Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation • Hacker News Board

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

#261

Post by kgwgk » Mon, Feb 01, 2021, 1:38 PM UTC

dcolkitt wrote: post #254

kgwgk wrote: post #235

Earlier quoted context omitted.

> 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"?

The point is that the value of AAPL is just the value of its future dividends. As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. The biggest asterisk is hand waving away the credit worthiness of the synthetic issuer. But this is a solved problem. We have plenty of derivative markets, where a counterparty guarantees some cash flow…

> As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective.

No, the stream of dividends doesn't have identical value.

There are other relevant corporate actions.

Shares can vote, your stream of dividends cannot vote.

If the company spins-off a segment it may distribute shares of the new company to shareholders while the owners of that third-party stream of dividends won't get anything.

If someone wants to acquire the company they will make an offer to buy outstanding shares, they won't care at all about those syntethic streams of dividends.

In general, if you want to sell a delta-one derivative that's fine. But you cannot sell that to someone who wants to buy a stock!

Would you want to be delivered a derivative when you bought a share in the market?

That wouldn't be shorting the stock, it would be selling something else. Related but far from identical.

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

#262

Post by nradov » Mon, Feb 01, 2021, 1:42 PM UTC

alisonkisk wrote: post #255

dcolkitt wrote: post #226

Earlier quoted context omitted.

> 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…

It also bankrupts viable businesses, when there is more short speculation than long speculation.

No that's false. Short selling a stock doesn't reduce the business's assets (except for treasury stock) or increase it's liabilities. Even if theoretically short sellers drove the $GME share price to zero the GameStop business would still exist.

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

#263

Post by dhruvdh » Mon, Feb 01, 2021, 1:42 PM UTC

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…

I can't say I agree at all.

Naked short system is potentially very disruptive (like we are currently experiencing with GME), is essentially a tool for entities with large capital to synthetically induce bankruptcy earlier than necessary, and poses systemic risks. There is a reason there are regulations that attempt to guard against it.

See: Dark Side of the Looking Glass, a 9-part lecture on the same. Part 1: https://www.youtube.com/watch?v=gpWzOjB8qtU

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

#264

Post by kgwgk » Mon, Feb 01, 2021, 1:44 PM UTC

sidibe wrote: post #192

oldgradstudent wrote: post #143

Earlier quoted context omitted.

> Shorting behaves the same way that fractional reserve banking does Yes. Except that the fractional reserve banking system has a lender of last resort.

And the whole "fractional" word. You can't lend someone 10 shares based on the one you bought.

In fact the "fractional" part goes the other way.

You can lend the whole share you bought.

But the bank cannot lend the whole dollar you deposited, they have to keep a fraction of it as reserve.

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

#265

Post by dhruvdh » Mon, Feb 01, 2021, 1:45 PM UTC

dcolkitt wrote: post #254

kgwgk wrote: post #235

Earlier quoted context omitted.

> 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"?

The point is that the value of AAPL is just the value of its future dividends. As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. The biggest asterisk is hand waving away the credit worthiness of the synthetic issuer. But this is a solved problem. We have plenty of derivative markets, where a counterparty guarantees some cash flow…

> The point is that the value of AAPL is just the value of its future dividends

This is simply not true at all. Like anything that can be bought and sold shares derive their value from supply and demand.

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

#266

Post by dcolkitt » Mon, Feb 01, 2021, 1:47 PM UTC

dhruvdh wrote: post #263

dcolkitt wrote: post #226

Earlier quoted context omitted.

> 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…

I can't say I agree at all. Naked short system is potentially very disruptive (like we are currently experiencing with GME), is essentially a tool for entities with large capital to synthetically induce bankruptcy earlier than necessary, and poses systemic risks. There is a reason there are regulations that attempt to guard against it. See: Dark Side of the Looking Glass, a 9-part lecture on the same. Part 1: https:/…

Incorrect. Shorting cannot make a company go bankrupt, because it has no effect on the operations. Having a low stock price will not make a profitable company become unprofitable.

All short sellers can do is reveal pre-existing flaws In the company. Which is why the presence of short sellers reduces corporate fraud

https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12369

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

#267

Post by felipeko » Mon, Feb 01, 2021, 1:48 PM UTC

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…

And what happens in the shareholder meeting?

Would the previous majority shareholder group lose their majority even if they had sold no shares?

Or would the new majority shareholders have no decision making power even though they have more "shares"?

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

#268

Post by thatguy0900 » Mon, Feb 01, 2021, 1:48 PM UTC

eru wrote: post #172

Gasp0de wrote: post #126

Earlier quoted context omitted.

The naked shorting reduces the value of real shares. Basically because the naked shorters can sell as many nonexistent shares as they want, while the investors who buy can only buy shares that exist.

How does naked (or any) shorting reduce the value of real shares? Shares are worth the present value of their future dividend cash flow. Shorting doesn't change no dividend payment at all ever.

That doesn't make sense. If I have to pay each share 5$, and I have given out 500 shares, but when it's time to pay out dividends 700 shares show up to claim them,then someone has to lose money right? Either I have to give 5$ to 200 shares that I never sold to people to begin with, or the 500 people who actually bought shares from me lose some of their portion to the extra 200. What am I missing if that's not the case? Surely that dividend money for those extra 200 shares has to come from somewhere?

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

#269

Post by Lazare » Mon, Feb 01, 2021, 1:48 PM UTC

Miner49er wrote: post #256

krok wrote: post #178

Earlier quoted context omitted.

It doesn't inflate the supply, because the amount of people who own the share is equal to the number of actual shares, plus the number of people who are short the share. All the people who are short the share have to buy it back in the future. So the additional supply has exactly been matched by additional demand. What you are saying is like saying that lending money to your friend creates inflation by expanding the…

> All the people who are short the share have to buy it back in the future. Not if the company goes bankrupt though, right? Seems like a potential strategy hedge funds can use (and maybe are using) is to short a company a ton and collect a lot of money from that. They can short more than the float, so even collecting more cash then the market cap of the company. This drives the price down, because there is more suppl…

Hilariously, the company going bankrupt can be even worse for shorts, since a bankrupt company will stop trading, and if it stops trading, the short position can't be closed.

See, eg, https://www.bloomberg.com/opinion/articles/2018-04-11/-go-to...

> Seems like a potential strategy hedge funds can use (and maybe are using)

Anyhow, no, doesn't work. Even apart from getting burnt when the fraud is finally exposed and the company goes bust before your short position is closed or whatever (which is thankfully pretty unusual), stock borrow costs will eat you alive. Also, you can't short more than the float (short interest can be over 100%, but that's confusing net versus gross), you can't collect more cash than the market cap of the company, and you can't really bankrupt healthy companies by shorting the stock.

(The way short sellers (like Muddy Waters work is they find a company doing a bunch of fraud, they take out a large short position, then they publicise their research. If the market agrees with them, the uncovered fraud tanks the stock price, and they make a healthy profit. Sometimes the company ends up bankrupt and/or with their executives in prison, but the cause is the fraud, not the short selling. Short selling an otherwise healthy company into bankruptcy doesn't make a lot of sense in theory, and doesn't seem to happen in practice.)

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

#270

Post by dcolkitt » Mon, Feb 01, 2021, 1:48 PM UTC

dhruvdh wrote: post #265

dcolkitt wrote: post #254

Earlier quoted context omitted.

The point is that the value of AAPL is just the value of its future dividends. As long as a creditworthy institution guarantees the same stream of dividends, they are identical in value from the investors perspective. The biggest asterisk is hand waving away the credit worthiness of the synthetic issuer. But this is a solved problem. We have plenty of derivative markets, where a counterparty guarantees some cash flow…

> The point is that the value of AAPL is just the value of its future dividends This is simply not true at all. Like anything that can be bought and sold shares derive their value from supply and demand.

The demand for shares is the demand for its discounted future cash flows. No rational investor buys for any other reason.