

Ask HN: Please explain short selling? - captaincrunch

So I just wrote a stock prediction system... I understand just enough about the market to be dangerous. One thing I simply cannot  wrap me head around is selling short.   Who are the stocks borrowed from?  Are the people lending the shares actually hoping for the stocks success?
======
fexl
I'm a hedge fund accountant, and my software follows many thousands of trades
including short sales. I know exactly how to account for these trades, but I
have no idea what's really going on.

As an accountant, all I see is that someone sold 1200 XYZ shares at $23.00
each, receiving a grand total of $27,600 cash. To simplify the example, I am
not subtracting any commission there.

Now the funny thing is, this account _didn't have_ any XYZ shares before the
trade. Nevertheless the trade happens, and the account has -1200 XYZ shares,
and $27,600 more cash than it had before.

At that moment, the account has incurred a liability to buy back 1200 XYZ
shares -- eventually. The account can hold this liability indefinitely, so
long as it has enough total capital to reassure the brokerage that it can
easily buy back the 1200 XYZ shares at any time.

I've read the stories about "naked short selling," and how that's a giant scam
because the seller doesn't even have to locate any shares to borrow. In this
telling of the story, the seller is _issuing_ brand new shares and selling
them into the market -- in effect, counterfeiting. I spoke with a _very_
experienced money manager about this, and that's his take.

I also spoke with a friend who is very wise about markets, and he had an
entirely different take. He made the point that no matter how the short sale
occurs, either "naked" or "covered", in both cases the seller ends up with the
liability of -1200 XYZ shares, so what's the difference? The only difference
is that if the short sale is naked, the seller owes the shares to the buyer.
But if the short sale is covered, the seller owes the shares to the lender.
Either way it's a liability of -1200 XYZ shares, and the only difference is
_to whom_ the shares are promised.

Now I'm a rational man, so it bothers the hell out of me to agree with both
sides of a contradiction. So what gives? I don't know. The only other shred of
evidence I have, and it's a very small shred, is the phenomenon of "Payment in
Lieu of Dividends." If I have negative quantity of shares, and those shares
pay a dividend, then that dividend is charged to my account as an expense.
Normally, as an accountant, I see that as a simple negative dividend, which we
call a "Dividend Expense." But _sometimes_ I see those negative dividends
labeled "Payment in Lieu of Dividends." I read an article once saying that the
only difference is that "payment in lieu" occurs when the shares were sold
short in a "naked" fashion.

So maybe, just maybe, there is a real difference between the two forms of
short sales, as my money manager friend asserts. The money manager asserts
that naked short selling actually increases the total supply of shares, even
past the official "float" of shares issued by the company!

The people at the Gold Anti-Trust Action Committee (GATA) even claim that
short sellers are creating this artificial counterfeit supply in the gold
market. I would suggest calling their bluff and _redeeming_ the physical gold
into allocated Swiss storage -- but lo and behold, these financial instruments
have _no_ redemption contract. They're cash-settled only. How conveeeeeenient.

You asked if the people lending the shares actually hope for the stock's
success. Of course they do. If someone borrows 1200 XYZ shares and sells them,
the lender still has an asset of 1200 XYZ shares, and clearly still wants
their price to rise. The seller has a liability of -1200 XYZ shares, and
clearly wants their price to fall. The buyer has an asset of 1200 XYZ shares,
and clearly wants their price to rise.

Note that in my example there, the total net quantity of shares in the three
accounts involved is precisely 1200, both _before_ and _after_ the short-sale.
So where is this alleged increase in supply from short-selling? Perhaps
there's no increase in this case because it wasn't a naked short sale.

OK fine, let's make it a naked short sale. A trader simply sells 1200 XYZ
shares without either having them or bothering to borrow them. Another trader
buys those 1200 XYZ shares. Now the seller has a liability of -1200 XYZ
shares, and the buyer has an assert of 1200 XYZ shares. So after the short
sale, the total net quantity of XYZ shares in those two accounts is precisely
0. But the net quantity was precisely 0 _before_ the short-sale as well! So
once again, where oh where is this alleged increase in supply caused by short-
selling?

~~~
garethm
The increase in supply is not caused by the final net position. It's in what
you see when you look at the market.

Suppose there are 100k shares issued. Some traders decide to naked short 50k.
Actual holders of the shares say, "Oh crap. Half the company is for sale -
better dump my shares while I still can." So they put up a total of 75k for
sale.

Now 50k of the 75k of actual shares need to be purchased by the people selling
short, but if you look at the total number available for purchase at that
point, you'll see 125k shares for sale - more than were ever issued.

Of course, this same issue can bite the short sellers in a "short squeeze".
Suppose we own 60k of the shares in the company. If we see someone selling
50k, we know they are doing a naked short, and we should buy it. When we do,
we will own 110% of the company. Obviously, to make things go to 100%, the
short sellers need to buy the remaining 10% of the shares from you. You get to
pick the price.

* Edited to add - you can see a recent example of a short squeeze in Volkswagen around October 2008: <http://www.reuters.com/article/idUSTRE49R3I920081028>

~~~
fexl
These are great examples, and your point is well taken.

The <https://loom.cc/faq> system avoids this sort of nonsense altogether. An
asset type such as 2fcb2b81bb96bb51cec88edcb4b9a480 might represent a real
underlying asset being traded, but _only_ the true issuer of that asset could
create new units of it.

Anyone desiring to sell that asset short would have to create a brand new
_distinct_ asset type such as 6b17a53d425dbb15f933b98ace93e587. This new asset
type would represent just that _one individual's_ liability to pay back the
original asset. So the new asset type would in effect be a simple loan
contract.

With this approach, the supply of the original asset type
2fcb2b81bb96bb51cec88edcb4b9a480 remains completely unaffected, and nobody
needs to panic.

~~~
parkan
fexl, loom looks very interesting, and the maintainer (you?) actually touches
up on some specific market-based ideas I've been sort of idly kicking around
in the FAQ (e.g. phone service contract exchanges). Is there a way to get an
invite/sponsorship to play around with the system?

~~~
fexl
Sure. I guess I could post it here, but maybe we could try hooking up at
<https://bonchat.org/9ff3842f90e90d5e> with "katie tiny judd".

Or, more conventionally, visit the loom.cc web site and send an email from
there (click Contact).

~~~
steve19
Please post and invite. I am sure many of us would like to try it.

~~~
fexl
d302b24bb138e715e5c0cede42edd9f4

d9c48e12e7bf32fe3ce3410c4966b3bc

~~~
fexl
The d9c4 is retracted.

------
tarkin2
1\. You borrow 100 shares from a broker.

2\. You sell the 100 shares for, say, £1000 in total.

3\. Prices for the share ideally go down. (You and others have been selling,
after all)

4\. You then buy 100 of the shares for, say, £900 in total

5\. You then give the broker the 100 shares back

6\. You've made £100

Normally the broker would charge a commission for the lending, hence his/her
motivation. So if the commission were £10 you'd have £90 profit.

Naked short selling is when you miss out the broker. So you don't owe the
broker anything, but you still need to give the buyer of your fictional shares
something real, so you end up buying them, at a hopefully lower price, later.

Defenders of short-selling claim it helps quickly respon to fundamentals in
the market place. For instance once we heard the US might fine BP people could
start selling BPs shares without owning them (yet).

~~~
captaincrunch
Thanks, this is exactly what I was looking for. I'm also glad, that I am not
the only one confused about this type of trade.

What if the lender decided to sell the stocks that he had lent out? Would the
trade need to be closed for the short seller, or would he have to repay
immediately and short sell a new lenders stock?

~~~
d2viant
It depends on where the shares were borrowed from.

Either they were borrowed from the brokerage firms inventory or they were
borrowed on margin from another clients account. If they're borrowed from the
firms inventory, it's unlikely the short seller will be affected, because the
firm will just have you borrow against different shares in their same pool of
inventory. If they have no more left, they can borrow from another firm. In
the very unlikely scenario that the firm decides to not hold ANY more shares
of that company, then you may get called on the stock.

In the second scenario, if you're borrowing from another client, however, you
may be at risk of getting a margin call -- in which case you would need to
purchase the shares on the open market at their current price and return them
to the lender.

~~~
captaincrunch
So if you get called, you have to get them back to the lender...

------
elecengin
I think there are plenty of good descriptions of the basics of short selling
here, but I wanted to help explain the "who are you borrowing from" aspect.

When you trade, you must trade through a broker-dealer. A broker-dealer is
authorized to trade on behalf of it's customers. A broker-dealer must uphold
certain regulatory requirements put in place by the SEC, and policed by a
variety of government and non-government entities, including organizations
like FINRA.

Originally, shorting was managed by the broker-dealers. It was the
responsibility of the broker-dealer to manage finding an entity to "borrow"
the stock from (usually a large institutional client). These institutional
clients own very large positions in the stock, and the broker-dealer normally
provides a guarantee that it will be returned. If for some reason this process
was mismanaged, when the trades cleared and settled, there would be a "fail to
deliver" (meaning they weren't able to come up with the stock) This is a
severe problem for the broker-dealer, and can result in them losing their
license. Abusing this system became known as "naked shorting" where you never
made an attempt to "locate" (borrow) the stock. Naked shorting was severely
curtailed in 2005 under Regulation SHO.

You may also be curious how a customer knows what stocks its broker-dealer can
borrow. Originally there was a black-list of sorts called the Hard-To-Borrow
list. This list was stocks that were relatively illiquid and that couldnt be
shorted freely. If you wanted to short these, you had to request a "locate"
from your broker for a specified number of shares, and they would go looking
for someone to provide it, and confirm how many shares they could find. Under
Regulation SHO, this changed to a white-list "Easy-To-Borrow" model where you
were only allowed to short stocks on the list freely and had to request
locates for the remainder of the symbol universe.

Finally - another interesting note on shorting called the "uptick rule". The
uptick rule was originally put into place in the 1980's under Rule 390. This
rule was built to prevent a stock from being run into the ground by repeatedly
shorting it while the price was already falling. It required that in order to
short, the previous print (quote) must have been higher than the one before
(the stock was heading up). This really didn't help the problem too much, and
was repealed in 2007.

~~~
hga
Wikipedia matches my memory that the uptick rule was established in the '30s:
<http://en.wikipedia.org/wiki/Uptick_rule>

~~~
elecengin
Oops, you are absolutely right. I got confused. Rule 390 was much more
obscure... It had to do to with selling NYSE listed stocks on ECNS and such.

It was under Regulation SHO that this got changed. Thanks for pointing that
out!

------
mechanical_fish
_I just wrote a stock prediction system_

Oooh, a bankruptcy engine! The most prominent art form of our times. ;)

You seem to understand that you've become dangerous to yourself and others. Be
sure to keep listening to those thoughts. Just in case, you might want to get
a tattoo: _Past performance is not necessarily indicative of future results._

~~~
lrm242
You do realize you're simply repeating commonly held bullshit wisdom, right?

~~~
clistctrl
As someone who has also tried to write one, I'll agree with his statement.
Often following the technicals works very well. But if you know nothing about
the fundamentals, one of these days you're going to end up making a very bad
trade. I wrote my system so as to limit my losses. Which seems to work well.
In my opinion the best way to trade is to make a decision to enter/exit the
market based on fundamentals, and use technicals to decide how you do so.

~~~
tjmaxal
but you have to remember the vast majority of trades are made by humans and
the vast majority of humans are emotional not always logical creatures. So the
technicals which don't account for human emotions are bound to be wrong a
certain (usually large)percentage of the time.

~~~
byrneseyeview
This is no longer true. Most trades are automated, to one extent or another.
The _intent_ is generally from humans, though--for example, if one person is
bullish about a stock, and purchases 10,000 shares, it might lead to 30,000
more shares being traded by algorithms trying to capture profits from the tiny
perturbations caused by this initial trade).

However, many stock trading algorithms appear to fade short-term trends and
ride long-term trends (you can see this if you look at stocks with high hedge
fund ownership; they tend to have gone up a lot, with any extreme moves
quickly dampened).

------
px
The concept could be illustrated this way (ethical considerations aside):

Let's say that there is a high demand for electric generators after a
hurricane. You "borrow" as many generators from out of state friends as you
can, and proceed to sell them at a premium (let's say $1500 each). After some
time passes you find them on sale at Home Depot for $500. You buy enough of
them to return to everyone you originally borrowed from, making a tidy profit
in the process.

To answer the question more directly, short sellers borrow stocks from other
stockholders. And, yes, the people lending the stocks are hoping for the
stocks' success.

~~~
stcredzero
_Let's say that there is a high demand for electric generators after a
hurricane._

Are you also from Houston?

------
gte910h
You borrow stock from someone (or your broker does) and you then sell the
borrow stock. You give someone (usually your broker) a promise to give them
back the stock at a later date.

That's it. In it's entirety.

Depending on the value of your portfolio/margin account, if the value of the
stock goes up too much, they may ask for more collateral, etc. But other then
that, there isn't anything to it.

Shorting a stock is a bet against the price of the stock. Honestly, it doesn't
make sense as much as buying a put option in many cases, but sometimes it
does. <http://en.wikipedia.org/wiki/Put_option>

------
bismuth
You borrow from large institutional investors. These funds just own large
amounts of stock in the hopes of achieving a profit through dividends and
growth of the company. A trader who wants to short a stock can borrow some of
this stock for a fee. Everybody wins this way. The large institutional
collects the borrow-fee, and the trader can profit from a decline because he
has borrowed the stock.

[pet peeve] Note that naked short is actually mathematically equivalent to
(naked) long only with a minus sign. For example: every publicly traded
company is naked short it's own stock from the day it goes public (collecting
a huge heap of cash in exchange for selling the stock). Another example:
Everybody owning stock (or anything really) is also short cash (unless they
borrow money to buy it). So all people long [insert company name here] are
short [insert currency here] i.e. they will profit when [currency] drops wrt
to [stock]. Those unpatriotic bastards! [/pet peeve]

~~~
fexl
True. When you buy IBM on margin, you're shorting USD.

So if they reinstate the uptick rule for short selling, shouldn't they add a
downtick rule for margin buying? :)

------
wdewind
Short selling works like this:

Party A buys 500 MSFT shares from partner B today, and then immediately sells
them at the current market price to C. Depending on the terms of the deal,
party A must pay back the same number of shares at a later date to party B.
Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current
market rate (hoping it has decreased over the last 30 days), and repays the
same number of shares (hoping it's a smaller $ value) to party B.

The people lending the short are expecting the stock to go up, the people
buying are expecting it to go down.

Hope that helps

~~~
megablast
Usually the lenders are hedge funds, who hold large amounts of stocks of all
sorts. They are playing a different game to shorters, and happy to get a fee
for lending stock. So they make money in holding stock, which is what they
were going to do anyway.

~~~
ct4ul4u
Actually, the biggest lenders are index funds.

------
djb_hackernews
Going to get down voted here but is anyone else concerned that we have people
building price prediction systems and hedge fund accountants that admit they
don't have a complete understanding of what a short sale is?

~~~
fexl
I won't down-vote you, even though I'm that hedge fund accountant you're
talking about. :) Even without knowing all the minute intricacies of how the
share lending occurs, my accounting results can still pass audits with flying
colors, year after year.

Just in case anyone thinks I'm proud of my "ignorance," I'm not. I'm
discussing things here in order to gain a better understanding, even though
that understanding is _not_ crucial to my performance as an accountant.

And yes, I _am_ concerned about the current sorry state of so-called
"markets."

------
ct4ul4u
There are many sources of stock for stock loan. 25 years ago, the primary
source was stock in the margin accounts of investors. Today, nearly every
large holder of stock loans it out. The reason they loan it out is to make
more money.

Virtually every broker/dealer (b/d) that holds their own accounts has a stock
loan desk (small to medium sized firms frequently have their accounts an
another firm's books on a fully-disclosed basis). Virtually all large index
fund managers have a stock loan desk as well. The stock loan desk at a b/d
will loan stock to the firm's customers from the available shares (more on
that in a moment) or it will find another place to borrow the shares from on
behalf of the customer. This can involve looking in a system called Loannet or
merely calling up other participants in the market.

The original source of available shares was the margin accounts of customers.
The amount of stock available for loan depends on the amount of funds loaned
to the customers. The stock loan activity is completely invisible to the
customer whose account the shares are taken. Don't want your shares loaned?
Don't use a margin account. Stock loan is the financing mechanism that
provides the funds loaned to you for your margin account.

Securities can also be loaned from fully-paid (non-margin) accounts of
customers with the written consent of the customer. It's a pain in the ass
from a regulatory and operational point of view. It's usually only done if the
customer has a really large holding in a hard to borrow stock. The customer
generally negotiates a share of the revenue from the transaction.

In the past 25 years, institutional investors have started to loan stock as
well. The pioneers were index funds, but it has spread to most other fund
types. The big institutional investors generally set up their own desk and
participate in the market directly. Being a direct participant can improve
their ability to borrow stock as well.

The borrowing party puts up collateral (100-110%) for the stock and the
lending firm either uses the funds to finance the margin business or puts it
in a limited class of interest bearing accounts (I forget the name and
regulation) at a bank. The borrowing party gets the stock and promptly sells
it. The amount of the collateral is trued up to the value of the borrowed
shares on a regular basis, so the risk to the lender is small.

So it is clear that one reason to loan the shares is financing. The second
reason is revenue.

The revenue comes from the interest earned on the collateral. The interest on
the collateral belongs to the lender except for a negotiated "rebate". For
most stock, the rebate is generally 10 to 25 basis points less than the
overnight benchmark (fed funds). The lender keeps what they can earn over the
rebate.

Notice that I said "for most stocks". Some stocks can be hard to borrow. The
supply can be low because large amounts of the stock are held in non-margin
accounts or by investors who don't loan it out. The demand can be high because
there is a large amount of short interest in the stock already.

The negotiated rebate on hard to borrow shares can be negative, and not just a
few basis points. The negative rebate for a really hard to borrow can be
negative 10 percent and worse. And a negative rebate means that you're paying
somebody interest to hold _your_ money as collateral.

This can be very lucrative for index funds based on a broad index like the
Russell. It's one reason index fund fees are so low.

At the other end of the scale is generally available stock. Known as GC
(general collateral), loan transactions in this stock are usually initiated by
a stock lender looking for financing.

From a b/d point of view, stock loan is one aspect of a business called prime
brokerage. Prime brokerage is a bundle of custody, operational, financing, and
loan services offered to hedge funds.

One note, the perspective I've provided is largely from the institutional
trading side of the b/d business. Retail investors borrowing stock will
generally see a tier of rebates (I _think_ the most common rebate is zero).

------
T_S_
You can borrow money from a friend. Right? You can borrow stock from anyone
who holds it. If your friend wants his money back, you can pay him cash and
the bills don't have to have the same serial numbers as the ones you borrowed.
Same with stock. (Entrepreneurs note: You are currency issuers. Think about
that.)

The main difference is that everyone holds their shares at a broker so they
let the broker handle this loan for them. You borrow the shares via the
broker, the broker sells them, and then lets you have access to some of the
proceeds (limited by regulation) and uses the rest as a low interest loan to
itself.

 _Small brokerage accounts get nothing out of this even though they lent the
shares._ That's probably the main reason it seems so mysterious. Most people
aren't aware of the mechanism. Your pension fund or insurance company is aware
and makes sure they get a cut of the benefits of share lending.

------
megablast
Regular investing in the stock market is when you buy some stock, believing it
will go up, so you can sell it at a profit at a later date.

If you believe the price of a stock will go down, then you can short it. This
involves the opposite of regular investing, selling high first, then buying
low later. To do this, you borrow the stock of someone else, with an agreement
to pay them the stock back at a later date. You sell it straight away, then
when the time comes to return the stock to the lender, when hopefully the
stock price has gone down, you buy it back form the stock market, and give it
back to the lender.

The lender of the stock usually gets some fee for lending it to you. They
benefit, since they are just holding onto stock for the long term anyway.

Naked short selling is when you don't make an agreement to borrow the stock in
the first place.

The losses you can receive from shorting stock can be huge, is the stock you
sold goes up by a lot.

~~~
cynicalkane
_Regular investing in the stock market is when you buy some stock, believing
it will go up, so you can sell it at a profit at a later date_

That's speculation, not investing. I think it's important people understand
the difference.

~~~
lrm242
Really? Given the statement above, which boils down to: "buy low and sell
high", what's the difference? Generally, market microstructure tells us there
are speculators and value investors, both serving a due purpose in the
functioning of a market. Value investors are most adequately described as
those who buy an asset below market value, rather than at or above market
value. Both types of market participants are in it to make a profit.

~~~
cynicalkane
The difference is, for the value investor, the selling part is optional. A
company can repay its investors with dividends, liquidation (rare), being
bought out... Often value investors end up selling to the market, but you have
to break away from the mentality that buy low sell high is the point of
"investing". If it is that way, then it's a zero-sum game, so why's it an
important part of capitalism again?

~~~
lrm242
Ignoring liquidation and acquisition, because they are rarely the goal of a
value investor...

Dividends do repay investors, but the price always adjusts ex-dividend. A
value investor is not happy owning a declining asset even if the dividend pays
at regular intervals. They always look for capital appreciation and will,
whenever they deem appropriate, convert unrealized gains into realized.

You seem to be referring to buy & hold. Taking the Dow as a market proxy, if
you bought BEFORE June 1999, you are currently at break even... over 10 years
later. Congratulations, you're strategy is working out perrrrfectly.

~~~
cynicalkane
A value investor would not have bought a broad market index in 1999, where the
P/E-10 was, IIRC, somewhere around 40!

I have to say I'm not particularly interested in discussing this with someone
who thinks the classic value investing paradigm is comparable to buying and
holding an index at the worst possible time.

~~~
lrm242
Re-read the last sentence. You're not paying attention.

------
fr0sty
A few things: (and it seems lots of folks here know just enough to be
dangerous)

1\. Naked Short Selling is illegal. There is an exception for market makers
that allows them to trade naked shorts but that is beyond the scope of this
discussion.

2\. All short selling done by retail customers, hedge-funds, etc. is all
'covered short selling'. This means that the stock being sold is first
'borrowed' from a third party. The third party is paid interest on their loan
of stock which is their incentive for loaning it out.

3\. There is no absolute time limit on the duration of a short position, but
long-term short positions are difficult to hold because you still have to pay
interest on the stock your borrowed which eats into potential profits.

------
retube
I used to trade bonds (amongst other stuff) so I can tell you how it works for
bonds. Presumably it's similar for stocks:

As you know, going short means you sell the bond/stock. Generally going short
implies you are going negative, as opposed to selling inventory you already
own. So if I go short 100 million 10y bunds (German government debt) this
means I sell 100m bonds I don't have.

The guy I am selling to doesn't know I am going short, he just knows I've sold
him the bonds and he expects delivery at the end of the day (or possibly in 1
or 2 days time, depending on the definition of "spot" and various other
things).

So I have to deliver him 100m bonds I don't have. Where do these come from?
This is where the "repo" or repurchase market comes in to play. Very simply,
the repo market is short-term buy/sell market: Party A agrees to sell Party B
some bond at some price, AND additionally agrees to buy it back a short while
later for a slightly higher price. What Party A has effectively done is borrow
money from B and put up the bond they own as collatoral.

So what happens after I short my bond is that I go to the repo traders and say
"hey - I'm short 100m bunds, you need to do a repo trade to flatten my
position". So these guys will loan out some cash (around 100m euros) and take
as collateral 100m bunds. These I use to deliver to my seller.

Edit: In reality I don't tell the repo traders I've gone short a bond. It's
their responsibility to make sure all positions are repo'd out. They see a
netted view of all bond positions across the bank and repo just the net
positions.

------
michaelcampbell
The mechanics have been adequately explained already so no need to go into
that again. One thing that should be pointed out (and this is no indictment of
shorting; I do it on occasion) is that since a stock can only go down to $0,
there is limited profit. It can theoretically go up without bound, so there is
a risk of losing without bound too. Practically, these risks are limited, but
also practically, the maximum profit is also.

------
mvalente
To make money with stocks you want to buy cheap/low and sell for more/higher.
It doesnt have to be in that order.

If you expect a stock value to go down lower than X dollars, you commit to
sell them stock at >X$ (without owning) and, when the time comes and your
expectations (about the stock going down) become true, you buy for <X$ and
sell the stock for >X$.

\-- MV

------
coreyrecvlohe
Simply put, a short sale is borrowing a stock from an institution, and selling
it on the market with an obligation to cover the sale (return the value of the
stock back to the borrowed party).

Now if the price of the stock goes up after you sold it, depending on how wide
the margin becomes, you can stay in the contract, but guarantee more cash to
the provider so that they are confident you will be able to cover it the
future.

If the stock goes down, you can close the contract and return the value of the
sale back to the institution, and effectively pocket the retained cash value
of the purchase from when you first sold the stock short; turning a profit
from a decline in price.

Often times there are companies out there that are running on fumes,
overvalued, or are partaking in fraud; short selling is a useful tool that can
help the markets discover new information about possibly shaky institutions.

------
knieveltech
The article linked below describes Porsche's short squeeze and contains one of
the best explanations of short selling I've come across to date.

<http://radian.org/notebook/porsche>

------
hernan7
Not sure if it's 100% relevant, but this was a fun/semi-informative read on
shorting stocks:

<http://www.wired.com/wired/archive/8.04/dumb.html>

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cschneid
Regarding who the shares are borrowed from, from my understanding, any client
who signs a margin account agreement also signs something that says "sure, you
can borrow my shares, and lend them to another person". Your account will
never show it, and presumably there's no way to actually lose those shares
(between insurance, and the margin allocated on the borrowers side).

As other people say "large institutional" investors most likely provide a nice
pool of shares as well, which their agreements with the brokerage allow to be
shared out.

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cadr
I think the idea is that the people lending are planning to hold onto those
stocks over a long period of time, so they are hoping that in the long run the
stock price goes up.

While they are holding onto them, money can be made by lending out the stock.
The security lender will lend stock, get a fee for doing so, and will hedge
against risk by getting collateral for the stock they lend.

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artsrc
Before you take a position in a stock you should research the stock to find
out what it is worth.

If a share is worth more than the current price you should buy it. If it worth
less than the current price you should short sell it.

If you don't short sell, then half of your research is wasted.

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bernardlunn
Naked Short Selling needs a new name. It sounds like Short Selling which is
quite legitimate way to bet that a stock price will decline. Markets need
traders who will spot problems at say Enron and bet against them.

But Naked Short Selling is simply fraud. It needs a new name.

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artsrc
What is the difference if you arrange the loan required to short sell before
of after you do the short sale?

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dmitri1981
There is pretty interesting illustration of Naked Short Selling here:
[http://www.rollingstone.com/politics/news/12697/64824?RS_sho...](http://www.rollingstone.com/politics/news/12697/64824?RS_show_page=0)

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ilitirit
Related: <http://radian.org/notebook/porsche>

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tmsh
the key is equivalence, rights of ownership and contracts, standardized at 2
or 3 different levels.

