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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)

#171

Post by ashtonkem »

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.

You’ll note that most people purchase things with credit cards and checks. Trying to buy your daily latte with a gold coin will get you some very strange looks and a manager trying to figure out what to do.

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

#172

Post by astrange »

arcticbull wrote: post #141
frankenst1 wrote: post #136

Earlier quoted context omitted.

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 fisca…

CPI matches other measures of inflation like http://bpp.mit.edu pretty well. People who think inflation is high are cranks - the history of cranks goes from Austrians, to Shadowstats, and currently is on Chapwood Index.

If we had inflation at 10% the economy would be smaller now than it was in 2010. It's under 2% and we can't get it up no matter how hard we try (not that hard so far.)

> If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%.

Note that the effective rate was nothing like this because there were also lots of deductions.

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

#173

Post by jkhdigital »

tempestn wrote: post #91
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…

I think you could make an argument that allowing naked shorting could in fact be beneficial. Part of what's allowing gamestop stock to explode recently is that it's next to impossible to find shares to borrow for shorting. If everyone who wanted to short the stock could do so without having to borrow shares, price discovery might work significantly better. (I assume the counter-argument would be that short squeezes c…

If stocks were synthetic assets then sure. But common stock represents an ownership share of a company, which is a collection of real physical things. Naked shorting means you’re basically allowing anti-stock, but there’s no such thing as “anti-ownership”. Stock, like hard money, should allow debit balances only.

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

#174

Post by swixi »

Lazare wrote: post #146
oblio wrote: post #118

Earlier quoted context omitted.

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.…

This just seems like a complicated way to go about budgeting correctly. Save money when you have excess from increased revenues, and use that to cover yourself when revenues decrease. I don't understand what is gained by bringing puts into the equation, if they are just as cyclical as your revenues. And it seems to me that you'd need a decent understanding of what your budget should be in order to decide how much to spend on puts in the first place. What am I missing?

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

#175

Post by jkhdigital »

Lazare wrote: post #112
Tokelin wrote: post #47

Earlier quoted context omitted.

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

I don't have a good general answer; it's complex. But some specific things relevant to this story: Market makers are allowed and expected to run naked shorts in order to ensure liquidity. We want a system where you can just buy or sell an item "into the market", and then everything will get sorted out eventually. We optimise for the case where shares can be found because it's overwhelmingly common. Stock borrowing is…

And this is why I look forward to when most securities reside on blockchains. “Probabilistic” markets give us black swans and insider fraud.

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

#176

Post by lmm »

jkhdigital wrote: post #161
koolba wrote: post #106

Earlier quoted context omitted.

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…

That last part is what really confuses me... what if the seller never resolves the failure to deliver? The buyer is walking around believing they own a share that the seller never actually gave them... I understand that the types of institutions that can engage in this behavior will true up their balance eventually, but why allow it in the first place? I can understand playing fast and loose with derivatives, since t…

Same as if you pay for ten tons of lumber and it doesn't show up. Stock trading grew out of traditional property trading and inherits a lot of its norms from there.

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

#177

Post by lmm »

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.

Things like that are more closely associated with heist movies (or their more mundane analogue, "used notes", with run-of-the-mill crime) than legitimate commerce.

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

#178

Post by fractionalhare »

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.

It's not really about presentation of balance sheets, it's about liquidity. The explicit purpose of market makers is to provide liquidity, so they have a special exemption to buy and sell shares without being certain they exist. They have to have a good faith belief they will exist though. Usually they're right. Occasionally they're wrong.

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

#179

Post by caminante »

FabHK wrote: post #117
rwmj wrote: post #16

Earlier quoted context omitted.

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.

He owned the equity, and therefore theoretically had control over its management. The firm might still have a lot of debt, so be owned largely by banks (or bond holders). Firm value = equity ("market cap") + debt + various, see https://en.wikipedia.org/wiki/Enterprise_value

> He owned the equity, and therefore theoretically had control over its management.

Except, for example, if there were different share classes with voting rights or if the "float" is small [0].

[0] https://www.investopedia.com/articles/basics/03/030703.asp

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

#180

Post by LordDragonfang »

arcticbull wrote: post #132
IG_Semmelweiss wrote: post #129

Earlier quoted context omitted.

I respectfully disagree. The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place. If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spik…

>>> Gold Window The gold window was closed because gold was garbage money. A money supply you can’t adjust cannot respond to shocks and it can’t respond to changes in the economy or society. The crash in 2008 and again now would have been much much much worse without an ability to control supply. Inflation is defined in terms of supply and velocity. Velocity plummeted so supply was raised to offset and lo and behold…

>Wages are up 10% since 1963 on an inflation adjusted basis

And they're down 5% since 1970. Claiming that chart shows growth is a gross misreading of that source. The slope of the trendline since 1963 is practically zero.

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