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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)

#261

Post by fapjacks »

oa335 wrote: post #103
mcgoo wrote: post #34

Earlier quoted context omitted.

If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.

Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).

Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).

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

#262

Post by VBprogrammer »

dragonwriter wrote: post #226
ineedasername wrote: post #223

Earlier quoted context omitted.

Fair enough, but your comment wasn't phrased specific to that example, it was a general statement about owning 100% of outstanding shares: If you have 100% of the outstanding shares, you have 100% of the voting right Let's chalk it up to a miscommunication.

“Outstanding shares” has a specific meaning: all authorized and issued non-treasury shares. If you have 100% of them, you have all voting rights.

I mean, this has to be true right? Otherwise the stock market doesn't function as shared ownership, it would be more like Kickstarter at scale with no recourse for failure to deliver.

Plenty of takeovers have been conducted on the open market, even without consent of the board, also known as a hostile takeover.

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

#263

Post by aorth »

anaphor wrote: post #252
aorth wrote: post #244

Earlier quoted context omitted.

Wait, by my own calculation it seems GME had way more shares failed to deliver than that. I count over *14 million* in December using the [two data files provided by the SEC]( https://www.sec.gov/data/foiadocsfailsdatahtm ): $ cat cnsfails202012[ab].txt | csvgrep -d '|' -c SYMBOL -r '^GME$' | csvcut -c 'QUANTITY (FAILS)' | sed 1d | paste -sd+ | bc -l 14276093 How many of those are the same shares failing to be delive…

The numbers you're looking at are aggregate data, so that includes past days I think, not just the given day. I think you have to subtract each number from the previous one. > The figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as existing fails

Ah yes, they are aggregate indeed. The sentence just before the one you quoted also says:

> Fails to deliver on a given day are a cumulative number of all fails outstanding until that day, plus new fails that occur that day, less fails that settle that day.

So the last day we have data for is December 31, 2020:

  SETTLEMENT DATE,CUSIP,SYMBOL,QUANTITY (FAILS),DESCRIPTION,PRICE
  20201231,36467W109,GME,228358,GAMESTOP CORP (HLDG CO) CL A,19.26
As I understand it that means there were only 228358 shares failed to deliver at that point in time. This needs more analysis to understand how irregular it is compared to the other 12,000 symbols that had shares fail to deliver in December...

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

#264

Post by dragonwriter »

stale2002 wrote: post #257
dragonwriter wrote: post #217

Earlier quoted context omitted.

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.

So then you agree that there could be situations where only a couple percent of the ownership of a company is available on the market, and if you buy all of those shares, then you would not control the company? As in, you agree than a couple insiders could control a large majority of a company, and that this percentages of the company would not be on the open market, and therefore even if you buy all of the shares th…

> So then you agree that there could be situations where only a couple percent of the ownership of a company is available on the market, and if you buy all of those shares, then you would not control the company?

Sure, it's possible that at any given time people aren't offering to sell a majority of the voting power of stock, or (theoretically, at least) any voting stock at all (it's even possible that the only class of stock trading on the market is nonvoting; SNAP I think does that.)

I was taking issue with the particular claim, made twice in the direct chain of ancestry of this comment, that a company could simply hold the majority of it's voting stock itself, so that holding 100% of the shares not owned by the company would not give you control since the company itself (presumably, it's management) would exercise most of the voting rights. It doesn't work that way.

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

#265

Post by sooheon »

lmm wrote: post #207
ArchD wrote: post #198

Earlier quoted context omitted.

Does it have to be that way? Everything is electronic and stocks can move at the speed of the network whereas lumber cannot. There could be some archaic processes that are not electronic but are there inherent good reasons why they cannot be converted?

Not necessarily. But we're talking about a heavily regulated system, run by a lot of very conservative entities, that currently works pretty well on the whole; there's going to be a whole lot of "if it ain't broke don't fix it".

I guess this is where the sentiment of "let's break it so they fix it" comes from.

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

#266

Post by sooheon »

jkhdigital wrote: post #162
rags2riches wrote: post #113

Earlier quoted context omitted.

Trades aren't settled immediately. Finance runs on various forms of promises, basically.

I’ve never heard a simpler statement of the fundamental Achilles’ heel of modern finance: “various forms of promises” The system has become so intertwined that when someone breaks a promise, it’s too disruptive to actually hold them to account so we just paper over it to keep the wheels of commerce rolling.

Which is a form of hostage negotiation. Promise breakers are incentivized to profit as much as possible from broken promises as long as they can hold the system as a whole hostage.

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

#267

Post by thaumasiotes »

wcoenen wrote: post #258
harryh wrote: post #186

Earlier quoted context omitted.

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…

As you point out, an IOU for a share doesn't pay out a dividend from the company, so it is not the same as an actual share. We seem to be in violent agreement that shares are not created out of thin air (but IOUs for shares can be).

> As you point out, an IOU for a share doesn't pay out a dividend from the company

Huh? They most definitely do. That's actually one of the simplest non-objections to naked shorting; in the system we have, the short seller must pay the dividend to the person who loaned them the stock. In a naked short, the short seller would pay the dividend to the person who bought the stock.

Voting rights don't transfer so cleanly; in the current system, a stock lender can't vote the loaned shares. The most natural system of naked shorting would prevent the purchaser from voting a share that was sold short, which would produce a difference between shares sold short and other shares.

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

#268

Post by LatteLazy »

tempestn wrote: post #247
LatteLazy wrote: post #139

Earlier quoted context omitted.

I thought most of the online brokers had it by default now? Isn't it part of the "no commission but we do literally anything else to make a buck" business model? If not then he either doesn't own all the stock or there is some fraud here. As it is, it's the simplest explanation and one he hasn't ruled out. So he needs to check there first. It's possible they lent it by mistake or he agreed as part of the 10,000 page…

Perhaps now. I'm in Canada so don't know the details of the Robin Hoods and such. The OP is from 2005 though.

It's interesting. I'm a limey brit (sorry, I should have said sooner), brokers here were always able to lend stock without involving the owner. It's one of the reasons that brokers here have always been pretty cheap. It also helped Unit Trusts (ETFs etc who can do the same) take off quickly here.

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

#269

Post by LatteLazy »

esrauch wrote: post #157
LatteLazy wrote: post #137

Earlier quoted context omitted.

The Broker calls Person B. Person B has 1 day to get the share back or they're in default. It's up to Person B to buy back from whoever is selling at whatever price they want. It is possible for short sellers to get caught as you describe (someone owns all the stock and they have bought 1 additional share and now wont sell). But it's very rare. It requires a few things to all happen at the same time: * 1 person has t…

But as the original stock holder what happens when if the loanee defaults? The broker just calls you up and says "you had the share in your account but we lost it, here's some money for your troubles?" It seems like the holder wouldn't care if they were just selling it, but if you were transferring the stock out to another brokerage, they just give you the alleged ask price of the shares (which actually doesn't exist…

>The broker just calls you up and says "you had the share in your account but we lost it, here's some money for your troubles?"

Pretty much.

Devils advocate: if you know you own all the stock, and someone offers to sell you stock, you know the deal cannot actually be completed. So at best you're owed your money back for the "extra" stock you "bought".

If you own 101% you should know you cannot actually transfer or vote that stock extra 1%, it's simply not possible. All 101% means is if the stock goes up, you get 101% of the gains.

Fyi, times when votes are happening are interesting for shorted stock because a not insignificant percentage of the stock does get recalled so owners can vote it. So short sellers have to reduce their positions and then increase them again. It is one way to try and estimate short-seller impact in the stock...

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

#270

Post by phlo »

Lazare wrote: post #134
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.

There's some more info here: https://www.forbes.com/2006/08/25/naked-shorts-global-links-... Global Links was trading around 10c a share with ~350 million shares, for a market cap of around $35 million. They implemented a 350:1 reverse share split, which in theory should have resulted in them having a stock price of $35, 1.1 million shares, and a market cap of around $35 million. For some reason, it took longer for t…

Just looking at the numbers here, this could just be a case of a sign getting flipped somewhere along the way.

Global Links intends to do a reverse split, replacing 350 old shares (worth 10¢ each) with one new share (worth about $35). For the sake of argument, let's say they mixed up the ratio in their split filing. Instead of doing a reverse split, they do a forward split, replacing each share of old stock (10¢) with 350 shares of new stock (about one third of a cent, each). The shares trade at a somewhat high volume, because each share is worth a fraction of a cent.

Simpson notices that, after a 350:1 reverse split, Global Links ought to have about 1M shares outstanding.¹ He also notices that the current trading price is a fraction of a cent. Small enough to make this a worthwhile experiment. He acquires about 1.2M shares without moving the price too much. He also doesn't question how this was possible to happen within a day or two.

After the split, Global Links has some 100B shares outstanding. Simpson's position of 1.2M is less than one percent of that, so the shares continue trading as before.

¹ He might be combining multiple sources of information here. Perhaps his brokerage doesn't show reference data, so he combines the price he sees in his brokerage's app with reference data from Yahoo!finance or something.

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