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I'd love to see where this has been explained. I've not seen this anywhere.

by jtdev 6y ago

mikeyouse 6y ago
One such example: https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/ https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha... > As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall. > An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares. > More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short. > In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.
- jtdev 6y ago
  Okay, but this still seems like a perversion of market mechanics that should be regulated/banned.
  - hntrader 6y ago
    Sort of like fractional reserve banking? In practice it doesn't make a big difference whether it's banned or not. Stocks almost never have a short-interest above 100%, and the larger the short-interest the less attractive it becomes to join in so there's already negative feedback built in.
    - Judgmentality 6y ago
      > In practice it doesn't make a big difference whether it's banned or not. Stocks almost never have a short-interest above 100% Except it just happened? This is like arguing for not fixing a really weird state in code. "It's not supposed to be able to get into that state so we just ignore it."
      - hntrader 6y ago
        > This is like arguing for not fixing a really weird state in code That's not a valid analogy. The reason we fix bugs and address code smells is that the cost of doing so is relatively low and the benefit is large from both a tail-risk mitigation perspective and technical debt perspective. If we're going to go through the rigmarole of passing new regulations in order to solve some problem, the problem should be of sufficient magnitude to justify the associated costs: (i) The cost of compliance to industry, which would be humongous, since you now need a centralized authority to track who owns the actual float versus the shorted float, and for this information to be communicated between all stakeholders & said authority. Then each stakeholder needs to build internal processes and software around this data to ensure they are compliant. (ii) The time & financial cost of enforcement and penalties, to both regulators (taxpayer) and industry. (iii) Possible unintended consequences, such as corporatist corruption of the specifics in order to entrench established interests. Evidence or reason hasn't been provided that this is even a problem, let alone a problem of any meaningful magnitude deserving of regulation.
        Judgmentality 6y ago
        > If we're going to go through the rigmarole of passing new regulations in order to solve some problem, the problem should be of sufficient magnitude to justify the associated costs Agreed. > Evidence or reason hasn't been provided that this is even a problem Strongly disagree. I realize there's lots of noise right now, but the signal is starting to shake out in the news. > let alone a problem of any meaningful magnitude deserving of regulation This is the interesting part I'm hoping is actually debated. But somehow I don't think it's ever really going to be discussed by the SEC, the same way I feel like 2008 was just a bunch of slaps on the wrist (what happened in 2008 was much, much, much worse than what happened recently with GME to my knowledge and I am not saying they are equivalent).
  - deleted 6y ago
    [deleted]
- RhodoGSA 6y ago
  I get how this works but it still doesn't make sense on why i should be able to lend shares that i don't own. The whole idea of shorts in general is kind of messed up. I get shorting is a form of 'Fraud detection', or 'Market stabilization' but betting on a company's failure seems.... not-right.
  - mikeyouse 6y ago
    You don’t only make money if the company fails, but if the market thinks it’s going to succeed at a faster pace than it eventually does. You’re not betting against the company, but the market’s opinion of the company. The alternative to allowing shorting is to only allow stocks to increase in price which is obviously silly.
    - RhodoGSA 6y ago
      Okay, Failure might not have been the right word. Also, my main point was in regard to shorting on borrowed shares. If i'm short a company on borrowed shares I should not be able to further lend those shares out for a short. But to my secondary point, which seems to be getting the most attention I can only say this. In a pure, utopian world it would be immoral for me to have a vested interest in a company 'Underperforming'. Without Shorting you would not have 'Only an increase in price' - thats silly. There would still be the option to sell your shares and since market dynamics dictates the price of those shares they can potentially fall to zero, thus losing money and if the shares fall enough, you could default on your credit, etc. This mechanism has the same protects a short has against fraud, mismanagement, etc. The difference here isn't just semantics. If i don't believe in a company, i sell my shares thus lowering the value of the shares (If the market agrees).

I'd love to see where this has been explained. I've not seen this anywhere.

by jtdev 6y ago

I'd love to see where this has been explained. I've not seen this anywhere.

One such example: https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/ https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha... > As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall. > An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares. > More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short. > In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.

jtdev 6y ago
Okay, but this still seems like a perversion of market mechanics that should be regulated/banned.
- hntrader 6y ago
  Sort of like fractional reserve banking? In practice it doesn't make a big difference whether it's banned or not. Stocks almost never have a short-interest above 100%, and the larger the short-interest the less attractive it becomes to join in so there's already negative feedback built in.
  - Judgmentality 6y ago
    > In practice it doesn't make a big difference whether it's banned or not. Stocks almost never have a short-interest above 100% Except it just happened? This is like arguing for not fixing a really weird state in code. "It's not supposed to be able to get into that state so we just ignore it."
    - hntrader 6y ago
      > This is like arguing for not fixing a really weird state in code That's not a valid analogy. The reason we fix bugs and address code smells is that the cost of doing so is relatively low and the benefit is large from both a tail-risk mitigation perspective and technical debt perspective. If we're going to go through the rigmarole of passing new regulations in order to solve some problem, the problem should be of sufficient magnitude to justify the associated costs: (i) The cost of compliance to industry, which would be humongous, since you now need a centralized authority to track who owns the actual float versus the shorted float, and for this information to be communicated between all stakeholders & said authority. Then each stakeholder needs to build internal processes and software around this data to ensure they are compliant. (ii) The time & financial cost of enforcement and penalties, to both regulators (taxpayer) and industry. (iii) Possible unintended consequences, such as corporatist corruption of the specifics in order to entrench established interests. Evidence or reason hasn't been provided that this is even a problem, let alone a problem of any meaningful magnitude deserving of regulation.
      - Judgmentality 6y ago
        > If we're going to go through the rigmarole of passing new regulations in order to solve some problem, the problem should be of sufficient magnitude to justify the associated costs Agreed. > Evidence or reason hasn't been provided that this is even a problem Strongly disagree. I realize there's lots of noise right now, but the signal is starting to shake out in the news. > let alone a problem of any meaningful magnitude deserving of regulation This is the interesting part I'm hoping is actually debated. But somehow I don't think it's ever really going to be discussed by the SEC, the same way I feel like 2008 was just a bunch of slaps on the wrist (what happened in 2008 was much, much, much worse than what happened recently with GME to my knowledge and I am not saying they are equivalent).
- deleted 6y ago
  [deleted]
RhodoGSA 6y ago
I get how this works but it still doesn't make sense on why i should be able to lend shares that i don't own. The whole idea of shorts in general is kind of messed up. I get shorting is a form of 'Fraud detection', or 'Market stabilization' but betting on a company's failure seems.... not-right.
- mikeyouse 6y ago
  You don’t only make money if the company fails, but if the market thinks it’s going to succeed at a faster pace than it eventually does. You’re not betting against the company, but the market’s opinion of the company. The alternative to allowing shorting is to only allow stocks to increase in price which is obviously silly.
  - RhodoGSA 6y ago
    Okay, Failure might not have been the right word. Also, my main point was in regard to shorting on borrowed shares. If i'm short a company on borrowed shares I should not be able to further lend those shares out for a short. But to my secondary point, which seems to be getting the most attention I can only say this. In a pure, utopian world it would be immoral for me to have a vested interest in a company 'Underperforming'. Without Shorting you would not have 'Only an increase in price' - thats silly. There would still be the option to sell your shares and since market dynamics dictates the price of those shares they can potentially fall to zero, thus losing money and if the shares fall enough, you could default on your credit, etc. This mechanism has the same protects a short has against fraud, mismanagement, etc. The difference here isn't just semantics. If i don't believe in a company, i sell my shares thus lowering the value of the shares (If the market agrees).