I 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).
I 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).
This, like any other article that discusses the "shorted above 100%"-phenomenon without mentioning synthetic longs, is either uninformed or intentionally misleading.
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.
As 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.
> Why? "I like the stock" or "The new CEO has an amazing plan to go digital!"
This, along with "I'm retarded" or "I'm an ape" is needed to avoid acusations of market manipulation.
That said, it were not the fundamentals of GME the ones that pushed the stock price up: it was discovered that some people just shorted too much, and market efficiency tend to pushish those errors. Some people still think that there's still a chance of squeezing, and they're putting money after that.
It's a bet, and it's played in r/wallstreetBETS. I don't think they're being manipulated: you can read almost daily a report on volume, open shorts, etc. They know that they are playing in a casino, and they know the rules of the game being played.
> people just shorted too much, and market efficiency tend to punish those errors.
That's not the efficient market, that's the market failing due to logically out of bounds behavior regarding negative numbers of theoretical real objects. The shorters were right, with respect to efficient market ideas about value.
The market doesn’t reflect reality unless everyone in the market agrees to reality. The hedge funds choose their reality and try to convince everyone of it. They’ve been doing that for decades. The only change here is that a bunch of people on social media started doing it too, and it’s working.
That's not what market efficiency means. Market efficiency is specifically a function of liquidity and price discovery. A market is more efficient when the price of assets is derived from some measure of intrinsic value. Technical factors emergent in trading mechanics (such as what causes a short squeeze) do not have intrinsic value. Obviously you can can extract value from them in the short term, but that is not the same thing as market efficiency. When you trade on technical factors like a short squeeze, your orders do not enhance a directional view of the asset or the liquidity of the asset.
This is to say that not everything which is profitable is enhancing market efficiency. Generally speaking: long/short strategies are preoccupied with price discovery and valuation, systematic momentum, trend and volatility strategies are concerned with arbitrage, and market makers are concerned with liquidity. These three exist on a spectrum between enhancing price discovery and enhancing liquidity. There isn't really anything inefficient about shorting too much - if that happens, it means there's widespread consensus the asset is overvalued, which is likewise a statement that there should be less of the asset at that value. The valuation and liquidity have a feedback cycle here.
In the case of GME, a directional view that could contribute to price discovery would be that GME should actually be valued on future revenues which are mispriced by the market due to a variety of factors (e.g. Ryan Cohen, digital-first transformation, etc). It would still be generous and optimistic, but it would at least be a coherent directional thesis. The process of market efficiency would be to incorporate this view when you stake with an open position, and theoretically if you're right your view will be vindicated.
There is nothing efficient about GME at $100, let alone $400.
> There is nothing efficient about GME at $100, let alone $400.
You've somehow left out the fact that short sellers are on the hook for over 100% of gamestop's stock, thus whoever is buying stock right now is placing themselves to dictate pretty much the price these short sellers will be forced to pay for the stock.
> literally many thousands of people on WSB were insisting it would go to $1000.
Yes, and nobody knows what would've happened if there was no dubious buying restriction from brokers. With the strong momentum of the stock price on that day, 1000$ was not unrealistic.
> Imagine 15 years ago pumping up Blockbuster stock to 20x what it was worth.
The famous VW short squeeze happened 13 years ago and made VW the biggest company in the world for a short period of time.
The very idea that someone would argue that GME at $1000 a share which is almost FIFTY TIMES what it was valued a few months ago is a reasonable price for this stock is just absolutely bonkers.
I'm talking about what the company is ACTUALLY worth, not how many suckers are willing to roll the dice on a dubious pump and dump scheme.
Imagine if someone told you Blockbuster was worth FIFTY TIMES what it was trading for on the market in 2007. Gamestop's long term prospects are about as optimistic as BB was at that time.
Their revenue comes almost exclusively from retail sales of video games, IN MALLS.
You can say that "they're going digital!" and ok, fine that might stave off bankruptcy for a few more years maybe even allow them to remain in business for a while, but selling games online is...pretty competitive lol.
And why would someone prefer to buy a digital game from GME when there is PSN, XBL, Steam, Battle.net etc. etc. ?
Or if we believe physical copies of games are going to be around past a few more years, how are they going to compete against Amazon, WM, Target, Newegg etc which have somewhere between a 5-10 year head start?
I think their point was that the price would go up due to "stock shortage" due to too many stock leasers had sold the stock they were leasing and needed to buy it back to return it?
Not that the company had any value in it self at that price.
> 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.
This really boils down to “I disagree with the retail traders.”
There is no “true” value, despite what all the “experts” might think. The price is what the market thinks it is. If you think that price is too high, just don’t buy.
The words parroted where a confirmation of social alignment.
What people were investing in was a sense of belonging/power and/or the belief that the short sellers could not exit their positions. Some knew that they could ride it up with the hype then cash out near the top and short it on the way back down.
Those sentiment towards the new CEO and a change of direction was valid but that’s a big gamble at $400 a share. That said I find any sort of investment that doesn’t generate income in the short to medium term odd myself.
WSB did it to squeeze Melvin Capital. A hedge fund did lose a huge amount of cash. It turned into a greed driven pump and dump afterwards via conspiracy theories that Melvin Capital is still in the market. The conspiracy theory was reinforced by the strong media push back, Robinhood's CEO blatantly lying on television and the still high short interest.
If you put money into GME for shits and giggles you got your money's worth.
Are 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?
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.
> 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.
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.
A 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.
It'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.
It’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.
What 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?
All 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"
You 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).
People just don't understand how the market works. When you click sell and get back a confirmation you have not sold. You have agreed to sell, in two days.
This 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.
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?
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&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.
> 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.
> 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.
> 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.
The 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)
Chairs aren't a fungible commodity and chairs depreciate, which are the two reasons you can't short chairs.
If chairs were fungible and didn't depreciate, then they would be shortable just like stocks, but you wouldn't be able to keep it yourself, you'd need to loan it out to be short-sold by someone else.
The concept of a commodity fails when it's controlled by a cartel or can't be produced in sufficient volume to meet demand, as seen with oil and short squeezes.
I'm not attempting to make a value judgement about one commodity vs another, I'm just outlining what is the necessary and sufficient condition for something to be short-able, which I think is widely misunderstood (I say this because of Elon's tweets that "we can't short cars").
Cars, chairs, etc, can't be shorted, since they aren't fungible. This reason is mostly a practical one. If people really wanted to short cars, despite the fact that they aren't fungible, they would be able to, they just need to prepare the necessary legal paperwork. Nobody does this because it would be extremely annoying to do so, and for very little benefit.
Things that are fungible can be shorted easily with minimal legal legwork. Stocks are fungible and therefore can be shorted.
Now regarding the supply of a commodity that's available to short, in the case of stocks that's determined by the executive team and board when there's a need to raise funds. I wouldn't exactly call that a cartel. They're just doing what they think is best for their business (i.e., issuing new stock when the company needs funds and they don't wish to raise through debt).
I 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.
> Yes, just like the price of goods sold at Walmart is based on third parties betting on what they think of the price.
If Wal-Mart bought and sold goods via its retail counter, then it would be based on this. But it doesn't; it offers essentially final sales to the consumer. You inherently can't do that in a stock market, since stocks are capital.
> There should not be any market mechanism that financially motivates people to root against a company.
Why not? If I think Tesla is a good buy and you think it's a bad buy, you can borrow a share (go short) and sell it to me at the current market price. We both win; you get to place your bet and I get to purchase the stock without distorting the market as much, since I'm buying a borrowed share.
But more generally, "any market mechanism" is much broader than you realize. Taking your quote seriously, you'd have to also ban options trading, since buying a put option or selling a call option are both bets against a company. But these tools are also critical for hedging, since they can be used to insure against deep losses.
(Buying a call option isn't a bet against a company, but there has to be someone else selling the option who takes the other side of that bet.)
"Rooting against a company" is also relative. If I think Microsoft will do better than Amazon, I can buy Microsoft shares and short Amazon to hedge my exposure to tech industry swings writ large.
>You inherently can't do that in a stock market, since stocks are capital.
This is just a distinction we’ve invented. It doesn’t have to exist.
> Why not? If I think Tesla is a good buy and you think it's a bad buy, you can borrow a share (go short) and sell it to me at the current market price.
If you think it’s a good value, you buy it. If I don’t think it’s a good value, I don’t buy it. You know, like literally every single market except the stock market.
We should absolutely ban options trading. We should ban every single market mechanism other than buying, holding, and selling. The market is not a casino, and these traders are not providing any net value to America.
> Why not? If I think Tesla is a good buy and you think it's a bad buy, you can borrow a share (go short) and sell it to me at the current market price. We both win; you get to place your bet and I get to purchase the stock without distorting the market as much, since I'm buying a borrowed share.
This is a pretty naive analysis. As we saw with GME, and other stocks in the recent years, that's not at all what's happening. What's happening is that hedge funds are shorting the entire float of a company multiple times over.
If you borrow a single stock and sell it to me, that's probably fine.
If you borrow 50 million shares, and flood the market with them, the stock price crashes because supply vastly outstrips demand.
That's what's happening right now, and the hedge funds are doing it without even borrowing the stock. They're just like "Yeah, trust us, we actually have 50 million shares over here -- oh, you're asking about our failures to deliver? Don't worry about that, we paid the $10k fine and banked a $200M profit on it!"
They're literally flooding the market with shares that don't exist. How is that allowed?
It covers all the concerns. Failure to deliver or percentage of float shared above 100% is not evidence of naked short selling. Even if it was, naked short selling is not necessarily illegal.
Even if it was illegal, it is not necessarily bad. You can't destroy a good company with short selling. If some hedge fund shorts your company below intrinsic value my hedge fund will buy your shares and squeeze those short sellers out. Many retail traders don't realize that other hedge funds made hundreds of millions from the Gamestop squeeze. The "take it from the rich" narrative is complete nonsense.
If your company is on its way to bankruptcy and constantly needs new cash through stock sales, I honestly don't care if somebody makes a little bit of money on your way out. You had it coming. Gamestop had it coming. It's curious how the same company that would give you $15 in store credit on a trade-in of a new game is now the darling of retail traders.
I'm not sure if you responded to the wrong comment, but you're talking about a whole bunch of stuff that's not relevant to my comment at all:
> Failure to deliver or percentage of float shared above 100% is not evidence of naked short selling.
I never said it was.
> The "take it from the rich" narrative is complete nonsense.
I never mentioned this.
> I honestly don't care if somebody makes a little bit of money on your way out.
No one made money on my way out, I've made about a 20% return on GME.
> You had it coming. Gamestop had it coming.
You sound angry and spiteful for some reason, not sure where that's coming from.
> It's curious how the same company that would give you $15 in store credit on a trade-in of a new game is now the darling of retail traders.
Ok, what are you talking about?
There is one relevant thing you said at least:
> Almost certainly not, more likely it's just a story they want you to believe so they can pump-and-dump Gamestop.
Almost certainly not? GME was shorted 140%. They absolutely certainly shorted more shares than actually exist. How can you short 100% of the float, then continue shorting more? I never said it had to be naked, I said they shorted more shares than exist. That's unequivocally true, no one is even trying to argue otherwise (except you, for some reason, maybe because you lost money shorting GME?).
> I'm not sure if you responded to the wrong comment, but you're talking about a whole bunch of stuff that's not relevant to my comment
It's all relevant to the broader argument. The link you posted mentions failure-to-deliver.
> No one made money on my way out, I've made about a 20% return on GME.
Good for you, but I'm talking about the general practice shorting a company that is about to go bankrupt. If you're willing to take the (apparently not insignificant) risk of going short on such a company, I'm fine with you taking those profits. I don't consider that "immoral".
> You sound angry and spiteful for some reason, not sure where that's coming from.
I'm not angry, but I do have some spite about Gamestop. The company sucks. Everybody always agreed the company sucks. Now a lot of people - perhaps not you - are acting as if the company is somehow good, that it can be turned around, that they "like the stock". That's all bullshit. If people were just honest about being in a casino and betting on "squeeze", that'd be totally fine.
> Almost certainly not? GME was shorted 140%. They absolutely certainly shorted more shares than actually exist. How can you short 100% of the float, then continue shorting more?
There is one number calculated in a particular way that reported short interest as 140%. So far so good. Everything else is an interpretation of that number that is not necessarily reflecting reality.
Still good enough for a major short squeeze, of course. In fact, all of the "most shorted" stocks in the S&P experienced a short squeeze alongside with Gamestop.
FYI, I pretty much never open a short position in the hopes of turning a profit, I only use it to hedge other positions. You know, like a proper hedge fund.
Isn't your implication of "shorted above 100%" that there are shares that don't exist that need to be bought back? With synthetic longs, that just isn't the case. If that isn't the case, then what's the issue with percentage of float shorted above 100%? I'll tell you: There simply is no issue here, it's just an accounting curiosity.
Now, perhaps you aren't making that argument, but the person writing the blog post for this comment thread is making that argument. It's used to convince clueless people that if only everyone holds on to their shares, they need to be bought back at practically any price. It's just not true.
If indeed you aren't making that argument, then I don't really get your point.
That 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.
As 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?
Yes, 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).
> 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...
I think you might've misunderstood the explanation. In Matt Levine's example, A lends to C, who sells to D, who lends to E, who sells to F. B can't just return the shares to A because they've sold them, and they aren't just going buy them back because the whole point is that they want to be short.
For 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
Right, 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.
> 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).