Documents Show How Goldman et al Engaged in 'Naked Short Selling' • Hacker News Board

Re: Documents Show How Goldman et al Engaged in 'Naked Short Selling'

#51

Post by quantgenius » Tue, Jun 05, 2012, 6:40 PM UTC

asmithmd1 wrote: post #6

waterlesscloud wrote: post #3

Earlier quoted context omitted.

I'm lost on the mechanics here, but doesn't this mean that any profit on the part of a short-selling customer was actually coming out of the pockets of GS? I mean...where does the money to cover the customer's profit on a naked short come from?

Come on, you know it was not coming out of GS pockets. It was a heads I win tales you lose situation. Evidently there is some amount of time between when a stock transaction is booked and when it clears - like a purchase made with a check. They were essentially writing bad checks by selling stock they didn't own. If the price of the stock went down, they would actually go out and buy the stock at the new lower price.…

We want to fail them means we are going to issue a failure to deliver because it turns out that the stock we thought was available is not. If you fail on a trade, you don't cancel the trade, a trade is binding, it means you require the customer to buy the stock back to cover the short sale since the stock wasn't actually available. Since in this case the Goldman rep had told the client they could get the stock even though the client thought the stock was likely to be available, issuing a fail to deliver and requiring the client to buy the stock back would lead to egg on the face for whoever the client spoke to at Goldman. The other option for Goldman of course was to buy the stock to lend the customer and hedge out their risk maybe with a put option or to keep looking somewhere else for stock to borrow.

Re: Documents Show How Goldman et al Engaged in 'Naked Short Selling'

#52

Post by joe_the_user » Tue, Jun 05, 2012, 6:45 PM UTC

quantgenius wrote: post #48

joe_the_user wrote: post #22

Earlier quoted context omitted.

Uh, The risk of massive short sales are not to the naked short-sellers. Thus the market does not work as an automatic way system taking this into account. Moreover, the hypothetical that the market prices in bad behavior is not a justification for bad behavior.

The risk of massive short sales are precisely to the naked short-sellers because you can be required to deliver at any time and if you fail to deliver you broker or the DTC can buy you in at any price, and charge you an enormous commission on that specific trade.

All this does hinge on whether an entity is going to be heavily penalized for failure to deliver.

Can you reference me instances of such penalities being applied?

I searched for instance and instead found this:

http://www.billcara.com/archives/2006/09/a_failure_to_de.htm...

Re: Documents Show How Goldman et al Engaged in 'Naked Short Selling'

#53

Post by roel_v » Tue, Jun 05, 2012, 6:46 PM UTC

cgmorton wrote: post #41

roel_v wrote: post #34

Earlier quoted context omitted.

"When you're selling something you don't own you're distorting the market's price discovery mechanisms." How? It only does so if one sets out to do it on purpose, and in that case there is no difference between selling something that own, or that you don't (yet) own. Let's say I sell grain to you for 300 USD per ton, to be delivered in Fall 2012. How does that distort the market? Alternatively, how is this example di…

I think the confusion here is that 'short selling' is a misnomer - it doesn't involve any merchandise at all. From the article: "In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock." That is to say, there were more Overstock shares in the market than actually existed, because they were borrowed from…

Eh, if there is confusion at all, it isn't on my side - it's perfectly possible for there to be a sale without any merchandise.

Why does it matter that there are more shares being traded than that actually exist? It isn't about the actual trades, it's a simple contractual thing - one party promises something, the other agrees to pay for it, and as long as both end up satisfied, that's it. There is no 'merchandise being created from nothing', it's just one party promising to do something, that's it.

"e.g. more shares existing in a company means every share is less valuable"

This doesn't make sense - there are no shares created. There is a party promising to deliver shares, that's completely different.

Re: Documents Show How Goldman et al Engaged in 'Naked Short Selling'

#54

Post by cynicalkane » Tue, Jun 05, 2012, 6:53 PM UTC

p0ckets wrote: post #42

cynicalkane wrote: post #33

Earlier quoted context omitted.

For Pete's sake, it's the rules of the game. You might have an objection to naked shorting. but you can't redefine naked shorting as "pretending" because you don't like the rules. They're not pretending to follow the rules of the market, they are actually following the rules of the market. Having actual posession of the item at the precise moment of sale is not a rule of the market in question. Lay investors still ge…

No. If someone bought all the traded shares of overstock.com at a particular point in time, they would've bought 107% of the available shares. So it would be impossible for all their shares to get delivered.

You're worried about a guy at a brokerage buying 107% of all traded shares of a company?

Re: Documents Show How Goldman et al Engaged in 'Naked Short Selling'

#55

Post by roel_v » Wed, Jun 06, 2012, 8:03 AM UTC

joe_the_user wrote: post #52

quantgenius wrote: post #48

Earlier quoted context omitted.

The risk of massive short sales are precisely to the naked short-sellers because you can be required to deliver at any time and if you fail to deliver you broker or the DTC can buy you in at any price, and charge you an enormous commission on that specific trade.

All this does hinge on whether an entity is going to be heavily penalized for failure to deliver. Can you reference me instances of such penalities being applied? I searched for instance and instead found this: http://www.billcara.com/archives/2006/09/a_failure_to_de.htm...

No, it hinges on entities being held to the same standard as any other contracting party in the economy. Party A agrees to do something for party B in exchange for a sum of money, party A doesn't hold up its end of the deal, now B has a claim on A for damages suffered because of A not doing what they promised.

(technically the law is more nuanced, of course - there is a whole field in law dealing with the subtleties of this, but this is what it comes down to, and it's the same whether it's for stock or grain or a wedding dress).