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

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

#211

Post by johnrgrace » Mon, Feb 01, 2021, 3:32 AM UTC

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…

The buyer gets made whole by the broker they bought from, retail you'll never know it happened. The buyers broker makes the sellers broker make them whole, they pay whatever the buyers broker has to pay to buy the shares elsewhere plus more. Brokers

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

#212

Post by swixi » Mon, Feb 01, 2021, 3:32 AM UTC

harryh wrote: post #190

swixi wrote: post #174

Earlier quoted context omitted.

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.

Maybe I'm misunderstanding you, but don't options contracts introduce risk? I've never run a business -- what risk are you incurring by having the cash sitting in a bank? If the play is instead to take a (perhaps small) risk in order to increase your amount of money or keep up with inflation, I understand that. But then I still don't see why options are necessary. There's lots of ways to do that.

The original post described options as a way to make your stream of money both "safer" and "steadier". I'm struggling to understand how introducing options can be safer and steadier than keeping money in a bank and creating an intelligent budget.

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

#213

Post by ineedasername » Mon, Feb 01, 2021, 3:33 AM UTC

dragonwriter wrote: post #197

ineedasername wrote: post #196

Earlier quoted context omitted.

If you own all of the voting shares sure. But a company can have 100,000,000 shares, own 99,000,000 of them, so only 1,000,000 are trading. If you buy all 1,000,000 of those shares you don't have much power.

If you have 100% of the outstanding shares, you have 100% of the voting rights; treasury stock doesn't vote.

No, someone could own the entire float of Facebook shares, and Zuckerberg still has a majority of the voting rights.

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

#214

Post by tylerhou » Mon, Feb 01, 2021, 3:34 AM UTC

dragonwriter wrote: post #197

ineedasername wrote: post #196

Earlier quoted context omitted.

If you own all of the voting shares sure. But a company can have 100,000,000 shares, own 99,000,000 of them, so only 1,000,000 are trading. If you buy all 1,000,000 of those shares you don't have much power.

If you have 100% of the outstanding shares, you have 100% of the voting rights; treasury stock doesn't vote.

I think the above commenter was trying to say: you can't always own 100% of the outstanding shares with voting rights, because in most cases insiders hold many shares that they will not sell.

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

#215

Post by argonaut » Mon, Feb 01, 2021, 3:36 AM UTC

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.

Two words for you: The DAO.

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

#216

Post by smabie » Mon, Feb 01, 2021, 3:40 AM UTC

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…

Really what you want in this case are just stock swaps or futures that are cash settled.

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

#217

Post by dragonwriter » Mon, Feb 01, 2021, 3:42 AM UTC

ineedasername wrote: post #213

dragonwriter wrote: post #197

Earlier quoted context omitted.

If you have 100% of the outstanding shares, you have 100% of the voting rights; treasury stock doesn't vote.

No, someone could own the entire float of Facebook shares, and Zuckerberg still has a majority of the voting rights.

That's about two classes of outstanding stock with different rights held by different group of stockholders, not about stock held by the issuing company.

That's not the hypothetical that was posed.

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

#218

Post by argonaut » Mon, Feb 01, 2021, 3:45 AM UTC

vkou wrote: post #135

zaroth wrote: post #101

Earlier quoted context omitted.

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…

> Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300. That is not correct. You have no idea whether or not the shorts currently open, as of today, were opened when GME was worth $12, $50, or $400. It's entirely possible that many of the $12 shorts closed when the stock first rallied. > That’s when you have massive failure to deliver and the whole…

I agree with everything you said except one nit: Robinhood still hasn't fixed their liquidity issues because they only let each account buy a maximum of one (1) GameStop share on Friday.

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

#219

Post by bhk » Mon, Feb 01, 2021, 3:45 AM UTC

cecilpl2 wrote: post #168

dmlittle wrote: post #75

Earlier quoted context omitted.

My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a particular company and it is owned by Person A. Person B then borrows the share from Person A and sells it to Person C (this is the first short). Person C now owns 1 share and Person A doesn't have a share but is contractually obligated to receive 1 share from…

This is possible, not illegal, and can be simplified even further. It's entirely possible for me to borrow a share from you, (short) sell it back to you, and then for us to repeat that process an unlimited number of times, thereby shorting an unlimited amount of stock. This would be stupid since I'd owe you more stock than exists and you could set any price you wanted for them.

With the total long position > 100% of issued shares, who gets denied voting rights?

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

#220

Post by bhk » Mon, Feb 01, 2021, 3:51 AM UTC

phonon wrote: post #208

YZF wrote: post #111

Earlier quoted context omitted.

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)

NYSE: SNAP ("Snapchat") listed shares have no voting rights, and they seem to be doing okay.

And GOOG seems to be doing okay.