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'

#11

Post by jblow » Tue, Jun 05, 2012, 3:52 AM UTC

tedunangst wrote: post #2

Article lists a bunch of interesting details, and even is very careful to make sure the term 'muppets' gets incorporated twice, but doesn't quite connect the dots and explain just exactly how the naked shorting fucked the muppets. For example: More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would th…

I think you didn't understand that paragraph. The implication is that Goldman couldn't get the stock, and in fact did not bother, and just lied and said they did.

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

#12

Post by lmkg » Tue, Jun 05, 2012, 3:52 AM UTC

waterlesscloud wrote: post #8

paperwork wrote: post #7

Earlier quoted context omitted.

No, the profit doesn't come from GS. Say you think XYZ, currently priced at $100 is going to go down in price. You tell your broker (GS in this case) to short 1 share in the market. GS sells XYZ (someone else buys it) and you get $100 in your account while the quantity of XYZ shows up as -1. Later, the price does drop to $90. You tell GS to buy 1 share, and you pay $90 for that share. You now have $10 in your account…

But if it's a naked short, the only transactions are between me and GS. I sell short at $100, GS gives me that $100. If there's no share behind that to sell, then they just gave me that $100 out of their own pocket, right? So then the stock drops to $90 and I cover my short by sending GS $90. There's still no real share to deal with. So GS gave me $100, had no source for that money other than their pockets, and I gav…

If you're short-selling, naked or not, GS is not the party you're selling to. GS is the broker. They execute the sale on your behalf, because they have access to the market. The $10 comes from two other third-parties that GS finds on the market.

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

#13

Post by lmkg » Tue, Jun 05, 2012, 4:14 AM UTC

tedunangst wrote: post #2

Article lists a bunch of interesting details, and even is very careful to make sure the term 'muppets' gets incorporated twice, but doesn't quite connect the dots and explain just exactly how the naked shorting fucked the muppets. For example: More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would th…

I'm not 100% up to speed on this particular topic, but I think that the damage is diffuse, i.e. it distorts the market but doesn't affect any particular involved party. Therefore, it doesn't make a good story, and doesn't show up in the news.

Basically, you're increasing the amount of good for sale, without the corresponding purchases that would normally balance that out. It's the converse situation of buying things even when you don't have the money (not even in the form of credit or loans), and distorts the market in corresponding ways. The market is robust to a certain amount of shenanigans like this, but when a player the size of GS is doing it willy-nilly, the distortions can become measurable.

According to econ 101, naked-shorting is observationally equivalent to a sudden inflation of supply, which should drive the price down. Lowering the price benefits those in a short position, at the cost of people who are taking a long position, like value investors, or the companies themselves. If you have weight to naked-short enough volume that it actually effects the market, you would in theory be pushing the stock market down and pocketing the difference.

Again, I'm not an expert and this is a pretty naive analysis. I am willing to be corrected. Eventually you have to cover your short, which in theory should un-do all the market effects you've done, but my gut says that in practice the sudden drop has lasting damage to intangibles like "investor confidence" and "market volatility."

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

#14

Post by bigiain » Tue, Jun 05, 2012, 4:30 AM UTC

waterlesscloud wrote: post #8

paperwork wrote: post #7

Earlier quoted context omitted.

No, the profit doesn't come from GS. Say you think XYZ, currently priced at $100 is going to go down in price. You tell your broker (GS in this case) to short 1 share in the market. GS sells XYZ (someone else buys it) and you get $100 in your account while the quantity of XYZ shows up as -1. Later, the price does drop to $90. You tell GS to buy 1 share, and you pay $90 for that share. You now have $10 in your account…

But if it's a naked short, the only transactions are between me and GS. I sell short at $100, GS gives me that $100. If there's no share behind that to sell, then they just gave me that $100 out of their own pocket, right? So then the stock drops to $90 and I cover my short by sending GS $90. There's still no real share to deal with. So GS gave me $100, had no source for that money other than their pockets, and I gav…

I'm guessing here - but I think GS were running this the other way round. _They_ were selling short, and taking your $10 if the stock price dropped, and saying "Oh sorry, that trade failed" if it didn't.

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

#15

Post by pppttt » Tue, Jun 05, 2012, 5:25 AM UTC

tedunangst wrote: post #2

Article lists a bunch of interesting details, and even is very careful to make sure the term 'muppets' gets incorporated twice, but doesn't quite connect the dots and explain just exactly how the naked shorting fucked the muppets. For example: More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would th…

It's actually quite clear. Much like printing money takes value away from savers, naked short selling takes value from existing stock holders.

  The lawsuit between Overstock and the banks concerned a phenomenon called 
  naked short-selling, a kind of high-finance counterfeiting that, especially 
  prior to the introduction of new regulations in 2008, short-sellers could 
  use to artificially depress the value of the stocks they’ve bet against.

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

#16

Post by rapind » Tue, Jun 05, 2012, 5:33 AM UTC

Every time I read about complex wall street scams I get so unreasonably infuriated. At this point I can't help but unfairly assume that anyone who works at an investment bank is a complete douche. Just thinking about the bailouts gets me worked up.

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

#17

Post by asynchronous13 » Tue, Jun 05, 2012, 5:43 AM UTC

Ok, here's the full quote:

  Last week, in response to an Overstock.com 
  motion to unseal certain documents, the 
  banks' lawyers, apparently accidentally, 
  filed an unredacted version of Overstock's 
  motion as an exhibit in their declaration 
  of opposition to that motion. In doing so, 
  they inadvertently entered into the public 
  record a sort of greatest-hits selection of 
  the very material they've been fighting for 
  years to keep sealed.

And now let's parse it:

  Last week, the banks' lawyers filed an 
  unredacted version of Overstock's motion 
  as an exhibit in their declaration of 
  opposition to that motion.

This means that Overstock's accusation is now public. This says nothing about the veracity of the accusation.

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

#18

Post by zhoutong » Tue, Jun 05, 2012, 6:06 AM UTC

waterlesscloud wrote: post #8

paperwork wrote: post #7

Earlier quoted context omitted.

No, the profit doesn't come from GS. Say you think XYZ, currently priced at $100 is going to go down in price. You tell your broker (GS in this case) to short 1 share in the market. GS sells XYZ (someone else buys it) and you get $100 in your account while the quantity of XYZ shows up as -1. Later, the price does drop to $90. You tell GS to buy 1 share, and you pay $90 for that share. You now have $10 in your account…

But if it's a naked short, the only transactions are between me and GS. I sell short at $100, GS gives me that $100. If there's no share behind that to sell, then they just gave me that $100 out of their own pocket, right? So then the stock drops to $90 and I cover my short by sending GS $90. There's still no real share to deal with. So GS gave me $100, had no source for that money other than their pockets, and I gav…

This is my understanding of how this works:

When you instruct GS to sell the share for you, GS actually went to the open market and just sell the share.

They are supposed to deliver the share at some time later, when they have found the share to borrow. However, they can do nothing and wait for the deadline to come. If the price drops, they will buy a share to deliver the previous sell order, and make a new sell order at the same price to "extend" the delivery deadline.

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

#19

Post by CUR10US » Tue, Jun 05, 2012, 6:59 AM UTC

Has anyone read the motion (available from an economist.com server)? This what the Rolling Stone article is based on.

Is the issue whether and how GS makes money from the practice of naked short selling? Maybe the issue is that feeding the market with info about short sales that are never actually cleared (but which the market assumes will be cleared), can destroy the value of a company's stock.

Obviously if you can sell something without ever having to own or deliver it (is that really a sale?), you can do a lot of selling; and you can exert considerable influence on the market for a stock.

Maybe what happened here is a company, Overstock, believes they got screwed by naked short selling.

I need to read the motion to get a better idea of what happened.

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

#20

Post by roel_v » Tue, Jun 05, 2012, 8:38 AM UTC

casca wrote: post #5

That naked short selling is allowed is an anachronism coupled with the lobbying of the self-interested. In the olden days, it was reasonable to give a time delay to deliver the physical paper that proved ownership. Now everything is electronic so _could_ be verified instantly. But there's a lot of money to be made by doing it and the government will covert catastrophic losses, so it should be expected that everyone d…

What's the problem with it, really? If A promises B to sell him something and then A can't deliver for some reason, then B will stand to be compensated by A for any damages resulting from that. Why would it be special for stock? Of course there is the risk that massive naked trades will influence the price of stocks, but that should just be priced in, like any other risk, no? What am I missing?