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It's actually really simple. The parties short seller sold to can lend their shares out again. Say I own the only share in Acme Corp. A borrows it and sells it
by HeavenFox 4y ago
It's actually really simple. The parties short seller sold to can lend their shares out again.
Say I own the only share in Acme Corp. A borrows it and sells it to B. B then lent it to C who then sold it to D. Now you have both A and C with short position, despite only one outstanding share.
- anigbrowl 4y agoSure, but they can't both cover it, as D can only sell it back to one of them to return to you. It only works if everyone essentially does the trade in reverse, which requires (illegal) coordination.
- phyalow 4y agoThe key insight is the order of reversal doesn't matter, and that any securities trade/position is eventually reversed (its the only action available). Hence having synthetic positions outstanding via rehypothecation doesnt actually matter as they are fungible with normal float.
- anigbrowl 4y agois eventually reversed (its the only action available) But this assumes normal market operation, which a short squeeze is not. Suppose in the example above A buys the share from D and sells back to the original issuer, who then refuses to lend it out again. C can't pay back B and presumably goes bankrupt. It only makes sense if people are required to lend securities to anyone who wants to borrow them.