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

euromoney.com

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

#101

Post by zaroth »

vkou wrote: post #95
rybosworld wrote: post #83

Earlier quoted context omitted.

The very high rates of failure-to-deliver on GME are in fact, suggestive of naked shorting.

No, they are evidence of people who woke up to find out that they owe you their shirt, in addition to six decades of indentured labour of their children, grand-children, and yet-to-be-born great-grandchildren... Deciding that maybe they aren't going to pay you right this instant. If you're shorting on margin, and the market moves too far before your position gets closed... Your position might get wiped out, your marg…

Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300.

When shares are traded out from under a short, and there’s no where left to borrow them from, and the hedge funds can’t meet collateral requirements for their short interest, and the broker needs to liquidate their position but they come up about $20 billion dollars short...

That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.

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

#102

Post by Swenrekcah »

jaycroft wrote: post #67
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.

I can’t quite wrap my head around how this is possible.

Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?

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

#103

Post by oa335 »

mcgoo wrote: post #34
fractionalhare wrote: post #11

Earlier quoted context omitted.

I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm . It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis.…

If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.

Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).

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

#104

Post by glitchc »

jaycroft wrote: post #73
Traktor wrote: post #64

Earlier quoted context omitted.

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'…

In sports, we call these "side-bets," wherein the total value captured in the bets can be many times the purse prize of the event (fight/match, what have you).

That there's a great deal of betting happening on the outcome of the stock market shouldn't surprise anyone (and yet it does!). It is, after all, the biggest game on the planet.

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

#105

Post by bredren »

cush wrote: post #86
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…

Were you able to access the entire article? I can only see page 1 of 6

https://www.euromoney.com/article/b1320xkhl0443w/naked-short...

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

#106

Post by koolba »

Swenrekcah wrote: post #102
jaycroft wrote: post #67

Earlier quoted context omitted.

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.

I can’t quite wrap my head around how this is possible. Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?

Because actual delivery does not happen until settlement time three days later. The seller has until then to acquire the shares.

Naked shorting is illegal. To short the shares the seller only has to perform a “locate” first. That involves contacting someone that has the shares and is willing to lend them. Skipping the locate step is illegal. They just don’t have to actually borrow them until delivery.

Additionally, if the locate fails to materialize then it’s the sellers responsibility to borrow them from someone else before delivery. If not, that leads to a fail to deliver which locks up further transactions for the seller until it’s resolved.

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

#107

Post by fractionalhare »

jaycroft wrote: post #67
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.

Not necessarily. As long as the borrower commits to borrow the stock at a determined point in the future which the broker legitimately deems should have borrow liquidity (availability of shares to borrow), the short sale is not naked.

And interestingly enough, if this transaction occurs in good faith and for unforeseen reasons there is no borrow liquidity at the agreed upon time, a fail to deliver will occur despite the short sale not being naked.

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

#108

Post by lazyasciiart »

dcolkitt wrote: post #85
dalbasal wrote: post #39

Earlier quoted context omitted.

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.

What is the common sense definition of “naked short selling”? I’d be shocked if the median American can even define short selling let alone naked short selling?

Selling a share without owning it first.

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

#109

Post by pc86 »

cstrat wrote: post #87
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…

In addition to the shorts, when people buy call options - doesn't that mean someone else is on the hook to provide shares at a later date, and they might not hold them at the time of selling the option?

A lot of calls will be "covered" by whomever wrote the option initially, meaning for each contract they wrote, they hold 100 shares of the underlying security as collateral. I don't know the percentage and my Google skills are failing me, but perhaps someone more familiar with the industry can comment on the ratio of covered v. naked calls.

I've written cash-secured puts and covered calls a decent amount as an individual investor, the worst thing that happens is you end up buying something for more than it's worth or selling something for less than it's worth. However, it rarely goes wrong the first time and you've made premium from other options many times over on the same security. If you look up the Wheel or Triple Income options strategy that goes into the specifics of it. It works pretty well for high-volume, stable stocks that you want to own anyway.

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

#110

Post by fractionalhare »

Swenrekcah wrote: post #102
jaycroft wrote: post #67

Earlier quoted context omitted.

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.

I can’t quite wrap my head around how this is possible. Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?

It sounds devious when you put it like that, but yes. Most things in finance are compositions of credits and debits that take time to settle. The aim is to have sufficient liquidity and price accuracy that the time between executing and settling is safe, but there's always risk that things go awry before the settlement.
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