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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

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
    - krok 6y ago
      Ok, I've done it. I told my children that I'm going to take them to McDonald's tomorrow evening. They see this promise as 100% good, as real as if they were actually holding the burger. The only difference from their point of view, is that if they were holding a physical burger now, by tomorrow evening it would be cold and bad to eat. The ones I have promised them are real burgers which are deliverable tomorrow evening, at the time we're going to want to eat them. So I've created two additional burgers owned by my children, in addition to all the physical burgers that currently exist, which are owned by either McDonald's, if they haven't been sold yet, or by customers if they have. Does this mean that I've found an infinite supply of free burgers and should go into competition with McDonald's? No. Because I'm going to have to buy the burgers from McDonald's to supply to my children. They own two new paper burgers, but I'm short two burgers. So the net total world supply of burgers is unchanged.
      - bal4591 6y ago
        Well you're still flawed if you scale your argument. What if you take your argument, and scaled it up. What if you promised each kid 1 trillion burgers. Will you have access to 1 trillion burgers tomorrow? What if they take their future 1 trillion burgers and sell half. What if you walk into McDonalds to claim the 1 trillion burgers. Does McDonalds have 1 trillion burgers? No. So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. So what you're saying is that you shouldn't sell things you can't possibly fulfil? Hence the argument against this kind of trading.
        Chris2048 6y ago
        Most financial institutions need some kind of basis for a promise - something that "secures" the contract e.g. like a loan secured by an asset. A regulated entity might have capital requirements which would limit the no of burgers promised to money held. Another might be a contract with mcdonalds for N burgers, or a warehouse full of burgers - shorted stocks require the lender to actually sell a stock, and the shorter to actually sell it (and buy it back later) but there will need to be security/"deposit" on the returning of the stock - there exist a risk that the lender will not get their stock back, which is part of the reason for the premium. Since you/I are not regulated financial institutions, not may would trust us to deliver 1 trillion burgers on paper; so the flaw exists in "What if they take their future 1 trillion burgers and sell half" - sell to whom? They'd have to find someone willing to buy. "What if you walk into McDonalds to claim the 1 trillion burgers" - the "paper burger" is an agreement between you and some third-party, not mcdonalds. You couldn't pre-order items from one shop, and go to another store with you invoice and demand they fulfil it - your contract is not some general/official currency, there is no obligation to accept it. > So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. It's a promise that you will supply N burgers, so the criteria for ok-ness is that you can supply N burgers, that McDs can provide that many is necessary-but-not-sufficient alongside: - you can pay for N burgers - you can transport N burgers (on time) but when I say "ok", I mean from a "morality of making personal promises" perspective, not "financial promises/obligations made by a regulated financial institution" perspective. Individuals are not financial institutions, and financial institutions are regulated as such.
- dexen 6y ago
  Your explanation makes a lot of sense. Nonetheless it's bit of a hard sell as it seems to parallel fractional reserve banking to a degree, and we've come to accept the later as the best currently available compromise.
  - jannes 6y ago
    I think the dilution from fractional reserve banking is priced into the buying power of each dollar somehow. You never look at the value of a dollar as the % of total dollars in circulation. The value of a dollar is rather defined by how many goods/services/other currencies you can get in exchange for it. With stock it matters a lot more how many % of a company is represented by a single share.
    - eru 6y ago
      Each loan is also a deposit. Each debit is also a credit. Similar, each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back.
      - JumpCrisscross 6y ago
        > each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back Again, to be super clear: for everyone but market makers, the law is you have to locate the borrowed share before selling short. Market makers can naked short to provide liquidity in a buying frenzy. Given they're shorting into a buying frenzy, they tend to be quite motivated to immediately cover themselves. We have lots of people shorting GameStop. We have zero evidence anyone is improperly naked shorting.
        eru 6y ago
        And to be fair, they also definitely have to cover themselves before they need to make delivery two days later. I think naked shorting would be a perfectly valid thing to allow every investor to do, you clearing house would just want to ask for pretty high margin requirements. Very similar to how there are covered call options, but also naked call options. And the economy hasn't collapsed either.
- JumpCrisscross 6y ago
  > something is horrifically wrong Horrifically wrong! Heavens to Betsy! What went horrifically wrong is the company went public with a clueless CFO. For all corporate actions—reporting, dividends and buybacks—that additional float is meaningless. It’s only relevant for short-term holders and short-term metrics.
myownpetard 6y ago
With normal shorting the number of shares being traded is no greater than the float. Only with naked shorting can there be more shares traded than float, as in the parent's example. Interestingly, in both cases the short interest can be greater than 100%. My understanding is that naked shorting can be used to artificially lower the stock price by increasing the supply with the ultimate goal of driving the company into bankruptcy. So on one side you have illegal(?) market manipulation benefiting sophisticated traders and on the other you have companies that are presumably creating jobs and generating something of value being destroyed as a result of financial engineering. You can decide if that's upsetting or not.
- woopwoop 6y ago
  Both naked shorting and regular shorting reduce the price of the stock. In the case of regular shorting, there is a sale offer that wouldn't have been and was, and in the case of naked shorting, there is a buy offer that would have been and wasn't.
  - myownpetard 6y ago
    True, but in the case of naked shorting there is now (for some period of time) another share being traded in addition to the shares issued by the company. In the case of regular shorting the float remains the same.
- eru 6y ago
  > With normal shorting the number of shares being traded is no greater than the float. Only with naked shorting can there be more shares traded than float, as in the parent's example. Interestingly, in both cases the short interest can be greater than 100%. Why? A owns a share, loans it to short seller B. B sells the loaned share back to A. Then A loans the share again to B, B sells it back to A. Now repeat the process a million times. You can get arbitrarily high amounts of shorting without any naked shorts. (And usually, A and B don't know each other. It's all done via exchanges and clearing houses etc.)
  - 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
  - krok 6y ago
    Ok, I've done it. I told my children that I'm going to take them to McDonald's tomorrow evening. They see this promise as 100% good, as real as if they were actually holding the burger. The only difference from their point of view, is that if they were holding a physical burger now, by tomorrow evening it would be cold and bad to eat. The ones I have promised them are real burgers which are deliverable tomorrow evening, at the time we're going to want to eat them. So I've created two additional burgers owned by my children, in addition to all the physical burgers that currently exist, which are owned by either McDonald's, if they haven't been sold yet, or by customers if they have. Does this mean that I've found an infinite supply of free burgers and should go into competition with McDonald's? No. Because I'm going to have to buy the burgers from McDonald's to supply to my children. They own two new paper burgers, but I'm short two burgers. So the net total world supply of burgers is unchanged.
    - bal4591 6y ago
      Well you're still flawed if you scale your argument. What if you take your argument, and scaled it up. What if you promised each kid 1 trillion burgers. Will you have access to 1 trillion burgers tomorrow? What if they take their future 1 trillion burgers and sell half. What if you walk into McDonalds to claim the 1 trillion burgers. Does McDonalds have 1 trillion burgers? No. So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. So what you're saying is that you shouldn't sell things you can't possibly fulfil? Hence the argument against this kind of trading.
      - Chris2048 6y ago
        Most financial institutions need some kind of basis for a promise - something that "secures" the contract e.g. like a loan secured by an asset. A regulated entity might have capital requirements which would limit the no of burgers promised to money held. Another might be a contract with mcdonalds for N burgers, or a warehouse full of burgers - shorted stocks require the lender to actually sell a stock, and the shorter to actually sell it (and buy it back later) but there will need to be security/"deposit" on the returning of the stock - there exist a risk that the lender will not get their stock back, which is part of the reason for the premium. Since you/I are not regulated financial institutions, not may would trust us to deliver 1 trillion burgers on paper; so the flaw exists in "What if they take their future 1 trillion burgers and sell half" - sell to whom? They'd have to find someone willing to buy. "What if you walk into McDonalds to claim the 1 trillion burgers" - the "paper burger" is an agreement between you and some third-party, not mcdonalds. You couldn't pre-order items from one shop, and go to another store with you invoice and demand they fulfil it - your contract is not some general/official currency, there is no obligation to accept it. > So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. It's a promise that you will supply N burgers, so the criteria for ok-ness is that you can supply N burgers, that McDs can provide that many is necessary-but-not-sufficient alongside: - you can pay for N burgers - you can transport N burgers (on time) but when I say "ok", I mean from a "morality of making personal promises" perspective, not "financial promises/obligations made by a regulated financial institution" perspective. Individuals are not financial institutions, and financial institutions are regulated as such.
dexen 6y ago
Your explanation makes a lot of sense. Nonetheless it's bit of a hard sell as it seems to parallel fractional reserve banking to a degree, and we've come to accept the later as the best currently available compromise.
- jannes 6y ago
  I think the dilution from fractional reserve banking is priced into the buying power of each dollar somehow. You never look at the value of a dollar as the % of total dollars in circulation. The value of a dollar is rather defined by how many goods/services/other currencies you can get in exchange for it. With stock it matters a lot more how many % of a company is represented by a single share.
  - eru 6y ago
    Each loan is also a deposit. Each debit is also a credit. Similar, each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back.
    - JumpCrisscross 6y ago
      > each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back Again, to be super clear: for everyone but market makers, the law is you have to locate the borrowed share before selling short. Market makers can naked short to provide liquidity in a buying frenzy. Given they're shorting into a buying frenzy, they tend to be quite motivated to immediately cover themselves. We have lots of people shorting GameStop. We have zero evidence anyone is improperly naked shorting.
      - eru 6y ago
        And to be fair, they also definitely have to cover themselves before they need to make delivery two days later. I think naked shorting would be a perfectly valid thing to allow every investor to do, you clearing house would just want to ask for pretty high margin requirements. Very similar to how there are covered call options, but also naked call options. And the economy hasn't collapsed either.
JumpCrisscross 6y ago
> something is horrifically wrong Horrifically wrong! Heavens to Betsy! What went horrifically wrong is the company went public with a clueless CFO. For all corporate actions—reporting, dividends and buybacks—that additional float is meaningless. It’s only relevant for short-term holders and short-term metrics.

myownpetard 6y ago

With normal shorting the number of shares being traded is no greater than the float. Only with naked shorting can there be more shares traded than float, as in the parent's example. Interestingly, in both cases the short interest can be greater than 100%. My understanding is that naked shorting can be used to artificially lower the stock price by increasing the supply with the ultimate goal of driving the company into bankruptcy. So on one side you have illegal(?) market manipulation benefiting sophisticated traders and on the other you have companies that are presumably creating jobs and generating something of value being destroyed as a result of financial engineering. You can decide if that's upsetting or not.

woopwoop 6y ago
Both naked shorting and regular shorting reduce the price of the stock. In the case of regular shorting, there is a sale offer that wouldn't have been and was, and in the case of naked shorting, there is a buy offer that would have been and wasn't.
- myownpetard 6y ago
  True, but in the case of naked shorting there is now (for some period of time) another share being traded in addition to the shares issued by the company. In the case of regular shorting the float remains the same.
eru 6y ago
> With normal shorting the number of shares being traded is no greater than the float. Only with naked shorting can there be more shares traded than float, as in the parent's example. Interestingly, in both cases the short interest can be greater than 100%. Why? A owns a share, loans it to short seller B. B sells the loaned share back to A. Then A loans the share again to B, B sells it back to A. Now repeat the process a million times. You can get arbitrarily high amounts of shorting without any naked shorts. (And usually, A and B don't know each other. It's all done via exchanges and clearing houses etc.)
- 6y ago