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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)

#141

Post by arcticbull »

frankenst1 wrote: post #136
arcticbull wrote: post #82

Earlier quoted context omitted.

Another irrelevant talking point. The whole point of inflation is to encourage investment as money is only worth something as it flows through the economy. You’re not supposed to save money under the mattress you’re supposed to save value by purchasing assets. A hundred years ago buying roughly speaking any asset would have preserved your entire wealth or created tons of new wealth. Wages have on average kept pace wi…

What is your response to the argument that - CPI(-U) is not a suitable measurement of inflation anymore since it discarded fixed basket goods somewhere in the 90s and that - inflation measures with "old-school" fixed baskets report inflation rate in the range of 6-10%/year - production of goods became much more efficient but instead of being reflected in cheaper prices it increased shareholder profits and wealth ineq…

My take on it re CPI is that I don’t know enough to know whether CPI is a suitable metric or not. I defer to economists here which is something you’re free to hold against me.

Re (2) I’d be very interested in learning more about the delta between CPI and these baskets. Do you happen to have a reference? I’m always down to learn more.

Re (3) I agree that inequality has gotten worse but I see that as a social and fiscal policy matter and not a monetary policy matter. If we’d been using gold, the same trend would have manifest. Poor people don’t hold onto money anyways they’re hand to mouth. And any extra they happen to hold onto could have been invested anyways. Frankly minimum wage over the period hasn’t been indexed to inflation either!

I’m a huge advocate of decreasing the gap between the rich and poor, I have more than I need to be sure, and the best way to do that is taxation.

This gap between rich and poor really started widening after the Reagan era tax cuts and trickle down economics. If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%. Estate tax the same. If you reduce that to 37%, rich people get richer because they keep more and more of their wealth. A practically 0% estate tax ensures the next generation starts on a monopoly board where there’s a hotel on every square. To me that’s a much clearer correlation than the spooky action at a distance of this 2% (a figure you admittedly contested) inflation rate. Do the ultra wealthy really hold cash? Do the poor? Does anyone?

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

#142

Post by jaycroft »

fractionalhare wrote: post #107
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.

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…

That's fair - said another way you just have to have a plan in place to borrow the share but don't actually have to have it borrowed yet. And all this discussion is fairly moot given the number of shares that routinely fail to deliver and the general lack of meaningful enforcement actions.

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

#143

Post by echelon »

YZF wrote: post #111
brockwhittaker wrote: post #62

Earlier quoted context omitted.

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.

It's fairly unusual to have companies with this sort of structure. Why would you ever buy shares in a company that doesn't pay dividends and where you can get infinitely diluted and have no control? (other than for speculative reasons)

> doesn't pay dividends

Tech/growth doesn't pay dividends as dividends are a signal your business is done growing. Dividend companies would rather return capital to investors than place more bets and keep growing.

Tech and growth stocks have minted many millionaires. And sometimes overnight.

This is also why growth companies sometimes don't reach profitability. They're spending their revenue eating the rest of the market and gaining monopoly.

> no control?

People that invested in Facebook made lots of money. They were probably fine with the arrangement. If they stop being fine with it, the stock price will decline.

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

#144

Post by m3kw9 »

rwmj wrote: post #16
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…

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

Outstanding vs float will tell you this may not be be possible

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

#145

Post by dalbasal »

kevinmchugh wrote: post #77
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.

How does the common sense definition of "naked short" differ from the technical one?

"Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.

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

#146

Post by Lazare »

oblio wrote: post #118
dleslie wrote: post #66

Earlier quoted context omitted.

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 fin…

I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting. Except for a handful of folks, everybody loses money on them. The ones that do make money are rigging the game (à la casinos) or are just lucky. Some of the lucky ones have been lucky for decades, some even went bankrupt after being lucky for so long.

> I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting.

Imagine I run a chain of hotels in beach resorts. When tourism is up, I make a ton of money; when tourism is down, I lose a ton of money. I'd like to flatten this so I can make a steadier, safer stream of money, budget more sensibly, and not be at risk of going under if 2-3 bad years come in a row.

What can I do? Well, maybe I look around and notice that a big spike in jet fuel prices drives ticket prices up, and when ticket prices go up people stay home and I lose money, whereas cheap jet fuel means high occupancy rates. So I might hedge by buying put options (and/or selling call options) on jet fuel. When fuel prices go up, I can offset my low revenues with cash from selling my now-valuable put options (or the cash I received earlier from selling now worthless call options). And when fuel prices go down, I can use some portion of my higher revenues to pay for the cost of the worthless puts I purchased (or to settle the now valuable calls I sold).

This sort of thing is common and healthy, not just among end users, but even more so among intermediaries working to remove and reduce the amount of risk inherent in the system.

Why are they not banned? Why would they be banned?

> Except for a handful of folks, everybody loses money on them.

That's not really how this works. Or indeed, could work.

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

#147

Post by Tenoke »

oblio wrote: post #122
Tenoke wrote: post #97

Earlier quoted context omitted.

>If your grandma accidentally loses her private voting keys to hackers, do we just roll over and let the hackers vote as your grandma? Obviously not. It's not obvious to me why not. It's a trade-off. You put the responsibility on the user to keep their keys but you save a lot by not spending anything on solving fake or real issues like this. In this case if you want assurances like this you can trust a third party th…

The real world wants assurances. That's why every country has central banks, notaries, central depositories, etc. > It's a trade-off. You put the responsibility on the user to keep their keys. Just like for driving or flying or almost any important occupation, we don't only "put responsibility on the user". We have laws against abuse.

We also allow things like bearer shares and gold coins which simply provide value to whoever has them.

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

#148

Post by nabla9 »

dalbasal wrote: post #145
kevinmchugh wrote: post #77

Earlier quoted context omitted.

How does the common sense definition of "naked short" differ from the technical one?

"Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.

>Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.

That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short.

Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...

>There is no special limit on shorting at 100% of shares outstanding! There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

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

#149

Post by arcticbull »

Tenoke wrote: post #147
oblio wrote: post #122

Earlier quoted context omitted.

The real world wants assurances. That's why every country has central banks, notaries, central depositories, etc. > It's a trade-off. You put the responsibility on the user to keep their keys. Just like for driving or flying or almost any important occupation, we don't only "put responsibility on the user". We have laws against abuse.

We also allow things like bearer shares and gold coins which simply provide value to whoever has them.

After the 1982 curtailments, bearer instruments practically don’t exist in the US.

As for gold, gold is a commodity, and one that has industrial utility. You can use it for things, so of course, it’s not particularly controlled.

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

#150

Post by wcoenen »

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…

> If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.

I'm pretty sure that's how the stock market is actually intended to work. This should be obvious if you consider things like dividends. There needs to be a fixed number of shares, each with a clear owner for that to work.

The reason it's a bit more complicated in practice, is because historically the technology wasn't there to do realtime gross settlement. So to limit the number of transactions that the central database had to handle, layers of delayed net settlement were set up instead.

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