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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"

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.
  - woofie11 6y ago
    There's a very different risk profile for me (an individual investor) if I'm buying shares from someone who doesn't have them, and merely promises to deliver them, than if they're backed by real shares. I'd like my brokerage to be holding real shares on my behalf for real dollars I gave them. I don't want them loaning my shares out either. They're mine. If there are naked shorts floating around (or shorts covered by my stock without permission), someone else is making money off of risk I am taking on, but didn't agree to. There can be a cascading set of failures which lands with me not having my shares. It's the difference between taking out a $300,000 mortgage on a $500,000 house, versus borrowing $300,000 with no collateral. You'll get a different interest rate, if you can get a loan at all. And this resembles someone taking a $300,000 mortgage, only missing the house. Yes, there's always a risk, but that risk profile is very, very different (esp. in the case of catastrophic events, like a stock market collapse or similar, when many institutions might be going down at the same time).
    - sanxiyn 6y ago
      > I don't want them loaning my shares out either. If you don't want that, don't. It's in your control.
killerpopiller 6y ago
in the second scenario, A would trade a share he doesn’t posses and B could trade the same share, no?
- woopwoop 6y ago
  Are you concerned that B could sell his contractual right to have A deliver a share to someone else, so that when A is obliged to deliver a share that actually gets delivered to a third party? Why is that bad?
Dylan16807 6y ago
That's only half of what's happening, and the objection is directed at the other half. First scenario, B sells the share they have to X. Second scenario, B sells the share they don't currently have to X. And there's a third scenario where B has not even ordered a share, but still sells a share they don't have to X.
phkahler 6y ago
When A borrows a share, they sell it to D. Now as far as anyone knows, both A and D own a share but in fact only one exists. The extra sale from A to D also influences the stock price. What some consider bets are creating actual volume on the exchange, along with temporary dilution of shates.
- woopwoop 6y ago
  Either way the stock price is influenced. In the first case, supply of the share is increased by the fact that A sells B's share, and in the second case, demand is decreased by the fact that instead of buying a share B buys a contract to have A deliver a share at a later time. Why is this a problem?
- kgwgk 6y ago
  What do you mean by "temporary dilution of shares"? All the shareholders will get dividends, for example. The same as if there were no shorts. The only thing that those who lend their shares will lose is the voting rights - and those who don't lend their shares will vote normally.
  - thatguy0900 6y ago
    That doesn't make sense. If I have to pay each share 5$, and I have given out 500 shares, but when it's time to pay out dividends 700 shares show up to claim them,then someone has to lose money right? Either I have to give 5$ to 200 shares that I never sold to people to begin with, or the 500 people who actually bought shares from me lose some of their portion to the extra 200. What am I missing if that's not the case? Surely that dividend money for those extra 200 shares has to come from somewhere?
    - kgwgk 6y ago
      Comes from the short-sellers. If I lend a share to you, you owe me a share and all the dividends that I would be receiving.
      - 6y ago
irjustin 6y ago
While in the specific scenario it's similar, in theory the 2nd scenario can be repeated an infinite number of times since it doesn't need to be tied to a "physical" share. This creates the illusion that there's a LOT of people who believe the stock will go down in price, which can affect market sentiment and actually cause real movement when in reality that wouldn't be possible if every short was in fact backed by a real share (which they're trying to do via rules making Naked Shorts illegal).
- woopwoop 6y ago
  The first scenario can be repeated an infinite number of times, too. Just have A sell the share right back to B and do the same thing. Now A has to deliver two shares to B.
- sokoloff 6y ago
  There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.
  - ZephyrBlu 6y ago
    Yeah this is the explanation I've seen people give. It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.
    - sokoloff 6y ago
      Right. Same reason people are flipping out when a stock goes from 199.99% floating to 200.01% floating. (They call it “over 100% shorted!!!”)
    - kgwgk 6y ago
      How are they functionally the same? Initial conditions: Alice has a share of XYZ Proper shorting: Alice lends her share to Bob, Bob sells the share to Carol => Alice has a share (lent to Bob, who will have to pay her the eventual dividends), Bob owes a share to Alice, Carol has a share (which has full rights including voting and dividend) Naked shorting: Bob sells an imaginary share to Carol => Alice sill has her share (with full rights) What does Carol have?
dannyw 6y ago
You are a company looking to raise money through the public markets. You have issued 10 million shares; but the market is trading with 15 million because of counterfeit stocks. The bankers and the hedge funds have got to dilute you; actively hurting your fundraising ability, and of course; your stock price (which you may own as a founder).
- woopwoop 6y ago
  This doesn't distinguish between shorting and naked shorting. But in either case I don't understand why I'm supposed to be upset. Is it because the stock price goes down?
  - dannyw 6y ago
    Does it matter? 1 stock = 1 stock. 1 stock should never be 2 stocks. It’s because I believe in ownership of what you make. If you founded a company, sold 10% on public markets for float, and magically 20% of your cap table now exists on the NYSE; something is horrifically wrong. And yes, you would have suffered negative financial outcomes because of the counterfeiting.
    - deleted 6y ago
      [deleted]
    - ghayes 6y ago
      There’s not just “1 stock.” Let’s say: A loans a share to be B who sells to C who loans to D and so on. You end up with a multiplier on nominal stock, always, and that’s perfectly normal. I really don’t understand the moralistic argument here, esp. without regard to the underlying value of the original asset. Up is not strictly good.
      - Daho0n 6y ago
        No matter how many times it gets repeated in the thread it is still nonsense made up by the stock market. Exchange "Share" with "Burger" and see how many Burgers you can create from thin air. If you end up with more than one you should start a McDonald's competitor! If you can't it is because you are making mental gymnastics as soon as the word is some magical word Wall Street made up. Sure it is correct that you can but it shouldn't be and can't be fixed fast enough. But thank you to everyone who gave me GME money with their mental gymnastics <3
kebman 6y ago
When I purchase a stock, I do it in the express belief that I will get a physical (though digitally stored) share of that company, and possibly one that gives me a voting right if the stock is marked as such. When a stock “fails to clear” this gives me a ton of problems such as slippage and volatility, and possibly a quite substantial loss. Same if you buy an apple, I'm sure you'd only do it in the belief that you will actually get something edible. If I got nothing, I'd want my money back! But then when you buy an apple, you can see and touch it before you commit. Not so with stocks. And so you buy it while trusting the broker that your order will actually be met. If instead my money is “borrowed” without my concent for some nefarious activity—in order to create more “liquidity”—that has a name: It's fraud. It's fraud of the customer whose money is being stolen. It's fraud of the customer who's being fooled into thinking that he's buying a real stock. That these shares do not exist, isn't some slip-up. It's an intentional effort, done with the motive of earning money by exploiting the trust of their customers. Such action should thus clearly be illegal. Same if you bought a stock, and your broker suddenly decides to steal it without your knowledge, and loan it out in order to sell it in the hopes of earning money if its value drops (i.e. short the stock). Clearly you'd want to know if your property is being loanded out, because it means that you're incurring risk, no matter if you're compensated for it through interest or not.
- egwor 6y ago
  If I want insurance to protect against the price going down, I'd buy a put option. I know a bit about this but I'm not an expert on this. Naively, those put options are effectively offered by those providing a short (they think the price is going to go down, or have a way to hedge the price decrease). Those don't get represented as shorts either. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/put-option/ https://corporatefinanceinstitute.com/resources/knowledge/tr... The other thing to consider here: if some entity needs to provide the put option, how does one hedge (risk manage) a put option ? They need to consider what would happen if the price drops, and as the price drops their hedge needs to increase in price. There's undoubtedly more to this, but that relationship sounds awfully like a short. Any experts want to wade in here?
  - 6y ago
michaelscott 6y ago
The asset that backs final settlement is different. I can always get cash from some other source to cover scenario 1 (which is also a more straightforward scenario because of that). A share is not some magical, fungible thing that is equivalent to cash; it represents an actual share in a company which comes with actual, legal rights. If a day comes where, as a completely hypothetical example, A is unable to deliver the share they promised to B then there is no externally resolving asset to settle the trade (unless parties agree beforehand to compensate in cash, in which case you get a functional equivalent to scenario 1). While the mechanics are more-or-less equivalent, the settlement assets in the two scenarios are not which can make a big difference depending on the circumstances of the trade. Neither is generally a problem in a high volume, liquid system though.
not_a_moth 6y ago
I'm not sure you read the article. Author is alleging the prime broker/clearing house system regularly "gives out" shares to sell on the market (diluting company's shares) with no transparency in the reconciliation because the main clearing system is privately owned. You're better off reading the full article since my summary is extremely surface level.
- JumpCrisscross 6y ago
  > with no transparency in the reconciliation because the main clearing system is privately owned The DTCC provides extensive reporting to market participants, including issuers [1]. [1] https://www.dtcc.com/settlement-and-asset-services/issuer-services/security-position-reports https://www.dtcc.com/settlement-and-asset-services/issuer-se...
  - dhruvdh 6y ago
    A daily report is 9450.00 USD per year per security as far as I can tell. https://www.dtcc.com/settlement-and-asset-services/issuer-services/spr-pricing https://www.dtcc.com/settlement-and-asset-services/issuer-se...
  - mrmino 6y ago
    9.5k a year a stock with no way to verify what they say. Also, it's DTC, not DTCC. The inter-company loopholes still apply, not to mention all the international shenanigans.
ycombigator 6y ago
If there are 5 bananas in the entire world and people are still allowed to pretend and sell 500 bananas - you dont see how this is a problem? Have you actually thought this through?
- kqr 6y ago
  That is exactly how money and other derivatives works, and it's not, in general, a problem. If Bob has one of the five bananas but sells Alice a contract for delivery of 500 bananas and then can't make good on his promise, then Bob has screwed only himself, because now people know that Bob's bananas are only worth 0.002 of other people's bananas. Even if Bob finds another rare banana he won't be able to sell it for anywhere near it's true value. Critically, Bob has only devalued his own banana contracts. In the meantime, Alice has only the one banana she bought from Bob, and she spent all her savings on that banana, thinking she'd get 500 of them. But Alice is clever. She has a plan for making back her savings. Alice sells 10 bananas for future delivery to Cecil. Alice plants the one banana she bought from Bob. And sure enough, come delivery time, Alice picks the bananas from her tree and delivers them to Cecil. Cecil, in turn, sold 20 fruit salads for future delivery to other people -- that's how she afforded the banana contract from Alice. Two observations I want you to make: 1. The one bad actor screwed himself out of the market in no time at all. 2. The 22 good actors managed to allocate capital effectively where it would do the most good for everyone, and allowed entrepreneurs of very little means to start profitable businesses. Derivatives trading is very resource efficient and has made modern society possible. It has a few drawbacks but they are self-correcting. There are problems, but they are not with derivatives trading. Edit: And keep in mind that Bob's banana contracts are not worth anything compared to other people's bananas, but they are still not completely worthless. If Dave owes Erica 50 of Bob's banana contracts, Dave will find it easy to repay them: you can trade almost anything for a Bob banana contract.
- OJFord 6y ago
  You can absolutely sell 5 bananas 500 times. You can't have 500 net buys (i.e. someone is 'long 500 bananas', or 500 people 'long' 1, etc.), but sales, fine!
  - 6y ago
dmingod666 6y ago
The 'naked' in the 'naked shorting' means you haven't borrowed the share before selling it, but you will in the future.
Gasp0de 6y ago
The naked shorting reduces the value of real shares. Basically because the naked shorters can sell as many nonexistent shares as they want, while the investors who buy can only buy shares that exist.
- eru 6y ago
  How does naked (or any) shorting reduce the value of real shares? Shares are worth the present value of their future dividend cash flow. Shorting doesn't change no dividend payment at all ever.
  - thatguy0900 6y ago
    That doesn't make sense. If I have to pay each share 5$, and I have given out 500 shares, but when it's time to pay out dividends 700 shares show up to claim them,then someone has to lose money right? Either I have to give 5$ to 200 shares that I never sold to people to begin with, or the 500 people who actually bought shares from me lose some of their portion to the extra 200. What am I missing if that's not the case? Surely that dividend money for those extra 200 shares has to come from somewhere?
    - auntienomen 6y ago
      The money goes to whoever holds the real share. A loans a share to B. Now A owns an iou, which doesn't have any voting rights. B agrees to pay A an amount of money equal to a dividend payment if a dividend is paid by the company. B goes short by selling the share to C. C owns a share of stock. When the company pays dividends, C is paid and B pays A.
      - thatguy0900 6y ago
        Alright, thank you. That makes sense. How do the voting rights work for share A? I was under the impression that brokerages loaned the shares out without the explicit knowledge of the original owners that it was happening. Is it just that people with margin accounts functionally don't get a vote?
StreamBright 6y ago
>> I don't understand why I'm supposed to be outraged by either You shouldn't. When the economy collapses because of the aforementioned practices and you family loses their jobs, housing etc, you should not be upset either.
- eru 6y ago
  Why would the economy collapse? If anything, it's very good to have short sellers, because they are the only market participants who have an incentive to expose bubbles. And expose them early.
  - StreamBright 6y ago
    Who knows? https://www.history.com/news/2008-financial-crisis-causes https://www.history.com/news/2008-financial-crisis-causes
    - eru 6y ago
      The Fed let nominal GDP (and nominal GDP expectations) tank. The rest followed from there.
8bitsrule 6y ago
Farther down it's stated that, as an outcome of this tactic ... "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. Admittedly, not every small company deserves to succeed, but they do deserve a level playing field...."
- Raidion 6y ago
  See that's what I don't follow. For most companies, when they IPO, they have the cash on hand from going public. The stock price doesn't really matter anymore for day to day running of the company. Sure a lower stock price long term means that they need to up RSU compensation or won't be able to raise money again, but do those really kill a company? I IPO for 20 million, giving me 18 months of runway. My stock instantly gets shorted a ton, then what? How does that impact me? How does that put someone out of business? If someone thinks that a company is profitable, they can always invest AND that investment is cheaper because of the 'excess' selling of the shorts. I don't follow how shorts kill companies.
  - 8bitsrule 6y ago
    Ever heard of “The great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”? New variant: https://prospect.org/power/wall-street-gambling-from-inside-the-house-gamestop-spacs/ https://prospect.org/power/wall-street-gambling-from-inside-...
DarkWiiPlayer 6y ago
> Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. It sure does to me though: First of all, there's the whole self-fulfilling prophecy thing. On a technical level, everything borrowed is eventually given back, so the effects should cancel out in the end. The problem starts when the borrowing and selling of stocks happens at a scale where it influences the stock price. At that point, you're a) actively hurting the company b) expecting to profit from it c) sometimes without even expecting the stock price to fall if it weren't for your intervention. Like, I don't see how financially hurting others for personal gain is not a bad thing, but what makes it even worse is that these might be companies producing actual goods, driving humanity forward, and this is being hindered by economic parasites that are only throwing sticks in peoples way. It's easy to understand why many believe this should definitely be illegal, and why people without much knowledge of stock markets would expect it to actually be illegal in the first place. This is the equivalent to shouting "fire" in a crowded theatre... intending to loot whatever people leave behind.

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.
- woofie11 6y ago
  There's a very different risk profile for me (an individual investor) if I'm buying shares from someone who doesn't have them, and merely promises to deliver them, than if they're backed by real shares. I'd like my brokerage to be holding real shares on my behalf for real dollars I gave them. I don't want them loaning my shares out either. They're mine. If there are naked shorts floating around (or shorts covered by my stock without permission), someone else is making money off of risk I am taking on, but didn't agree to. There can be a cascading set of failures which lands with me not having my shares. It's the difference between taking out a $300,000 mortgage on a $500,000 house, versus borrowing $300,000 with no collateral. You'll get a different interest rate, if you can get a loan at all. And this resembles someone taking a $300,000 mortgage, only missing the house. Yes, there's always a risk, but that risk profile is very, very different (esp. in the case of catastrophic events, like a stock market collapse or similar, when many institutions might be going down at the same time).
  - sanxiyn 6y ago
    > I don't want them loaning my shares out either. If you don't want that, don't. It's in your control.

killerpopiller 6y ago

in the second scenario, A would trade a share he doesn’t posses and B could trade the same share, no?

woopwoop 6y ago
Are you concerned that B could sell his contractual right to have A deliver a share to someone else, so that when A is obliged to deliver a share that actually gets delivered to a third party? Why is that bad?

Dylan16807 6y ago

That's only half of what's happening, and the objection is directed at the other half. First scenario, B sells the share they have to X. Second scenario, B sells the share they don't currently have to X. And there's a third scenario where B has not even ordered a share, but still sells a share they don't have to X.

phkahler 6y ago

When A borrows a share, they sell it to D. Now as far as anyone knows, both A and D own a share but in fact only one exists. The extra sale from A to D also influences the stock price. What some consider bets are creating actual volume on the exchange, along with temporary dilution of shates.

woopwoop 6y ago
Either way the stock price is influenced. In the first case, supply of the share is increased by the fact that A sells B's share, and in the second case, demand is decreased by the fact that instead of buying a share B buys a contract to have A deliver a share at a later time. Why is this a problem?
kgwgk 6y ago
What do you mean by "temporary dilution of shares"? All the shareholders will get dividends, for example. The same as if there were no shorts. The only thing that those who lend their shares will lose is the voting rights - and those who don't lend their shares will vote normally.
- thatguy0900 6y ago
  That doesn't make sense. If I have to pay each share 5$, and I have given out 500 shares, but when it's time to pay out dividends 700 shares show up to claim them,then someone has to lose money right? Either I have to give 5$ to 200 shares that I never sold to people to begin with, or the 500 people who actually bought shares from me lose some of their portion to the extra 200. What am I missing if that's not the case? Surely that dividend money for those extra 200 shares has to come from somewhere?
  - kgwgk 6y ago
    Comes from the short-sellers. If I lend a share to you, you owe me a share and all the dividends that I would be receiving.
    - 6y ago

irjustin 6y ago

While in the specific scenario it's similar, in theory the 2nd scenario can be repeated an infinite number of times since it doesn't need to be tied to a "physical" share. This creates the illusion that there's a LOT of people who believe the stock will go down in price, which can affect market sentiment and actually cause real movement when in reality that wouldn't be possible if every short was in fact backed by a real share (which they're trying to do via rules making Naked Shorts illegal).

woopwoop 6y ago
The first scenario can be repeated an infinite number of times, too. Just have A sell the share right back to B and do the same thing. Now A has to deliver two shares to B.
sokoloff 6y ago
There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.
- ZephyrBlu 6y ago
  Yeah this is the explanation I've seen people give. It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.
  - sokoloff 6y ago
    Right. Same reason people are flipping out when a stock goes from 199.99% floating to 200.01% floating. (They call it “over 100% shorted!!!”)
  - kgwgk 6y ago
    How are they functionally the same? Initial conditions: Alice has a share of XYZ Proper shorting: Alice lends her share to Bob, Bob sells the share to Carol => Alice has a share (lent to Bob, who will have to pay her the eventual dividends), Bob owes a share to Alice, Carol has a share (which has full rights including voting and dividend) Naked shorting: Bob sells an imaginary share to Carol => Alice sill has her share (with full rights) What does Carol have?

dannyw 6y ago

You are a company looking to raise money through the public markets. You have issued 10 million shares; but the market is trading with 15 million because of counterfeit stocks. The bankers and the hedge funds have got to dilute you; actively hurting your fundraising ability, and of course; your stock price (which you may own as a founder).

woopwoop 6y ago
This doesn't distinguish between shorting and naked shorting. But in either case I don't understand why I'm supposed to be upset. Is it because the stock price goes down?
- dannyw 6y ago
  Does it matter? 1 stock = 1 stock. 1 stock should never be 2 stocks. It’s because I believe in ownership of what you make. If you founded a company, sold 10% on public markets for float, and magically 20% of your cap table now exists on the NYSE; something is horrifically wrong. And yes, you would have suffered negative financial outcomes because of the counterfeiting.
  - deleted 6y ago
    [deleted]
  - ghayes 6y ago
    There’s not just “1 stock.” Let’s say: A loans a share to be B who sells to C who loans to D and so on. You end up with a multiplier on nominal stock, always, and that’s perfectly normal. I really don’t understand the moralistic argument here, esp. without regard to the underlying value of the original asset. Up is not strictly good.
    - Daho0n 6y ago
      No matter how many times it gets repeated in the thread it is still nonsense made up by the stock market. Exchange "Share" with "Burger" and see how many Burgers you can create from thin air. If you end up with more than one you should start a McDonald's competitor! If you can't it is because you are making mental gymnastics as soon as the word is some magical word Wall Street made up. Sure it is correct that you can but it shouldn't be and can't be fixed fast enough. But thank you to everyone who gave me GME money with their mental gymnastics <3

kebman 6y ago

When I purchase a stock, I do it in the express belief that I will get a physical (though digitally stored) share of that company, and possibly one that gives me a voting right if the stock is marked as such. When a stock “fails to clear” this gives me a ton of problems such as slippage and volatility, and possibly a quite substantial loss. Same if you buy an apple, I'm sure you'd only do it in the belief that you will actually get something edible. If I got nothing, I'd want my money back! But then when you buy an apple, you can see and touch it before you commit. Not so with stocks. And so you buy it while trusting the broker that your order will actually be met. If instead my money is “borrowed” without my concent for some nefarious activity—in order to create more “liquidity”—that has a name: It's fraud. It's fraud of the customer whose money is being stolen. It's fraud of the customer who's being fooled into thinking that he's buying a real stock. That these shares do not exist, isn't some slip-up. It's an intentional effort, done with the motive of earning money by exploiting the trust of their customers. Such action should thus clearly be illegal. Same if you bought a stock, and your broker suddenly decides to steal it without your knowledge, and loan it out in order to sell it in the hopes of earning money if its value drops (i.e. short the stock). Clearly you'd want to know if your property is being loanded out, because it means that you're incurring risk, no matter if you're compensated for it through interest or not.

egwor 6y ago
If I want insurance to protect against the price going down, I'd buy a put option. I know a bit about this but I'm not an expert on this. Naively, those put options are effectively offered by those providing a short (they think the price is going to go down, or have a way to hedge the price decrease). Those don't get represented as shorts either. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/put-option/ https://corporatefinanceinstitute.com/resources/knowledge/tr... The other thing to consider here: if some entity needs to provide the put option, how does one hedge (risk manage) a put option ? They need to consider what would happen if the price drops, and as the price drops their hedge needs to increase in price. There's undoubtedly more to this, but that relationship sounds awfully like a short. Any experts want to wade in here?
- 6y ago

michaelscott 6y ago

The asset that backs final settlement is different. I can always get cash from some other source to cover scenario 1 (which is also a more straightforward scenario because of that). A share is not some magical, fungible thing that is equivalent to cash; it represents an actual share in a company which comes with actual, legal rights. If a day comes where, as a completely hypothetical example, A is unable to deliver the share they promised to B then there is no externally resolving asset to settle the trade (unless parties agree beforehand to compensate in cash, in which case you get a functional equivalent to scenario 1). While the mechanics are more-or-less equivalent, the settlement assets in the two scenarios are not which can make a big difference depending on the circumstances of the trade. Neither is generally a problem in a high volume, liquid system though.

not_a_moth 6y ago

I'm not sure you read the article. Author is alleging the prime broker/clearing house system regularly "gives out" shares to sell on the market (diluting company's shares) with no transparency in the reconciliation because the main clearing system is privately owned. You're better off reading the full article since my summary is extremely surface level.

JumpCrisscross 6y ago
> with no transparency in the reconciliation because the main clearing system is privately owned The DTCC provides extensive reporting to market participants, including issuers [1]. [1] https://www.dtcc.com/settlement-and-asset-services/issuer-services/security-position-reports https://www.dtcc.com/settlement-and-asset-services/issuer-se...
- dhruvdh 6y ago
  A daily report is 9450.00 USD per year per security as far as I can tell. https://www.dtcc.com/settlement-and-asset-services/issuer-services/spr-pricing https://www.dtcc.com/settlement-and-asset-services/issuer-se...
- mrmino 6y ago
  9.5k a year a stock with no way to verify what they say. Also, it's DTC, not DTCC. The inter-company loopholes still apply, not to mention all the international shenanigans.

ycombigator 6y ago

If there are 5 bananas in the entire world and people are still allowed to pretend and sell 500 bananas - you dont see how this is a problem? Have you actually thought this through?

kqr 6y ago
That is exactly how money and other derivatives works, and it's not, in general, a problem. If Bob has one of the five bananas but sells Alice a contract for delivery of 500 bananas and then can't make good on his promise, then Bob has screwed only himself, because now people know that Bob's bananas are only worth 0.002 of other people's bananas. Even if Bob finds another rare banana he won't be able to sell it for anywhere near it's true value. Critically, Bob has only devalued his own banana contracts. In the meantime, Alice has only the one banana she bought from Bob, and she spent all her savings on that banana, thinking she'd get 500 of them. But Alice is clever. She has a plan for making back her savings. Alice sells 10 bananas for future delivery to Cecil. Alice plants the one banana she bought from Bob. And sure enough, come delivery time, Alice picks the bananas from her tree and delivers them to Cecil. Cecil, in turn, sold 20 fruit salads for future delivery to other people -- that's how she afforded the banana contract from Alice. Two observations I want you to make: 1. The one bad actor screwed himself out of the market in no time at all. 2. The 22 good actors managed to allocate capital effectively where it would do the most good for everyone, and allowed entrepreneurs of very little means to start profitable businesses. Derivatives trading is very resource efficient and has made modern society possible. It has a few drawbacks but they are self-correcting. There are problems, but they are not with derivatives trading. Edit: And keep in mind that Bob's banana contracts are not worth anything compared to other people's bananas, but they are still not completely worthless. If Dave owes Erica 50 of Bob's banana contracts, Dave will find it easy to repay them: you can trade almost anything for a Bob banana contract.
OJFord 6y ago
You can absolutely sell 5 bananas 500 times. You can't have 500 net buys (i.e. someone is 'long 500 bananas', or 500 people 'long' 1, etc.), but sales, fine!
- 6y ago

dmingod666 6y ago

The 'naked' in the 'naked shorting' means you haven't borrowed the share before selling it, but you will in the future.

Gasp0de 6y ago

The naked shorting reduces the value of real shares. Basically because the naked shorters can sell as many nonexistent shares as they want, while the investors who buy can only buy shares that exist.

eru 6y ago
How does naked (or any) shorting reduce the value of real shares? Shares are worth the present value of their future dividend cash flow. Shorting doesn't change no dividend payment at all ever.
- thatguy0900 6y ago
  That doesn't make sense. If I have to pay each share 5$, and I have given out 500 shares, but when it's time to pay out dividends 700 shares show up to claim them,then someone has to lose money right? Either I have to give 5$ to 200 shares that I never sold to people to begin with, or the 500 people who actually bought shares from me lose some of their portion to the extra 200. What am I missing if that's not the case? Surely that dividend money for those extra 200 shares has to come from somewhere?
  - auntienomen 6y ago
    The money goes to whoever holds the real share. A loans a share to B. Now A owns an iou, which doesn't have any voting rights. B agrees to pay A an amount of money equal to a dividend payment if a dividend is paid by the company. B goes short by selling the share to C. C owns a share of stock. When the company pays dividends, C is paid and B pays A.
    - thatguy0900 6y ago
      Alright, thank you. That makes sense. How do the voting rights work for share A? I was under the impression that brokerages loaned the shares out without the explicit knowledge of the original owners that it was happening. Is it just that people with margin accounts functionally don't get a vote?

StreamBright 6y ago

>> I don't understand why I'm supposed to be outraged by either You shouldn't. When the economy collapses because of the aforementioned practices and you family loses their jobs, housing etc, you should not be upset either.

eru 6y ago
Why would the economy collapse? If anything, it's very good to have short sellers, because they are the only market participants who have an incentive to expose bubbles. And expose them early.
- StreamBright 6y ago
  Who knows? https://www.history.com/news/2008-financial-crisis-causes https://www.history.com/news/2008-financial-crisis-causes
  - eru 6y ago
    The Fed let nominal GDP (and nominal GDP expectations) tank. The rest followed from there.

8bitsrule 6y ago

Farther down it's stated that, as an outcome of this tactic ... "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. Admittedly, not every small company deserves to succeed, but they do deserve a level playing field...."

Raidion 6y ago
See that's what I don't follow. For most companies, when they IPO, they have the cash on hand from going public. The stock price doesn't really matter anymore for day to day running of the company. Sure a lower stock price long term means that they need to up RSU compensation or won't be able to raise money again, but do those really kill a company? I IPO for 20 million, giving me 18 months of runway. My stock instantly gets shorted a ton, then what? How does that impact me? How does that put someone out of business? If someone thinks that a company is profitable, they can always invest AND that investment is cheaper because of the 'excess' selling of the shorts. I don't follow how shorts kill companies.
- 8bitsrule 6y ago
  Ever heard of “The great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”? New variant: https://prospect.org/power/wall-street-gambling-from-inside-the-house-gamestop-spacs/ https://prospect.org/power/wall-street-gambling-from-inside-...

DarkWiiPlayer 6y ago

> Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. It sure does to me though: First of all, there's the whole self-fulfilling prophecy thing. On a technical level, everything borrowed is eventually given back, so the effects should cancel out in the end. The problem starts when the borrowing and selling of stocks happens at a scale where it influences the stock price. At that point, you're a) actively hurting the company b) expecting to profit from it c) sometimes without even expecting the stock price to fall if it weren't for your intervention. Like, I don't see how financially hurting others for personal gain is not a bad thing, but what makes it even worse is that these might be companies producing actual goods, driving humanity forward, and this is being hindered by economic parasites that are only throwing sticks in peoples way. It's easy to understand why many believe this should definitely be illegal, and why people without much knowledge of stock markets would expect it to actually be illegal in the first place. This is the equivalent to shouting "fire" in a crowded theatre... intending to loot whatever people leave behind.