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

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

#321

Post by ds206 » Mon, Feb 01, 2021, 3:27 PM UTC

growse wrote: post #216

varispeed wrote: post #201

Earlier quoted context omitted.

Isn't selling something you don't own a fraud or the stock market has an exemption? The instance when A essentially sells the share to B accepting the right to receive the share back as a payment also wouldn't fly in any other environment, as this could just open the door to money laundering. So why is this accepted in the stock market? Or simply the law enforcement doesn't know how to tackle it?

Fraud requires intent to deceive. Where's the intent to deceive in short selling?

Here are some examples of how to deceive: https://youtu.be/VMuEis3byY4

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

#322

Post by fennecfoxen » Mon, Feb 01, 2021, 3:27 PM UTC

dragonwriter wrote: post #318

stupidcar wrote: post #147

Earlier quoted context omitted.

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…

> The price of anything is a result of its some intrinsic value and the volume of supply. No, it's the result of supply and demand not supply and “intrinsic value”. Demand is driven by subjective value, not “intrinsic value” which is a nonsense concept that misunderstands fundamentally how value and human action relate.

Demand for a stock is generally linked to the value of its future discounted cash flows, which is as close to a definition of "intrinsic value" as one can reasonably realize in the world.

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

#323

Post by fennecfoxen » Mon, Feb 01, 2021, 3:28 PM UTC

dhruvdh wrote: post #284

dcolkitt wrote: post #266

Earlier quoted context omitted.

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

Shorting can affect a companies ability to raise capital. All your comments sound like you live in a textbook, uncaring of what happens in the real world.

> Shorting can affect a companies ability to raise capital.

So can negative press coverage. And yes, either can prevent a company that is on the brink from staving off bankruptcy. It's questionable whether you ought to call the press coverage the cause of the problems, though, and the same objection applies to the shorting.

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

#324

Post by dcist » Mon, Feb 01, 2021, 3:30 PM UTC

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…

When someone borrows a share, do they pay the current share price to borrow it?

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

#325

Post by pluto9 » Mon, Feb 01, 2021, 3:31 PM UTC

Lazare wrote: post #269

Miner49er wrote: post #256

Earlier quoted context omitted.

> 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 th…

> 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.

This is giving the market a lot of credit for being a rational and well-informed actor. The market is not full of people who calmly evaluate a short seller's argument and make a logical decision. It's full of people who lack the time, experience, and confidence to question the "financial expert" making dire predictions on the morning news and think "I should get out of this stock just to be safe".

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

#326

Post by throwawayp123 » Mon, Feb 01, 2021, 3:36 PM UTC

brutusborn wrote: post #114

Lazare wrote: post #94

Very, very much a crank site. One pinch fact, two cups of confusion, and generous splash of seething rage. It's interesting in much the way the Timecube site is interesting...and is informative about financial markets in much the same way the Timecube site is as well.

How so? Could you please explain for someone who only knows enough to see this as potentially credible? I tried to research timecube but can't see the connection.

Here's one example that stood out to me:

  An off–shore hedge fund devised a remarkably effective incentive program to motivate the traders at certain broker dealers. Each trader was given a debit card to a bank account that only he could access. The trader's performance was tallied, and, based upon the number of shares moved and the other “success” parameters; the hedge fund would wire money into the bank account daily. At the end of each day, the traders went to an ATM and drew out their bribe. Instant gratification.

Vague accusations of bribery without proof or a source strike me as FUD. But it strikes me as something most people would want to believe if they're angry.

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

#327

Post by mrfredward » Mon, Feb 01, 2021, 3:37 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…

The whole point of capital markets is that companies can raise cash by creating shares, and then use that cash to make money for shareholders. Naked short selling subverts this by letting someone else issue shares of the company and use the cash their own way. Companies have to have a near monopoly on creating their own shares, or the whole system falls down.

If naked short selling is restricted to short term trades in special circumstances (as it is now), the system still functions and market makers have a little more freedom to create liquidity (whether the liquidity is worth the other issues is a question I won't try to answer here). Allow unrestricted naked shorting though, and the next time you buy shares in msft, it could turn out that your investment depends on msft dividends paid by a hedge fund betting on cattle futures more than it depends on microsoft's financial performance.

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

#328

Post by andylei » Mon, Feb 01, 2021, 3:45 PM UTC

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…

> You can drive the price down simply by inflating the supply

short selling does not increase the number of shares. if i borrow a share from you and sell it, you cannot also sell that share. the number of shares is constant regardless of how many shares are sold short (except for naked short selling).

short selling increases the number of people that can sell, but that only increases symmetry in an otherwise asymmetrical system. anyone can bet that the price goes up, but without short selling, only people that already bought can bet that the price will go down.

> 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

what is "manipulative" about selling a stock? if i buy a bunch of stock (to make the price go up), is that also "manipulation"?

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

#329

Post by specialp » Mon, Feb 01, 2021, 3:50 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…

Yes but there's a counter to this and limit that is not there on the long side: Remember stocks are ownership in a company. If a load of "predatory shorts" jumped on and drove the market value of a company way below of where it should be, I could jump in with sufficient money and make a tender offer. Then I'd own a real company with real assets for a fraction of the cost and take it private. And the shorts would have to cover their shares.

There's no such reality check with things going up on the long side as we see from Gamestop. Someone can't step in and cash out on the company at a ridiculously high price compared to fundamentals. It is only driven by the market. In general short sellers are vilified more than warranted. If you are long on a good company you should applaud them because after all, they now have to buy back at some point. People view it as if you are some villain going against what is right (shares just going up and everyone gets rich). Stocks that go down with high short interest are almost always going down because they are bad companies, not due to short sales.

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

#330

Post by bal4591 » Mon, Feb 01, 2021, 3:55 PM UTC

krok wrote: post #184

Daho0n wrote: post #161

Earlier quoted context omitted.

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…

Ok, I've done it. I told my children that I'm going to take them to McDonald's tomorrow evening. They see this promise as 100% good, as real as if they were actually holding the burger. The only difference from their point of view, is that if they were holding a physical burger now, by tomorrow evening it would be cold and bad to eat. The ones I have promised them are real burgers which are deliverable tomorrow eveni…

Well you're still flawed if you scale your argument. What if you take your argument, and scaled it up. What if you promised each kid 1 trillion burgers. Will you have access to 1 trillion burgers tomorrow? What if they take their future 1 trillion burgers and sell half. What if you walk into McDonalds to claim the 1 trillion burgers. Does McDonalds have 1 trillion burgers? No.

So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. So what you're saying is that you shouldn't sell things you can't possibly fulfil? Hence the argument against this kind of trading.