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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)
#72to the moon
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#73Recent 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? :)
I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending.
This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea.
Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#74Recent 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…
If you look at the SEC data on FTDs, there have been a huge number of them for GME in the past year https://www.sec.gov/data/foiadocsfailsdatahtm
So that kind of points towards a possibility of naked shorts, if I understand correctly (although by itself it doesn't prove it's happening).
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#75Earlier 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…
My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a particular company and it is owned by Person A. Person B then borrows the share from Person A and sells it to Person C (this is the first short). Person C now owns 1 share and Person A doesn't have a share but is contractually obligated to receive 1 share from Person B at a certain point in time in the future. Person D then borrows the share from Person C and sells it to Person E (this is the second short). Even though there only exists 1 share the short interest in this case is 200%.
Now there are obvious reasons as to why this isn't a smart thing to do as recent events with GME show but it's not necessarily illegal (as far as I know). If this is actually not true or it's illegal somebody please correct me.
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#76Earlier quoted context omitted.
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"
It’s not fraud in the same way going to prison isn’t kidnapping.
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#77Note: Shorting more than 100% of shares outstanding does not imply that there is naked shorting happening. You can re-borrowing the shares someone shorted and it happens.
It's times like this that common sense definitions of terms like "naked short selling," "market manipulation" and such turn out to be very different from the operable ones.
How does the common sense definition of "naked short" differ from the technical one?
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#78Earlier quoted context omitted.
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?
His broker can recall the lent stock, so they'd recall it and have it sent to whoever bought it on their/his behalf.
I worked on a computer system to handle all this for a while. It was front office so as well as buy/sell transactions we had to process lend/return and borrow/return actions to actually understand the company position.
Within each of those are lend request messages with approval/declines etc.
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#79Earlier quoted context omitted.
When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.
off topic, but I'm curious what would've been a typical workday there.
Someone reading that might be wanting to ask the same hoping to hear salacious "hookers and blow" Wolf of Wall Street legendary stories, but usually the reality is pretty mundane. Corruption is endemic to highly successful niche adaptations, but their yields rarely give rise to outlandish behavior. We see that a lot in breathless news stories, but that's just what sells ads.
Most corruption happens in a matter-of-fact, business-as-usual, we're-all-in-this-together atmosphere. And the proceeds don't usually lead to blowout lifestyle extravaganzas, as most participants are clever enough to realize that draws unwanted scrutiny. That is what makes corruption so insidious and difficult to root out. The rot spreads slowly, and inspection is commonly asymmetrically more difficult and costly to mount than undertaking the corruption act itself.
The most reliable way of rooting out corruption I've seen is an organizational culture that nurtures trust between leadership and organizational members, equitable gains sharing (so members feel they have skin in the game), and fiercely protecting whistleblowers (where the vast majority of human organizations utterly fail). Personally, Dunbar's Number appears to be some kind of (hopefully) local optimum but I'm curious how Geoffrey West's findings of scaling square with corruption incidence and scale.
Re: Naked shorting: The curious incident of the shares that didn't exist (2005)
#80Earlier quoted context omitted.
Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC. Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression. As with all blockchain unless the state…
It's less than 100 years since thousands of banks collapsed in the early 1930s and most depositors lost their money. The FDIC was created in 1933 and has prevented losses since.
Indeed, I was rounding, and poorly at that. Thanks for the correction!