "short attacks" hurt companies, and the paucity of meaningful examples further confirmed the above point (can't find reference due to crappy Twitter search). [1] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash [2] https://ttmygh.podbean.com/e/gwp_003/ https://ttmygh.podbean.com/e/gwp_003/

darawk 6y ago

This is mostly nonsense. There is nothing wrong with there being more shares short than shares outstanding. It just seems problematic, until you think it through. Person A has 1 share of company Y. Person B borrows 1 share of company Y from person A, and then sells it into the market. This is called a short sale. But person B just sold their borrowed share. Now that share is owned by person C. Person C can now lend it back out to person D, or to person B again, and the process can repeat infinitely. The idea that short interest is constrained by shares outstanding is just a fundamental misunderstanding of how the short market works. Shorting behaves the same way that fractional reserve banking does, and there is a 'money multiplier' like leverage effect in the process. There is nothing nefarious about this, and it certainly isn't 'countfeiting'. Short sellers provide an important service to capital markets, maybe the most important service: they help to identify mismanaged or fraudulent companies. The idea that attacking short sellers is attacking wall street is completely backwards. Most of Wall Street hates short sellers, because they drive down the prices of companies and confidence in markets (in the short run, in the long run, they increase it).

oldgradstudent 6y ago
> Shorting behaves the same way that fractional reserve banking does Yes. Except that the fractional reserve banking system has a lender of last resort.
- eru 6y ago
  Some fractional reserve banking systems do. Historically, systems without lender of last resort have done quite well. See eg the Canadian system of the 19th century, with no lender of last resort, and that often ended up as an emergency lender to the mis-regulated and crisis-prone American system to the south.
- sidibe 6y ago
  And the whole "fractional" word. You can't lend someone 10 shares based on the one you bought.
  - 6y ago

zwaps 6y ago

If the op is reading: In the description of a short attack, it says in the picture that the demand curve is "infinitely elastic, it moves all the time". This is not what elasticity means here. In fact, the demand shown in the picture is not infinitely elastic.

lop 6y ago

I wonder if there is public accessibly list (or registry if this is more correct term for it) where everybody can check the involved parties of short selling (of Gamestop). There is https://fintel.io/ss/us/gme https://fintel.io/ss/us/gme or https://www.marketbeat.com/short-interest/ https://www.marketbeat.com/short-interest/ - but a I mean a more (and free) total overview for stocks traded on NYSE for example. So far I was not able an URL for it. For all EU-countries there is an official list here: https://www.esma.europa.eu/sites/default/files/library/ssr_websites_ss_procedures.pdf https://www.esma.europa.eu/sites/default/files/library/ssr_w... (and most of the links work ;- ) Is there something similar for NYSE?

RivieraKid 6y ago

Can't believe this nonsense is upvoted on HN. Short-selling helps to correct market prices of capital, which is good. It even directly helps the average retail investor because when you buy an index, you want the prices to be as close as possible to the "actual value".

marketneutral 6y ago
the article does not argue against short selling. it argues that there are loopholes being used to facilitate naked shorting and that the lack of transparency with naked shorts is problematic.
MrMan 6y ago
it is worse than the HFT hysteria ten years ago

rsp1984 6y ago

Wow, it seems like none of the top commenters here have put in at least minimal effort to read and understand this. The author does not complain about short sellers per se or about the fact that more than 100% of a stock's float can be shorted. That is all nice and fine. Instead what the author does complain about is that fact that the (supposedly regulated) mechanisms for shorting a stock are fraught with loopholes and exceptions that make it possible for brokers and the DTC to create stocks "out of thin air" for the short sellers and never neutralize. This dilutes the company's stock in the process and thereby damages the company's shareholders. It is an issue that, if true, should absolutely be brought to public and regulator's attention.

neffy 6y ago
Can only agree. There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short, and there aren't enough shares available. It really is that simple. While this doesn't mean a price of infinity, since price is also constrained by the available money for the purchase, in reality this then becomes a liquidity trap which is guaranteed to bankrupt the least liquid short sellers until enough positions have gone under to bring the short position down under the float size. So whilst some flexibility may make sense to resolve some of the buffering issues with settling, if that is being deliberately exploited as claimed in the article, that is a huge regulatory problem.
- dcolkitt 6y ago
  > There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short The point of a naked short system is that short sellers never need to cover their positions. Naked shorting allows any credit worthy institution to create synthetic shares as long as they continue to pay the dividends. That’s what makes it IMO a superior system. It eliminates the disruptive problem of short squeezes. Shorts can never get recalled, because they’re simply synthetic cash flow streams. Overall we want more short selling in the market, and therefore want to remove as many constraints to short selling as possible. Short selling improves price efficiency[1], increases liquidity[2], reduces corporate fraud[3], and helps protect against speculative bubbles[4] [1] https://academic.oup.com/rfs/article-abstract/24/3/821/1590469 https://academic.oup.com/rfs/article-abstract/24/3/821/15904... [2] https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenceofShortSellingRestrictions.pdf https://img.iex.nl/iexprofs/images/2008-12-01ResearchEvidenc... [3] https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369 [4] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2006.00868.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261....

twic 6y ago

Time to read the SEC SHO FAQ [1] again: > Question 7.1: Do naked short sale transactions create "counterfeit shares?" > Answer: Some believe that naked short sale transactions cause the number of shares trading to exceed the number of shares outstanding, which in turn allows broker-dealers to trade shares that don't exist. Others believe that the U.S. clearance and settlement system, and specifically the NSCC’s CNS, produces "phantom" or "counterfeit" securities by accounting for fails to deliver. > Naked short selling has no effect on an issuer's total shares outstanding. There is significant confusion relating to the fact that the aggregate number of positions reflected in customer accounts at broker-dealers may in fact be greater than the number of securities issued and outstanding. This is due in part to the fact that securities intermediaries, such as broker-dealers and banks, credit customer accounts prior to delivery of the securities. For most securities trading in the U.S. market, delivery subsequently occurs as expected. However, fails to deliver can occur for a variety of legitimate reasons, and flexibility is necessary in order to ensure an orderly market and to facilitate liquidity. Regulation SHO is intended to address the limited situations where fails are a potential problem. > Similarly, CNS has no effect on an issuer's total shares outstanding. With regards to the contention that the U.S. clearance and settlement system, and specifically NSCC's CNS system, creates counterfeit shares, this is not the case. CNS is essentially an accounting system that indicates delivery and receive obligations among its members (i.e., broker-dealers and banks). These obligations do not reflect ownership positions until such time as delivery of shares are actually made. Ownership positions are reflected on the records of The Depository Trust Company ("DTC"). [1] https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm

dmichulke 6y ago
> Naked short selling has no effect on an issuer's total shares outstanding An overspecific dementi: Surely, it has no effect on issuer's total shares outstanding but on shares outstanding. GME had 140% short interest, issuance was 100%, so there was -40% float. So there was less float than for a non-publicly traded company (which would be 0) How would you like it if I sell more than 100% of your company? Should I be allowed to in the first place? "significant confusion" indeed

codecamper 6y ago

garbage.

peter_retief 6y ago

I know of a research company that deliberately smears companies to make money from selling them short "Viceroy comes up short on Capitec" https://www.timeslive.co.za/sunday-times/business/2018-02-01-treasury-comes-out-to-bat-for-capitec-and-wants-viceroy-probed/ https://www.timeslive.co.za/sunday-times/business/2018-02-01... Lets not be coy about these companies, they are crooks.

hncommenter13 6y ago

It's trivial to prove that naked short selling doesn't exist the way the author thinks it does. a) Take my word for it. I am a former VC now working as a professional short seller (for the past eight years; my first really great short idea I found from a comment on HN). When I instruct our prime broker to short a stock, I must provide a matching locate id that corresponds to a specific block of borrowed stock. No locate id, no trade. Can't locate the stock to borrow to obtain a locate id? No trade. Get a margin account and try it yourself. b) Borrow costs. If I could short sell anything I wanted without having to borrow the stock, there wouldn't be such a thing as a borrow cost. I could short anything in as much size as I wanted for free. (And retail traders wouldn't get paid for lending their shares, which happens all the time.) c) Recalls. If naked shorting were a thing, there would be no such thing as stock borrows getting recalled. Again, take my word for it, they happen. d) Margin. Would I have to post cash collateral to our prime broker to borrow a stock if I could naked short? There's no stock I need to return, as I wouldn't have borrowed it from anyone. I mean, I guess I could still lose money short a stock and they'd want some protection against that, but I doubt we'd have Reg T margin rules if naked short selling were a thing. And nobody could make me close the short, unless the company got sold. I could just stay short forever, as I haven't borrowed anything that ever needs to be returned. So if interest rates were >0%, I could just naked short at no fee, let the cash from the short sale sit in my account collecting interest, and never have to cover the short. I'd also pay no dividends on the borrowed stock, as I presently must, as I hadn't actually borrowed it. In other words, riskless profit for everybody. Let me know if you find one of those. e) There are dozens of stocks out there that I (and lots of other people) believe will likely be worth zero one day, but it's uneconomic to make that bet as the borrow cost is 90%+. If I could naked short, I'd make a huge fortune shorting them to zero. Other people would make huge fortunes. Neither I nor other short sellers have such fortunes. If short sellers made fortunes, there'd be hundreds of short-only funds. There are barely a handful remaining. More broadly, I've worked on hundreds of shorts over the past eight years. In some cases, the company was perfectly legitimate, just overvalued by an enthusiastic market. I've also helped expose companies that were screwing people and lying to investors, in several cases resulting in SEC investigations and criminal indictments. And I've lost money when companies got bought by other companies that later wrote off the entire investment. I've also been straight up wrong on plenty of them, and exited the position when that became clear. An important function of the market is price discovery, and my job--like that of a long-oriented analyst--is to express the reasoned view that the current price is wrong. It's not a market if there's no way to express a contrary view. Nothing I say or do can keep a company from raising capital or succeeding if the bull case is more convincing than the bear case. (Again, if I could destroy companies based on shorting them--even if I had to borrow the stock--I'd never lose money. So everyone would do it.) Netflix has had short interest forever and ever, and proved all the doubters wrong. And if you don't believe that overly high prices lead to misallocated investment in nonsense projects, take a good look at the amount of money sloshign around Silicon Valley these days. The fact is, it's a lot more fun and profitable to be a venture capitalist than it is to be a short seller, and there's a lot more VCs as a result.

hikerclimb 6y ago

50% of option trading is luck. Robinho of is meant to reduce risk...

Specie33 6y ago

I believe this whole GME and AMC deal was perpetrated by the owners of those companies debt and pushed through by people who owned a mouthpiece on WSB and other platforms. Way too many coincidences. Everyone left that has been trading stocks for 2 days will be holding the bag on this and will be left with nothing as Blackrock and Burry and others have already liquidated their positions. Two basically bankrupt companies that owed debt suddenly funded/bailed out by autists? 600 mil in debt repaid by selling stock on AMC? Anyone else think like this?

clktmr 6y ago
Not what is happening at all. GME was trading below net cash last year, which is insane. E-commerce is growing 300% YoY and Ryan Cohen, former founder and CEO of Chew, just made a major move as an activist investor. If GME was valued by VC measures, it would be trading at $420. Most of the people on WSB believe in the value of the company and have faith in a successful turnaround.

foobar99y 6y ago

Since it seems not a lot of the top replies actually read the paper and just seem to have read the title and dismissed it, I've summarized some of the fraud claims in the paper below. The paper is NOT just claiming that regular shorts are stock manipulation. It outlines a series of tactics and loopholes in detail that involve the use of shorts among other market tools to sell people stocks that don't exist, but were counterfeited through book-keeping tricks. Their claims of counterfeiting stock involve the use of naked shorts(a.k.a where a share is sold, but never borrowed) Naked shorts must be attached to a real share within 3 - 21 days, not doing so is illegal. They outline a series of loopholes which are used to sell shorts w/o ever borrowing a real share, effectively diluting the actual stock issued by the company with extra counterfeits to drive the price down. The goal is to drive the price to 0 and bankrupt the company, so that the shorts don't have to be covered anymore, netting a large (tax-free) profit. Below is not an exhaustive list of manipulation tactics, just a selection of examples: 1. SEC rules left a loophole allowing naked shorts to be covered with naked calls. No actual instance of stock has to actually be borrowed in this case, but it's not marked as a fail-to-deliver in SEC reporting. The naked call option is not tied to any stock issued by the company, it's just an option to buy at a future date, but it can now be repeatedly borrowed out for shorts as if it were a stock. 2. The SEC keeps track of fail-to-deliver in the SHO list and has requirements of 3 days for brokers and 21 days for market makers to borrow an actual stock. Another fraud claim is that brokers/hedge funds collude to pass around naked shorts between offshore shell companies in order to indefinitely reset the 3 day SEC requirement to keep naked shorts indefinitely and keep it off of the SECs fail-to-deliver list. They also use a similar technique to allow 8 - 10 shorts to borrow the same shares and then just move them around in time to meet SEC reporting deadlines. During any audit by the SEC, the SEC calls ahead and they move all naked shorts to offshore accounts where they can't be seen and then move them back once the investigation is over. This means for every fail-to-deliver marked on the SECs books, there will be several times (10 - 20 according to the whitepaper) more counterfeit shares being sold by shorts that are not tied to any real shares. 3. The third fraud claim involves the clearing house (a.k.a a broker for brokers) the DTCC (we care about two of its subsidiaries DTC and NSCC). When a broker sells a short and fails to deliver an actual share in 3 days, before 1981 they would be forced to buy it back. After 1981, they can borrow one from the NSCC Stock borrow program. The NSCC will then go to the DTC which holds all the stock certificates and find a broker with a surplus of shares and borrow the necessary amount of shares. Now here's the fraudulent part. When the shares are borrowed only the net amount is deducted from the surplus, but no actual shares are actually removed from the individual accounts of the broker. Now both the lending broker and the borrowing broker have real shares in their account, but they're the same real shares. Since the borrowing broker has real shares now, these same shares can again be lent out by NSCC to another borrowing broker and again no shares are removed. Now 3 investors have the same shares in their account. Since transactions are done as net transactions (instead of individual stocks) between brokers, the fact that 3 investors have the same share never has to be reconciled and two counterfeit shares have been created. In regards to the GME short, even though only 71 million shares were issued by the company, currently institutions have reported to the SEC (13F filings https://fintel.io/so/us/gme https://fintel.io/so/us/gme) that they own more than 113 million shares (including 13% owned by gamestop ceo). Additionally according to the SEC's fails-to-deliver list for December, Gamestop has nearly 1.8 million shares failed-to-deliver. Most companies have anywhere from 0 to a few thousand. Going by the whitepapers estimates the number of counterfeit shares would be 10-20 times that amount, indicating that ~ 40 million shares of Gamestop would be counterfeit. In order to verify these accusations with concrete data, we would need access to the books/transactions of the DTCC. They are a private organization that is collectively owned by brokers and they are very secretive and have few disclosure requirements due to regulatory capture at the SEC.

z_notes 6y ago

I want to know who is the author? Creating this document took a significant amount of time and effort. A "whois" on the counterfeitstock.com site or inspection of the pdf document reveals nothing.