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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

#231

Post by egwor »

c1b wrote: post #199
eru wrote: post #157

Earlier quoted context omitted.

You know that a put and a call combine to make a synthetic stock? See https://en.wikipedia.org/wiki/Put%E2%80%93call_parity (If you write a put and a call for the same strike, you are basically in the same position as a short seller. If you buy a put and a call for the same strike, you are economically in the same position as an owner of the stock.) Hence, you can't separate options from stocks.

This is not entirely accurate. It is the same position as borrowing some amount of money to buy the stock. If I buy a put and call and the price at expiry is exactly that strike I am guaranteed to lose money.

Agreed. One of the reasons is that the option has a risk and therefore there's a cost associated with managing that risk and taking on the trade.

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

#232

Post by calf »

sidibe wrote: post #195
threedots wrote: post #160

Earlier quoted context omitted.

Seconded. The last week has been actually quite unsettling and completely changed my perception of HN.

Unfortunately I've also had all of this confused nonsense explained in real life to me from people I respect. I think people are bored from the pandemic and the excitement of something nefarious to rail against prevents them from looking into the facts

What did the real people tell you? What was their explain ation

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

#233

Post by jameshart »

JanSt wrote: post #223
dcolkitt wrote: post #211

Earlier quoted context omitted.

> The price of anything is a result of its some intrinsic value and the volume of supply. No. The price of a stock is the value of its discounted cash flows. Shorting creates synthetic shares, that guarantee the new longs an exactly replicated stream of cash flows. This doesn’t make the original shares any less valuable, because they still have the same cash flows. Imagine someone conjured a new company, called Tesla…

You cannot reduce ownership of a stock to discounted cash flow. Owning shares (mostly) comes with shareholder rights like voting. To me it is pretty obvious selling more of those rights than exist is fraudulent.

In the simple short scenario, where A owns a share, lends it to B, then B sells it to C, the share in question only has one owner: C. A doesn’t have a share any more, they have an IOU from B for one share. B doesn’t have a share either. Only C has a share.

Once the IOU comes due, B will need to acquire a share from D to give back to A, at which point both A and C own a share - but D no longer does.

At no point are there any magic duplicated shareholding rights.

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

#234

Post by _ink_ »

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…

> and the process can repeat infinitely.

If it is possible to 'create' and sell an infinite amount of shares, wouldn't this automatically and artificially dilute the stock price, making these short attacks self-fulfilling prophecies?

This makes me think, that the theory that retail traders own more than 100% of GME might actually be true and that this is the reason why the situation is still not resolved.

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

#235

Post by kgwgk »

dcolkitt wrote: post #226
neffy wrote: post #191

Earlier quoted context omitted.

Can only agree. There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short, and there aren't enough shares available. It really is that simple. While this doesn't mean a price of infinity, since price is also constrained by the available money for the purchase, in reality this then become…

> There is a really simple reason for not allowing naked short selling and that is the potential for effectively creating a divide by 0 error, when the short sellers have to cover their short The point of a naked short system is that short sellers never need to cover their positions. Naked shorting allows any credit worthy institution to create synthetic shares as long as they continue to pay the dividends. That’s wh…

> That’s what makes it IMO a superior system.

Wouldn't you want to know if what you bought are actually, say, AAPL shares or "synthetic shares"?

An AAPL share will always be worth an AAPL share. What can you say about those "synthetic shares"?

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

#236

Post by dcolkitt »

vladvasiliu wrote: post #224
dcolkitt wrote: post #211

Earlier quoted context omitted.

> The price of anything is a result of its some intrinsic value and the volume of supply. No. The price of a stock is the value of its discounted cash flows. Shorting creates synthetic shares, that guarantee the new longs an exactly replicated stream of cash flows. This doesn’t make the original shares any less valuable, because they still have the same cash flows. Imagine someone conjured a new company, called Tesla…

This seems somewhat counter-intuitive to me. Could you maybe go into how creating a second company, Tesla-2, would have zero effects on the original Tesla's future cash flows and stock price? In my naïve view, TSLA's future cash flows have value because the company is expected to sell a lot of cars that: 1. No one else makes (or practically no one, such that TSLA has a majority of market share) 2. Many people want to…

Just to be clear, in the toy example, TSLA-2 does not compete with the original Tesla in anyway. They simply replicate the cash flows. Maybe TSLA-2 sells electric cars in a parallel universe. Or more likely maybe, it’s just a creditworthy institution who promises to match the profit stream, i.e. a swap.

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

#237

Post by Consultant32452 »

Ninn wrote: post #9
colinng wrote: post #3

I always thought that shorting was a disgusting practice, and wondered, “who buys a share, and lends it out so someone can manipulate it and lower its value, and profit from it”? It never occurred to me the majority of the “lending” did not actually happen.

Just to clarify, many portfolios are created in a way that lending allowed is ON by default, as such people may not be explicitly by the actual owner, but something that the given trading platform does using your underlying assets. This is similar to how the bank may lend out your current balance and not actually hold ALL of the money that its customers has in their accounts.

This is one of the things going on with Robinhood right now. If you place a limit order, they cannot lend you share out from under you. WSB people are putting limit sells at very high numbers trying to keep scarcity but RH is cancelling those limit orders.

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

#238

Post by nemo44x »

Daho0n wrote: post #161
ghayes wrote: post #92

Earlier quoted context omitted.

There’s not just “1 stock.” Let’s say: A loans a share to be B who sells to C who loans to D and so on. You end up with a multiplier on nominal stock, always, and that’s perfectly normal. I really don’t understand the moralistic argument here, esp. without regard to the underlying value of the original asset. Up is not strictly good.

No matter how many times it gets repeated in the thread it is still nonsense made up by the stock market. Exchange "Share" with "Burger" and see how many Burgers you can create from thin air. If you end up with more than one you should start a McDonald's competitor! If you can't it is because you are making mental gymnastics as soon as the word is some magical word Wall Street made up. Sure it is correct that you can…

What you’re forgetting is you still have to deliver. If you created burgers out of thin air and sold them (you’re actually creating a promise of a burger, not a real burger) then you’d have to deliver these burgers when whoever bought them calls for them. Or you’d go to jail.

So how could you do this? Well you could create a burger delivery service that sells other peoples burgers. But you sell them for a bit more than what you pay for them and you can begin you’re offering “all the burgers” and connecting the sellers with the buyers. Now you’re creating burgers out of thin air to people buying them from you and you’re delivering the burger they ordered even though you don’t even own a grill. Congrats, you just created a burger exchange that sells promises of future burgers on margin out of thin air.

If you’re even smarter you’d use other people’s money (which is key) to capitalize this venture instead of your own and keep an outsized share of the profits. This is what investment banks and hedge funds do. Other people’s money is key to winning and not really losing.

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

#239

Post by jameshart »

beowulfey wrote: post #215
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…

>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. What happens to Person A in this scenario?

At a later date, Person B returns a share to them. And B pays them for the privilege of borrowing the share in the first place.

Person B thinks that it will cost less to buy that share in the future than the money they make from selling the share today, which is why they asked A to lend them the share in the first place. They plan to buy a cheaper share and give that back to A.

A doesn’t care if they get back their original share, they just want to get a share back.

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

#240

Post by kgwgk »

ZephyrBlu wrote: post #188
kgwgk wrote: post #153

Earlier quoted context omitted.

Both look like they "create shares" but the consequences are different. Don't you agree? Would you rather be the Carol who bought the XYZ stock that Alice lent to Bob or the other one? Proper-shorting-scenario Carol owns a perfectly good XYZ share. What does naked-shorting-scenario Carol have?

What do you mean by consequences? In the naked short scenario you don't immediately have the share, though I'm unsure how important this is for someone shorting the stock. In saying that, brokers can still fail to deliver the share with non-naked shorting in which case it is effectively a naked short. In the case of $GME, there were a lot of shares that failed to deliver in December as shown in this /r/wallstreetbets…

I'd say that having the share is important for the person buying the stock.

Short-selling is forbidden to reduce the risk that when you want to buy a share and buy the share you find a few days later that in fact you didn't quite buy a share because whoever sold the share to you didn't have one to sell.

But it's fine, I concede the point.

As far as I care, you can find weird to distinguish "naked" shorting from "borrow-and-sell" shorting because if the short-seller who didn't borrow the stock before selling it does borrow the stock afterwards to be able to settle the trade the end result is the same.

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