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

Post by jkhdigital » Mon, Feb 01, 2021, 1:19 AM UTC

koolba wrote: post #106

Swenrekcah wrote: post #102

Earlier quoted context omitted.

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, i…

Post by theknocker » Mon, Feb 01, 2021, 1:25 AM UTC

jkhdigital wrote: post #151

fractionalhare wrote: post #107

Earlier quoted context omitted.

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... seems gimmicky. Like using repurchase agreements to pretend that your balance sheet looks cleaner than it actually is.

Post by astrange » Mon, Feb 01, 2021, 1:31 AM UTC

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)

Post by dang » Mon, Feb 01, 2021, 1:31 AM UTC

fractionalhare wrote: post #6

Should have a [2005] in the title. This is probably showing up on HN because naked short selling is topical, but the information in the article might be misleading if it's out of date.

Post by jkhdigital » Mon, Feb 01, 2021, 1:36 AM UTC

glitchc wrote: post #104

jaycroft wrote: post #73

Earlier quoted context omitted.

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.