Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

euromoney.com

Post reply on HN
Print view View original

181–190 of 312 posts

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

#181

Post by jkhdigital »

arcticbull wrote: post #82
erichocean wrote: post #81

Earlier quoted context omitted.

> In the last 100 years nobody had lost a single penny to a bank run or default including 2008s WaMu default. Debasement of the currency, however, has been…high. So you didn't "lose" that dollar from a hundred years ago, it's just worth about a penny now. Where'd the other $0.99 go?

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…

Keynesian Econ 101, maybe. There are other schools of thought, which I personally find to be more rigorous and principled.

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

#182

Post by emmelaich »

fractionalhare wrote: post #160
emmelaich wrote: post #138

Earlier quoted context omitted.

Your words aren't that reassuring, since this is the same SEC that failed to find Madhoff's Ponzi scheme.[0] > since 1992, there had been six investigations of Madoff by the SEC, which were botched either through incompetent staff work or by neglecting allegations of financial experts and whistle-blowers [0] https://en.wikipedia.org/wiki/Bernie_Madoff

Sure, but I'm not trying to be reassuring. I'm trying to encourage healthy skepticism of random claims on the internet.

Your comments are appreciated!

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

#183

Post by cameronh90 »

jkhdigital wrote: post #175
Lazare wrote: post #112

Earlier quoted context omitted.

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.

"Probabilistic" markets will be (and to some extent already are) re-invented on-top of the blockchain.

Current generation cryptocurrency blockchains are more similar to the post-trade settlement system, where everyone figures out who owns what after-the-fact.

Maybe smart contracts will change that, but performance will need to get a lot faster and I'm not sure how feasible it is to implement a full exchange on top of (for example) Ethereum. Would love to see it though!

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

#184

Post by jkhdigital »

arcticbull wrote: post #158
erichocean wrote: post #153

Earlier quoted context omitted.

> The gold window was closed because gold was garbage money. The gold windows was closed because the French decided to redeem their dollars for gold, and due to the rampant debasement of dollars, there wasn't enough gold available to do so. Source: history.

Sure and so it was garbage money; good money never had this problem yeah?

Mises had a few things to say on the subject of what makes money “good” or “bad”. You might learn something if you read The Theory of Money and Credit.

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

#185

Post by valuearb »

jeffbee wrote: post #29

Basic rule of thumb is any company where the management is whining about shorts, and about naked shorts in particular, is garbage. The reason companies get shorted over 100% of outstanding shares is because everybody agrees they are garbage. Not a conspiracy. Go look at the stock of the absurd company in question after you read this article.

Yes “naked shorting” is a technical failure that hasn’t been a real problem in forever, but us frequently cited by shady CEOs as cover for why their stock price fell. Patrick Byrnes is one famous example.

From this very article: “ Alan Sporn, former president and major shareholder of OTC bulletin board company Trident Systems, is suing a group of brokers who, he claims, utilized a number of techniques, including the stock borrow program, to undermine the price of Trident's stock. This attack on the value of the company's stock virtually destroyed the company, both in terms of raising capital for growth, and in depressing the value of the shareholders' investments to virtually nothing, claims Sporn.”

Sporn case was so weak the judge ruled for sanctions against him and he had to negotiate an agreement to avoid being stuck with defendants court costs.

https://www.siliconinvestor.com/readmsg.aspx?msgid=21558818

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

#186

Post by harryh »

wcoenen wrote: post #150
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…

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.

This isn't really true. Let's say a company has 100 shares and they decide to issue a $1 dividend. If there is no shorting, the company just pays out $100 and everything is done.

But let's say there is shorting. Someone loans out 10 shares to a short who then sells them to someone else. All of a sudden there are 110 shares out there. So when the company pays out the $100 it's $10 short of what is required for each stockholder to get the dividend.

So where does the required $10 come from? From the party shorting the stock of course! Anyone short a stock is required to pay out, in cash, any dividends issues while they hold a short position. So it all works out.

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

#187

Post by jkhdigital »

xadhominemx wrote: post #24
jkhdigital wrote: post #10

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

No blockchain would ever be able to keep with with equities trading

Blockchain doesn’t keep up with Bitcoin trading either, but you can always withdraw your assets to a private wallet and not have to worry about getting Mt. Gox’d. There’s no way to “withdraw” securities from the opaque financial system, so you are always at risk of fraud.

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

#188

Post by zappo2938 »

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…

Does this mean that there is still only 100% of stocks available and the ratio of iou's to total stocks 113/100?

I guess that makes sense that a person can borrow a stock, sell it, borrow it again from the second buyer, sell it again. The number of stocks floating around stay the same, however, the number of iou's increases. Likewise, a person can buy the one share, return it, then buy it again, and return it again to settle the second of the iou's.

Interesting that nobody is really explaining the mechanics of how this works. Makes me wonder if a lot of retail investors are about to get hurt.

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

#189

Post by fastball »

nabla9 wrote: post #148
dalbasal wrote: post #145

Earlier quoted context omitted.

"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 lend…

I think the point is this:

Yes you can have > 100% short interest without naked shorts.

But are the circumstances that lead to such a situation (regardless of nudity) economically useful, or is it just allowing parasitism to exist in our system without good reason?

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

#190

Post by harryh »

swixi wrote: post #174
Lazare wrote: post #146

Earlier quoted context omitted.

> 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…

Saving money requires keeping cash (sometimes a lot of it) in the bank that could otherwise be put to productive use. Options contracts allow offloading of risk without keeping this excess cash sitting there doing nothing.

It can be much more capital efficient.

Post reply on HN