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Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

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Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#141

Post by scaramanga »

JumpCrisscross wrote: post #59
dannyw wrote: post #47

Earlier quoted context omitted.

“Market makers” shouldn’t get to mess around with shares they don’t have. This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto.

> This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto We have fast settlement for Treasuries. They’re T + 1 and heading towards real-time settlement. For equities, however, there really aren’t many downsides to T + 2. At the same time, there are many advantages. On the balance, most people who have an idea about clearing are fine with T + 2, though it’…

What is the distinction here between what you call "order book" markets and "market made markets".

Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?

Or are you working with some specific technical definitions here?

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#142

Post by JumpCrisscross »

scaramanga wrote: post #141
JumpCrisscross wrote: post #59

Earlier quoted context omitted.

> This whole idea of privileged traders, T+X settlement, etc is just crazy to someone who’s been used to trading crypto We have fast settlement for Treasuries. They’re T + 1 and heading towards real-time settlement. For equities, however, there really aren’t many downsides to T + 2. At the same time, there are many advantages. On the balance, most people who have an idea about clearing are fine with T + 2, though it’…

What is the distinction here between what you call "order book" markets and "market made markets". Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"? Or are you working with some specific technical definitions here?

> Surely anything traded on a central limit order book requires outstanding limit orders to provide liquidity and therefore all order book markets are "market made"?

No. Some markets, e.g. the NYSE, have specialists [1]. They support the market even when there is nobody else on one side of the order book. When companies list on the NYSE, they are explicitly asking for a group of market makers to be able to naked short their shares as a stabiliser. Many longer-term investors, similarly, explicitly express preference for these protections.

Other markets, like dark pools, are completely counterparty to counterparty. Still others operate around dealers (who are similar to but distinct from specialists).

There is a lot of variation in and competition around market structure.

[1] https://www.investopedia.com/ask/answers/128.asp

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#143

Post by oldgradstudent »

darawk wrote: post #139

This is mostly nonsense. There is nothing wrong with there being more shares short than shares outstanding. It just seems problematic, until you think it through. Person A has 1 share of company Y. Person B borrows 1 share of company Y from person A, and then sells it into the market. This is called a short sale. But person B just sold their borrowed share. Now that share is owned by person C. Person C can now lend i…

> Shorting behaves the same way that fractional reserve banking does

Yes. Except that the fractional reserve banking system has a lender of last resort.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#144

Post by Pyramus »

dandanua wrote: post #24
konschubert wrote: post #12

Shitty companies failing is a necessary and important mechanism of a functioning economy. Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. Short activists expose shitty companies and as such, they play an important role in the economy. Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Maybe shorting, in particular naked shorting, is not id…

Shitty company will go down in a natural way in a free market economy. Why do you feel you need to help it to go down? Why let people make money on someone's fail? Why let people have incentives to ruin other people lives?

> Shitty company will go down in a natural way in a free market economy.

This is the crux. "Shitty" as in obsolete business model: Yes. Shitty as in fraudulent company behaviour: No.

In fact, fraudulent behaviour creates a competitive advantage. And there is only an incentive for the regulator to intervene in the most extreme cases.

Wirecard employed thousands of employees, paid taxes, contributed to social security, and created wealth for investors. Tesla has accelerated the spread of EVs and similarly created enormous wealth for investors. These are real, significant positive effects.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#145

Post by nearbuy »

jariel wrote: post #11
dragosmocrii wrote: post #5

Holly shit, this is an exceptionally informative piece of information. It makes sense now why the GME movement, but I doubt that most who joined it actually understand the purpose. This needs to be more widespread

There needs to be a lot more evidence than some random screed on the web. He barely gave a single example 'TASER' and frankly didn't really specifically indicate how that worked. With 100 companies at any time under the squeeze it should be relatively easy for him to give a lot of examples and to specifically list the trades themselves, but also point at the 'media barrage' and highlight the asymmetrical effect those…

If you check the TASER stock at the claimed time (June 2005), there's no sudden dips in stock price.

The site claims that a single article which was corrected 3 days later did damage to the stock price, but I'm not seeing it in the price history.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#146

Post by ZephyrBlu »

threedots wrote: post #128
ZephyrBlu wrote: post #65

Earlier quoted context omitted.

Yeah this is the explanation I've seen people give. It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.

Friction is the difference. Naked shorting removes the need to locate borrow. That need acts to prevent runaway supply expansion. Naked short selling also circumvents the rights of share owners as a class to decide whether to allow synthetic share creation.

Fair enough. I assumed that locating shares to borrow would be relatively easy.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#147

Post by stupidcar »

darawk wrote: post #139

This is mostly nonsense. There is nothing wrong with there being more shares short than shares outstanding. It just seems problematic, until you think it through. Person A has 1 share of company Y. Person B borrows 1 share of company Y from person A, and then sells it into the market. This is called a short sale. But person B just sold their borrowed share. Now that share is owned by person C. Person C can now lend i…

What your describing still sounds incredibly dodgy.

The price of anything is a result of its some intrinsic value and the volume of supply. So a precious stone is valuable because of its beauty, but also because it's rare. If someone mines a billion such stones, it won't affect their individual beauty, but it will certainly reduce the price someone is willing to pay for one.

Now, you seem to be saying that short selling is a signal about intrinsic value, but the process you describe, whether you want to call it counterfeit shares or fractional reserve shareholding or whatever also messes with the valuation by inflating the supply. If there are more shares of a given company available, those individual shares will be worth less.

The result would seem to be that naked short selling at volume will create a self-fulfilling prophecy. You can drive the price down simply by inflating the supply, regardless of whether the company is well managed or not. Maybe you start with badly-managed companies, but there's always going to be a perverse incentive to target any company so long as you can manipulate the supply enough to force a price drop. If you care about the market as a measure of company health, that doesn't sound like a good idea.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#148

Post by JumpCrisscross »

not_a_moth wrote: post #87
woopwoop wrote: post #18

The author seems to be really upset about this, but I don't understand why. Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. Maybe I am misunderstanding. Basically, a short is when A borrows from B a share of corporation C with the promise to return a share of corporation C at a later time, plus some cash interest. A naked short is where instead B gives…

I'm not sure you read the article. Author is alleging the prime broker/clearing house system regularly "gives out" shares to sell on the market (diluting company's shares) with no transparency in the reconciliation because the main clearing system is privately owned. You're better off reading the full article since my summary is extremely surface level.

> with no transparency in the reconciliation because the main clearing system is privately owned

The DTCC provides extensive reporting to market participants, including issuers [1].

[1] https://www.dtcc.com/settlement-and-asset-services/issuer-se...

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#149

Post by JumpCrisscross »

stupidcar wrote: post #147
darawk wrote: post #139

This is mostly nonsense. There is nothing wrong with there being more shares short than shares outstanding. It just seems problematic, until you think it through. Person A has 1 share of company Y. Person B borrows 1 share of company Y from person A, and then sells it into the market. This is called a short sale. But person B just sold their borrowed share. Now that share is owned by person C. Person C can now lend i…

What your describing still sounds incredibly dodgy. The price of anything is a result of its some intrinsic value and the volume of supply. So a precious stone is valuable because of its beauty, but also because it's rare. If someone mines a billion such stones, it won't affect their individual beauty, but it will certainly reduce the price someone is willing to pay for one. Now, you seem to be saying that short sell…

> naked short selling at volume will create a self-fulfilling prophecy

To be super clear, naked short selling is banned for everyone but market makers [1]. A market maker goes naked short when there is a buying frenzy. Their economic incentive is to then cover the short given they are in a buying frenzy.

The NYSE explicitly markets its specialist system to issuers as a stabiliser mechanism. It’s a selling point to long-term investors and Boards. The only people who get upset about this are hedge funds and day traders who get ahead of their skis.

[1] By Wall Street tradition, every long losing money must allege naked shorting. That doesn’t substitute for evidence of it. Large amounts of short interest do not indicate naked shorting. (Lots of FTDs do, but this figure has to be scaled to leverage and volatility.)

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#150

Post by ZephyrBlu »

kgwgk wrote: post #106
ZephyrBlu wrote: post #65

Earlier quoted context omitted.

Yeah this is the explanation I've seen people give. It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.

How are they functionally the same? Initial conditions: Alice has a share of XYZ Proper shorting: Alice lends her share to Bob, Bob sells the share to Carol => Alice has a share (lent to Bob, who will have to pay her the eventual dividends), Bob owes a share to Alice, Carol has a share (which has full rights including voting and dividend) Naked shorting: Bob sells an imaginary share to Carol => Alice sill has her sha…

In the situation being discussed, where more shares than the available float are shorted, they are functionally the same because both can theoretically create infinite amounts of shares.
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