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Naked shorting: The curious incident of the shares that didn't exist (2005)

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Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#61

Post by toast0 »

eloff wrote: post #9
fractionalhare wrote: post #8

Earlier quoted context omitted.

It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.

So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?

I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc.

Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots of buy interest and less sell interest, they may need to sell more shares than they normally hold. Market makers still need to have the shares in time for settlement, which may require borrowing if they have net sales more than holdings in a given day, but they don't need to locate shares to borrow before selling. Market makers are given an exception, because liquidity is valued, and they need to be registered and have specific capital requirements etc.

TL;DR, naked short selling isn't a thing anymore. There's been no reports of Gamestop shorts being naked shorts, and no reports of shares failing to deliver on time. Naked shorting isn't required for short interest to be over 100%.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#62

Post by brockwhittaker »

koolba wrote: post #55
sn_master wrote: post #18

Earlier quoted context omitted.

Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.

If you own all the shares then you can control the company via voting control. That’d generally allow you to prevent the issuance of new shares and you could hand pick the board as their terms expire. It’s not immediate, but you’d eventually be in control of everything.

Not all shares have voting power, and even so the voting power of those shares (if they were 2% of the company for example) may be proportionally tiny compared to the founders/board/execs.

For example shareholders don't have any control at FB, since Mark controls 51% of the voting power.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#63

Post by Ntrails »

koolba wrote: post #55
sn_master wrote: post #18

Earlier quoted context omitted.

Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.

If you own all the shares then you can control the company via voting control. That’d generally allow you to prevent the issuance of new shares and you could hand pick the board as their terms expire. It’s not immediate, but you’d eventually be in control of everything.

Owning a controlling share, and owning company are not the same thing - even from a simple net worth point of view.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#64

Post by Traktor »

PragmaticPulp wrote: post #42

Recent events have a lot of people confusing high short interest with naked shorting. A stock can have short interest greater than 100% without any naked shorting. How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale…

I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#65

Post by ketamine__ »

LatteLazy wrote: post #49
slashdev wrote: post #7

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into…

His broker lent the stock back out. This is one more way brokers make a living: charging rent for shares lent to shorts.

So what would have happened if he sold them all at the same time?

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#66

Post by dleslie »

Tokelin wrote: post #47
Lazare wrote: post #40

Summary: Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times. It…

What would be a better model for how the stock market works?

When it's not the purchase-a-thing model it's otherwise-disinterested third parties making large bets on possible future outcomes. It has more in common with a bookie's ledger than a warehouse of goods.

Why this is often harmful and dangerous is that the financial viability of businesses and individuals are often backing these bets. A person or company expecting financing to be predictable and stable may suddenly find it not so because their lender is desperate to cover their gambling losses.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#67

Post by jaycroft »

PragmaticPulp wrote: post #42

Recent events have a lot of people confusing high short interest with naked shorting. A stock can have short interest greater than 100% without any naked shorting. How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale…

And just for completeness on your comment, a naked short is the same as a regular short, but in the opposite order. First sold short, then borrowed after the fact.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#68

Post by PragmaticPulp »

Traktor wrote: post #64
PragmaticPulp wrote: post #42

Recent events have a lot of people confusing high short interest with naked shorting. A stock can have short interest greater than 100% without any naked shorting. How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale…

I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)

The linked Wikipedia page has a graphic that explains it better than I can in text: https://en.wikipedia.org/wiki/Short_(finance)

Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy.

In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long.

The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#69

Post by sweettea »

toast0 wrote: post #61
eloff wrote: post #9

Earlier quoted context omitted.

So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?

I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc. Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots…

You might take aa look at the SEC's December reports of fail-to-delivers, before the GME rocket lit: there were three days with over a million shares failed to be delivered, and several more weeks with over .5%. WSB had a post encouraging everyone to file a SEC report over this back then.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#70

Post by kleton »

arcticbull wrote: post #31
andrepd wrote: post #27

Earlier quoted context omitted.

Well fractional reserve banking is accounting fraud. Widespread and legal, but fraud nevertheless. Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking . The banks' ability to create money from thin air is almost unrestrained.

No it’s not. It’s legal and permitted and therefore not fraud. It’s backstopped to prevent losses. This is a talking point with no basis. Let’s stick to fact.

> As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Not fraud though, because "When the president does it, that means it is not illegal"

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