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The GameStop Mess Exposes the Naked Short Selling Scam – The American Prospect
- deleted 6y ago[deleted]
- throw451697 6y ago> All these articles about naked short selling seem to be missing a simple point: Alice owns 100 shares of some stock. She lends them to short seller Bob who sells them to Carmen. Carmen now owns 100 shares, which she lends to short seller Dan, who in turn sells them to Esther. Esther lends her 100 shares to short seller Fred who sells them to Gloria. At this point, the short interest in the stock is 300 shares (Bob, Dan and Fred sold short) but it's only Alice's 100 shares that made the rounds. And nobody broke any rules. In other words: 1. Alice owns 100 shares 2. When Alice lends them to short seller Bob, Alice no longer owns 100 shares. She owns an IOU from Bob, and Bob owns the shares. 3. Then Carmen owns 100 shares. 4. When Carmen lends the shares to short seller Dan, Carmen no longer owns 100 shares. She owns an IOU from Dan, and Dan owns the shares. 5. ... At the end of the cycle, Alice owns 100 IOU from Bob, Carmen owns 100 IOU from Dan, Esther owns 100 IOU from Fred and only Gloria owns 100 shares. It's basically fractional reserve, for shares. If Bob goes under Alice owns nothing.
- HenryBemis 6y agoNow to see the insanity of the A-->B-->C-->D-->D-->E-->F setup: how can I lend you a chair, it goes from hand to hand from A to F, and at the same time I still have it on my patio? Stocks used to be pieces of papers. In the goold old days, in the end of the day people were spending hours moving papers "stocks" around from your account to my account (literally, papers)(https://duckduckgo.com/?q=paper+stock+certificates&t=ffab&iar=images&iax=images&ia=images https://duckduckgo.com/?q=paper+stock+certificates&t=ffab&ia...) I know that the big players are adding iterations, complexity (and other similar words) only so they can repack "the thing" re-sell it to someone. It's like derivatives in mathimatics. You raise, and you raise, and you raise, and you raise, and you... kinda like the movie Inception. (I apologise if I got the wrong math term.. it's been 'a while'). Edit: OP deleted his/her comment while Throw and I were drafting ours.
- qeternity 6y ago> Now to see the insanity of the A-->B-->C-->D-->D-->E-->F setup: how can I lend you a chair, it goes from hand to hand from A to F, and at the same time I still have it on my patio? Securities only have utility when you sell them. It’s more like having a chair in your garage that you’re not using, and lending it to your neighbor. Do you still own a chair? Yes. Does your neighbor have a chair? Yes. When you want the chair back you simply ask for it back, and your neighbor can either borrow a chair from someone else or buy their own.
- andi999 6y agoThe danger with stocks is they are all the same (from the same company). Nobody would think of selling the chair they borrowed from the neighbor (if they want to stay friendly with the neighbour). Maybe it is more like eggs. You ask you neighbour for a few eggs, and later give them back (but everybody understands them to be different eggs)
- exporectomy 6y agoPeople do that with money. "Can I borrow $20 to pay the rent? I'll pay you back next week, I promise."
- thaumasiotes 6y ago> Now to see the insanity of the A-->B-->C-->D-->D-->E-->F setup: how can I lend you a chair, it goes from hand to hand from A to F, and at the same time I still have it on my patio? You don't. Nobody claims you do, not even in the short-selling situation you're trying to describe; you can't vote a share that you've lent out. > Stocks used to be pieces of papers. In the goold old days, in the end of the day people were spending hours moving papers "stocks" around from your account to my account (literally, papers) This didn't change; it's just that, under US law, you can no longer own any stock. (Well, more specifically, you can't own stock that you buy on a stock exchange.) Instead, there is a company that exists solely for the purpose of owning all the stock and registering your interest in it. When you sell a stock to someone else, DTCC owns that stock before and after you sell it; what changes is that their internal records may or may not update the name under which that stock is registered. There's a fun paper here ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017206 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017206 ) going over the history: > Congress, in the 1975 Securities Acts Amendments, took the extremely unusual step of legally imposing a single technique for settlement on the markets. The effect on securities settlement was somewhat comparable the effects of a law that would require all computers plugged into the internet to run on DOS.
- toast0 6y ago> If Bob goes under Alice owns nothing. Which is why Alice requires good collateral of from Bob before agreeing to loan the shares; generally cash or treasuries of equal value to the shares, marked to market daily. If Bob goes under, Alice has Bob's collateral.
- CTDOCodebases 6y agoWhat if all this trading occurred within a two day timeframe then at the end of the two day settlement period Alice’s stockbroker doesn’t deliver Alice’s shares? What happens then?
- Judgmentality 6y agoIt's called a failed to deliver. It happens all the time. It's bullshit, but there are millions of FTDs on GME.
- Traster 6y agoThis is categorically not like fractional reserve. The whole point of fractional reserve is the bank can lend out a multiple of its deposits- hence fractional. In this situation no one is lending anything they don’t have. This is just like the difference between GDP and money supply. GDP is the rate at which money is changing hands, which can be many multiples of the money supply for perfectly valid reasons. Similarly this situation did change the actual supply of stock it just increased the rate of movement.
- lupire 6y agoFraction is less than 1. Multiple is more than 1. You are describing negative fractonal reserve.
- Traster 6y agoI wouldn't have thought I would have to explain this on hacker news but if you're lending a multiple of the deposit than you have fractional reserve. (which is not the same thing as lending the actually number of shares you have ownership of)
- michaelscott 6y agoA good summary of the situation, although it's not really fractional reserve. The problem is that in any report of short interest Alice is not shown to have that IOU but rather her original 100 shares (in addition to Bob's). I understand the term short interest is appropriate because it reflects the consensus of bearish sentiment better, but it only works if the IOUs flying around can be backed by money (i.e. don't require settlement in the original shares). In the event that large amounts of the stock are bought, held and refuse to be sold to cover short positions the entire chain can collapse to Alice sells 100 shares to Gloria and the rest either suffer heavy losses or go completely bankrupt.
- lupire 6y agoIt's basically the same as a bank run, where you ask for your money back but it's not actually there. But it's leveraged because it's stock not money and the stock is comtroled by a cartel; you cants make some to settle your debt.
- cm2187 6y agoIt’s not really an IOU. It is collateralised, so the risk to Alice in theory is much smaller. The collateral is typically adjusted daily, so technically there is still a residual risk if there was a large intra day movement. But I wouldn’t think of it as a bank loan.
- delaaxe 6y agoAll of this doesn't address the concept of naked short selling in the post's title. Naked short selling happens when Bob sells short 100 shares without having borrowed them from anyone beforehand, effectively conjuring new shares out of thin air. Certain market participants are allowed to do this for "liquidity purposes"
- JackFr 6y agoSo as the buyer opposite the short, in such a case, what do I have in my account? It’s not thin air.
- otherme123 6y agoYou have the right to receive a share, as soon as it is available in the market. They have 2 days to fullfil your account, or they issue a "fail to deliver". Naked shorts are allowed to market-makers, because if when you buy there's no counterpart but it's reasonably expected, you receive this "right to a real share" to be filled with a real share as soon as the market-market can buy a real one. You'll never notice however. This mechanism works like oil in an engine and is almost neutral to the market dynamics, and they receive a fee to keep the engine oiled. The problem is when market-makers abuse this ability, and shorting nakedly too much sends wrong signals to the market, pushing it down and self-fullfilling the profecy. In the same way that pump-and-dump is illegal, this works in reverse (short-and-distort).
- delaaxe 6y ago
- neurotech1 6y agoArchive version: http://archive.is/X4hzt http://archive.is/X4hzt Site appeared overloaded
- hanselot 6y ago>The GameStop Mess Exposes the Naked Short Selling Scam >A decade ago, a Biden confidant tried to stop it. Now there’s another chance. A decade ago, "insert actual narrative being sold here". Now there's another chance.
- wyxuan 6y agoAnother day, another attempt by someone who doesn't understand the financial markets, especially as it relates to GME. The truth is that the 140% figures is merely a misleading figure Matt Levine debunks the naked short selling idea here: (see footer #3 to read what I'm talking about) https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops?sref=e2TM0yf8 https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga... but the gist of it is that each share can be borrowed more than once, so the float seems higher than it actually is.
- michaelscott 6y agoFor me this is an issue of how the data is presented. I like the explanation provided in the footnote at your link because it highlights that issue: A lending (in effect) 90 shares to D does not mean that there are now 180 shares in ownership. What A has after this lend is simply a promise to pay back at market rate for the shares and it's D who now owns the original 90 shares
- cesaref 6y agoRight, and the lenders are typically institutions who are holding the stock for reasons other than speculation (e.g as part of a tracker fund for clients) and are simply attempting to extract more value from their holding. No point it sitting there in your depot account if you can get paid a few % by lending it.
- cesaref 6y agoYes, it's misleading. I wrote a stock borrowing system for an investment bank 10 years ago or so, and there is a fair bit of complexity around registrars, collateral, dividends etc. The 'A shorts to B who shorts to C' type arrangement is unlikely in the extreme. Would B keep paying A for the borrow (and have the collateral tied up) if they have passed the stock to C? Nope, they'd return it... There's also other products which would alter the exposure to securities without ownership, such as total return swaps. These aren't going to appear at the registrar, so who has exposure is more complicated (add in futures and options etc etc).
- gammalost 6y agoWhat a mess of a system. Getting paid for moving shares around is really one of the most useless things we have
- delaaxe 6y agoHow about getting paid to do the clearing between those share movers?
- incrudible 6y agoI completely disagree. Entering short positions is an important market mechanism that allows managing risk and mitigates speculative frenzy. For this to work, there needs to be a system to borrow shares. If you think the market is volatile now, you just haven't seen it when only long positions are possible.
- cecja 6y agoThat's the dumbest take out of all of this. Let's do risky business and secure it with shady business. Love it.
- ALittleLight 6y agoYou could still sell covered calls and buy puts.
- incrudible 6y agoThat assumes somebody is selling you the put, but options pricing assumes short selling is possible. Puts would be way more expensive if short positions weren't possible.
- cwhiz 6y agoYes, just like the price of goods sold at Walmart is based on third parties betting on what they think of the price. Oh, but it’s definitely necessary in the stock market. Without it, we would speculative frenzy that we definitely don’t have now. There should not be any market mechanism that financially motivates people to root against a company.
- protoman3000 6y agoWe need a borrow checker for the financial system.
- 02020202 6y agoas an investor, i think short selling should be banned altogether. it shouldn't have been allowed in the first place because it skews the markets and here we are.
- incrudible 6y agoThis, like any other article that discusses the "shorted above 100%"-phenomenon without mentioning synthetic longs, is either uninformed or intentionally misleading. https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm The "naked short selling is rampant" narrative has been used to pump-and-dump stock before, and the SEC warns about this explicitly. In the case of the Gamestop squeeze, it was used to convince people to hold on to their stock after the squeeze was over, claiming that there was an even bigger squeeze incoming.
- jboog 6y agoAs someone relatively well educated in finance and capital markets the whole GME fiasco has further convinced me of just how foolish and easily manipulated the average person is. It was pretty incredible what happened with the whole pump and dump a few weeks ago I won't lie, but when GME was at 325 a share and literally many thousands of people on WSB were insisting it would go to $1000. Why? "I like the stock" or "The new CEO has an amazing plan to go digital!" They sell video games. In malls. Is this 2003? Imagine 15 years ago pumping up Blockbuster stock to 20x what it was worth. Just utter insanity. Not to shit on "average joe" it's also caused me to reflect on what biases might be causing me to have really dumb beliefs on things I don't have any domain knowledge of.
- exporectomy 6y agoAre you confusing some individuals who commented positively about the new CEO's digital plan with the whole popular trend of trying to punish short sellers and maybe turn GME shares into a kind of currency that has value independent of how the company is actually doing, like cryptocurrencies?
- jboog 6y agoAre we still punishing short-sellers now? Because most of the major HFs and shorts closed their positions or hedged several weeks ago now and GME is still being pumped all over WSB And that's not even getting into the fact that 99% of WSB posters had no idea what a "short squeeze" was about 60 days ago. There were some sophisticated people who understood what was going on there and hundreds of thousands of easily manipulated people who thought it sounded like a way to make a quick buck. And I'm not begrudging the people who made money on this. Good for them! I'm just annoyed by the ex post rationalization that there were all somehow masters of complex financial instruments because they bought a meme stock.
- Judgmentality 6y agoI find it odd all the comments are focusing on how stocks are exchanged, and not on the fact that the article suggests that brokers are straight-up lying about having shares. > So their brokers commonly wink and do a “locate,” not a borrow, effectively saying, “Yes, I know where the share is and can buy it when the time comes to deliver.” The evidence, unfortunately, is based mostly on past behavior and looking at the volume of FTDs. > Citadel violated the Security Commission’s Reg SHO, the rule regulating short sales. On November 13, 2020, FINRA, the traders’ self-regulator, fined Citadel Securities $180,000 for failing to mark 6.5 million equity trades as short sales between September 14, 2015, and July 21, 2016. Citadel did not admit or deny the allegations but paid the fine. It then goes on to explain how it's relatively easy to obscure this, but there's really no "gotcha" in this article. It's mostly a summary of how relatively weak enforcement is from the SEC, and that it seems very probable the guys with money have substantial influence over the regulators (the story behind this is actually pretty good in the article).
- cecja 6y agoAnd that is no problem for you? That people trade with stuff they don't have and don't deliver? But hey as long as the trade office just accepts it.
- Veen 6y ago> The evidence, unfortunately, is based mostly on past behavior What other evidence do you expect? It can't be based on future behaviour.
- ubercow13 6y agoIt would be good if there was enough public information available for people to deduce that it is happening in the present.
- danielbarla 6y agoI suspect they meant "inferred from past behaviour" as opposed to say, exposed in a set of emails definitively proving intent & collusion (which would be slightly more clear cut and hard-hitting).
- jimworm 6y agoAs a layman, it looks like failures to deliver have very little consequence, so I'll ask some stupid questions here. If one of these activist investors happened to have lent a stock out, which then failed to deliver, what is the worst consequence they could inflict on the borrower? If no consequences are available, then how do short squeezes happen?