4 ms·

"When you're selling something you don't own you're distorting the market's price discovery mechanisms." How? It only does so if one sets out to do it on purpo

by roel_v 14y ago

"When you're selling something you don't own you're distorting the market's price discovery mechanisms." How? It only does so if one sets out to do it on purpose, and in that case there is no difference between selling something that own, or that you don't (yet) own. Let's say I sell grain to you for 300 USD per ton, to be delivered in Fall 2012. How does that distort the market? Alternatively, how is this example different from naked selling? Or isn't it, and do you think that this sort of insurances should be prohibited too? "In many contexts I think most people would consider it fraudulent to sell something before you've bought it." I'm not sure. There are many retailers who only order something from their wholesaler or manufacturer after you've bought it from them. Why would a buyer be concerned with when or how a seller gets his merchandise? It only becomes a problem after failing to deliver the goods, and when no adequate compensation for such a failure can be given (i.e., a seller going bankrupt because of a naked sale gone wrong). Something that could be controlled, regulated or mitigated in many ways that are much less intrusive than forbidding 'naked shorts'.

cgmorton 14y ago
I think the confusion here is that 'short selling' is a misnomer - it doesn't involve any merchandise at all. From the article: "In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock." That is to say, there were more Overstock shares in the market than actually existed, because they were borrowed from thin air. With a retailer, the merchandise will get delivered, and then the buyers will have it forever. With 'naked shorting', the merchandise is created from nowhere, lent out, sold, rebought, returned, and then disappeared. The shares never actually exist. But they affect the market as if they do exist - e.g. more shares existing in a company means every share is less valuable, so by magicking these shares into existence the price is equally magically dropped, which helps makes the shorting auto-succeed. It is straight up cheating. Imagine a grain holding company lends you some paper 'shares' that are stand-ins for X amount of grain. It produces many of these shares, flooding the market with 'grain', and as a result the price falls. At this point their lenders buy up the grain from grain farmers at these lower prices, thus making a profit, and then return the grain to the company who then hands it out to the people who bought the shares. In this way, the grain farmers lose money because their product is devalued, while the company and its investors make money. This is the only mechanic at play: money flowing from the people who create value into the pockets of the market manipulators. Oh, and this 'grain holding company'? They never had any grain to begin with. All they had was the know-how and connections to lie and get away with it.
- quantgenius 14y ago
  107% of available shares being shorted is NOT a physical impossibility. Let's say there are only 10 shares of OSTK outstanding. I own them all and make them available for borrow by short sellers. Short sellers borrow all 10 and sell them. I buy 1 of the 10 shares shorted. I lend that out too and it gets shorted. Now 110% of all issued shares have been shorted. Nothing impossible or illegal here. This is a situation that would be EXTREMELY unusual because it's very, very dangerous for the short sellers. I could recall all my lent out shares and unless I sell one of the shares I own there is no way for the short sellers to deliver so the price will spike into the stratosphere due to a short squeeze. The fact that short sellers were willing to short stock despite the massive short interest (which is a publicly available number) means the market as a whole believed that OSTK was wildly overpriced, which in hindsight it was.
- roel_v 14y ago
  Eh, if there is confusion at all, it isn't on my side - it's perfectly possible for there to be a sale without any merchandise. Why does it matter that there are more shares being traded than that actually exist? It isn't about the actual trades, it's a simple contractual thing - one party promises something, the other agrees to pay for it, and as long as both end up satisfied, that's it. There is no 'merchandise being created from nothing', it's just one party promising to do something, that's it. "e.g. more shares existing in a company means every share is less valuable" This doesn't make sense - there are no shares created. There is a party promising to deliver shares, that's completely different.

by roel_v 14y ago

cgmorton 14y ago

I think the confusion here is that 'short selling' is a misnomer - it doesn't involve any merchandise at all. From the article: "In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock." That is to say, there were more Overstock shares in the market than actually existed, because they were borrowed from thin air. With a retailer, the merchandise will get delivered, and then the buyers will have it forever. With 'naked shorting', the merchandise is created from nowhere, lent out, sold, rebought, returned, and then disappeared. The shares never actually exist. But they affect the market as if they do exist - e.g. more shares existing in a company means every share is less valuable, so by magicking these shares into existence the price is equally magically dropped, which helps makes the shorting auto-succeed. It is straight up cheating. Imagine a grain holding company lends you some paper 'shares' that are stand-ins for X amount of grain. It produces many of these shares, flooding the market with 'grain', and as a result the price falls. At this point their lenders buy up the grain from grain farmers at these lower prices, thus making a profit, and then return the grain to the company who then hands it out to the people who bought the shares. In this way, the grain farmers lose money because their product is devalued, while the company and its investors make money. This is the only mechanic at play: money flowing from the people who create value into the pockets of the market manipulators. Oh, and this 'grain holding company'? They never had any grain to begin with. All they had was the know-how and connections to lie and get away with it.

quantgenius 14y ago
107% of available shares being shorted is NOT a physical impossibility. Let's say there are only 10 shares of OSTK outstanding. I own them all and make them available for borrow by short sellers. Short sellers borrow all 10 and sell them. I buy 1 of the 10 shares shorted. I lend that out too and it gets shorted. Now 110% of all issued shares have been shorted. Nothing impossible or illegal here. This is a situation that would be EXTREMELY unusual because it's very, very dangerous for the short sellers. I could recall all my lent out shares and unless I sell one of the shares I own there is no way for the short sellers to deliver so the price will spike into the stratosphere due to a short squeeze. The fact that short sellers were willing to short stock despite the massive short interest (which is a publicly available number) means the market as a whole believed that OSTK was wildly overpriced, which in hindsight it was.
roel_v 14y ago
Eh, if there is confusion at all, it isn't on my side - it's perfectly possible for there to be a sale without any merchandise. Why does it matter that there are more shares being traded than that actually exist? It isn't about the actual trades, it's a simple contractual thing - one party promises something, the other agrees to pay for it, and as long as both end up satisfied, that's it. There is no 'merchandise being created from nothing', it's just one party promising to do something, that's it. "e.g. more shares existing in a company means every share is less valuable" This doesn't make sense - there are no shares created. There is a party promising to deliver shares, that's completely different.