A “short squeeze” sounds innocuous enough... • Hacker News Board

Re: A “short squeeze” sounds innocuous enough...

#11

Post by newt0311 » Thu, Jan 08, 2009, 8:39 AM UTC

sam_in_nyc wrote: post #10

mynameishere wrote: post #3

The key phrase is "infinite squeeze" which is a condition where shorts are forced to buy at any price determined by owners, http://www.economist.com/displaystory.cfm?story_id=12523898&... ...this is the worst possible condition of a financial market, in which a class of investors can literally dictate prices without limit (IIRC, German authorities stepped in at some point to prevent catastrophe).

What happens in the case of an "infinite squeeze" where the party who owes stock to another cannot pay it back? Is this a risk the lender has to deal with, that they may not ever see the stock they lent out again because the party they lent it to squandered it? Seems to me in the "short squeeze" situation the value of the stock cannot be infinite -- it is bound by the terms of the contract to which the shares were le…

Probably similar to a bankruptcy case though the ins and outs of securities regulations would likely muddy the waters considerably.

Re: A “short squeeze” sounds innocuous enough...

#12

Post by 1gor » Thu, Jan 08, 2009, 9:10 AM UTC

sh1mmer wrote: post #7

This is a brilliantly clear explanation.

Perhaps the author should also made it clear that Porsche took advantage of poor securities laws in Germany rather than showed any 'financial genius'.

In US and UK there are explicit regulations forbidding secretly building a stake in a company. This 'hack' is illegal here just like insider trading is.

Re: A “short squeeze” sounds innocuous enough...

#13

Post by dabeeeenster » Thu, Jan 08, 2009, 9:22 AM UTC

sam_in_nyc wrote: post #8

Question: how is it that nobody knew how much VW Porche owned? Is there no way to see who owns a certain stock, or what stock a company owns?

You get different brokers to buy it on your behalf bit by bit, anonymously. From there it depends on the laws of the country you are operating within.

Companies often do this when selling stock too, so as to not draw attention to themselves or their positions.

Re: A “short squeeze” sounds innocuous enough...

#14

Post by [deleted] » Thu, Jan 08, 2009, 10:17 AM UTC

mynameishere wrote: post #3

The key phrase is "infinite squeeze" which is a condition where shorts are forced to buy at any price determined by owners, http://www.economist.com/displaystory.cfm?story_id=12523898&... ...this is the worst possible condition of a financial market, in which a class of investors can literally dictate prices without limit (IIRC, German authorities stepped in at some point to prevent catastrophe).

[deleted]

Re: A “short squeeze” sounds innocuous enough...

#15

Post by swombat » Thu, Jan 08, 2009, 10:19 AM UTC

1gor wrote: post #12

sh1mmer wrote: post #7

This is a brilliantly clear explanation.

Perhaps the author should also made it clear that Porsche took advantage of poor securities laws in Germany rather than showed any 'financial genius'. In US and UK there are explicit regulations forbidding secretly building a stake in a company. This 'hack' is illegal here just like insider trading is.

Indeed - and it should be illegal. The lack of transparency means that hedge funds will now think twice before investing in a company that's based in that jurisdiction.

Re: A “short squeeze” sounds innocuous enough...

#16

Post by swombat » Thu, Jan 08, 2009, 10:20 AM UTC

dabeeeenster wrote: post #13

sam_in_nyc wrote: post #8

Question: how is it that nobody knew how much VW Porche owned? Is there no way to see who owns a certain stock, or what stock a company owns?

You get different brokers to buy it on your behalf bit by bit, anonymously. From there it depends on the laws of the country you are operating within. Companies often do this when selling stock too, so as to not draw attention to themselves or their positions.

Except that, in the US and UK, that's illegal. In Germany, though, where this happened, it's not. That's not a good thing for Germany.

Re: A “short squeeze” sounds innocuous enough...

#17

Post by dabeeeenster » Thu, Jan 08, 2009, 10:29 AM UTC

swombat wrote: post #16

dabeeeenster wrote: post #13

Earlier quoted context omitted.

You get different brokers to buy it on your behalf bit by bit, anonymously. From there it depends on the laws of the country you are operating within. Companies often do this when selling stock too, so as to not draw attention to themselves or their positions.

Except that, in the US and UK, that's illegal. In Germany, though, where this happened, it's not. That's not a good thing for Germany.

It's only illegal for companies though, right? If individuals do it they don't need to declare anything do they?

Re: A “short squeeze” sounds innocuous enough...

#18

Post by patio11 » Thu, Jan 08, 2009, 10:33 AM UTC

sam_in_nyc wrote: post #10

mynameishere wrote: post #3

The key phrase is "infinite squeeze" which is a condition where shorts are forced to buy at any price determined by owners, http://www.economist.com/displaystory.cfm?story_id=12523898&... ...this is the worst possible condition of a financial market, in which a class of investors can literally dictate prices without limit (IIRC, German authorities stepped in at some point to prevent catastrophe).

What happens in the case of an "infinite squeeze" where the party who owes stock to another cannot pay it back? Is this a risk the lender has to deal with, that they may not ever see the stock they lent out again because the party they lent it to squandered it? Seems to me in the "short squeeze" situation the value of the stock cannot be infinite -- it is bound by the terms of the contract to which the shares were le…

You will forfeit whatever you posted for collateral. For a retailer investor, that might mean a margin call causing you to liquidate what you held with your brokerage. There are safety requirements (imposed by the government and your brokerage) to make sure you cover the liability.

But when you're talking about billion dollar bets, you probably didn't fully secure it. Nope, you put your reputation up for collateral instead -- "You can trust us to say this billion dollar chunk of stock will be returned on time to the very minute because we have NEVER FAILED TO DO SO, EVER".

You really need that capital bit to be true because, if not, you'll never be permitted to do this again by your counterparties. If that happens, say goodbye to your hedge fund -- actually securing the size of bets you are making is murderously expensive.

Do you understand why this means you're willing to pay literally any price to satisfy the short according to schedule? If you don't, your firm is finished as a going concern.

This is the same reason why no fund family will allow their money market funds to break the buck. They'll invariably kick in their own money to keep it solvent because the alternative means ruin. (The Reserve, which broke the buck earlier in the financial crisis and was not able to kick in funds from other sources, is probably finished, even though the FDIC is now insuring money market funds.)

Re: A “short squeeze” sounds innocuous enough...

#19

Post by jsrn » Thu, Jan 08, 2009, 11:30 AM UTC

sam_in_nyc wrote: post #8

Question: how is it that nobody knew how much VW Porche owned? Is there no way to see who owns a certain stock, or what stock a company owns?

The regulatory loophole they exploited only exists with cash settled options [1] - IIRC the hole will be closed this spring with new legislation. Btw. another German Company (Schaeffler) used the same loophole last summer to secretely buy Continental (with much less success, it seems).

   [1] Cash settlement - Cash-settled options do not
   require the actual delivery of the underlier.
   Instead, the corresponding cash value of the underlier
   is netted against the strike amount and the difference
   is paid to the owner of the option.

http://en.wikipedia.org/wiki/Exercise_(options)

Re: A “short squeeze” sounds innocuous enough...

#20

Post by eru » Thu, Jan 08, 2009, 11:41 AM UTC

1gor wrote: post #12

sh1mmer wrote: post #7

This is a brilliantly clear explanation.

Perhaps the author should also made it clear that Porsche took advantage of poor securities laws in Germany rather than showed any 'financial genius'. In US and UK there are explicit regulations forbidding secretly building a stake in a company. This 'hack' is illegal here just like insider trading is.

Was it really that secret?