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Shorting and Indian capital markets

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Re: Shorting and Indian capital markets

#101

Post by treis »

midasuni wrote: post #55
xadhominemx wrote: post #52

Earlier quoted context omitted.

It probably is over 100%. That’s unusually high but 100% short interest is not some sort of special number. Shorting works by borrowing a share and selling it to someone else. There’s no reason the same share could not be borrowed multiple times, as the shares are all fungible.

So if two people owned one share, they could simply pass it between each other until their shorts are covered?

Not exactly, but yes. A single share can theoretically unwind all of these short positions. If we have

A lends to B who sells to C who lends to D who sells to E who lends to F who sells to G.

The reverse of the process will unwind it:

G sells to F who returns to E who sells to D who returns to C who sells to B who returns to A

Re: Shorting and Indian capital markets

#102

Post by treis »

tikej wrote: post #42
ZephyrBlu wrote: post #36

Earlier quoted context omitted.

I'm pretty sure a mass buying of the stock would drive the price right into the floor. So the first few people will get an extremely high price because like you said, the shorts are forced to buy, but as the sell off begins the price will plummet.

But aren’t the shorts for like 140% of the GME stock? That means if everyone holds with prices, sooner or later the shorters will have to buy ALL that stock anyway at nearly any price to cover for the losses and give back shorted stock.

No, because the shorts aren't due all at the same time. Say that 15% is due each day for the next 10 days. On day 1 those shorters will buy 15% of the stock and return it. The people they return it to then can sell it to the shorters that need to cover on day 2. Those people then return it and it's sold to the day 3 shorters and so on.

Re: Shorting and Indian capital markets

#103

Post by bluGill »

tonyarkles wrote: post #60
xadhominemx wrote: post #52

Earlier quoted context omitted.

It probably is over 100%. That’s unusually high but 100% short interest is not some sort of special number. Shorting works by borrowing a share and selling it to someone else. There’s no reason the same share could not be borrowed multiple times, as the shares are all fungible.

From what I understand, it is a slightly special number. Each one of those shorts is supposed to have some kind of contract in place that can be used to cover the position (e.g. a call option that would ensure that the stock could be purchased, even if the options contract isn't ITM). If there's over 100% short interest, then it's impossible for all of the outstanding shorts to be covered in that way (or, alternative…

That doesn't matter because nobody covers the stock at the same time. The shorts buy back a few stocks, return it, then a bit later buy it back again from someone else who sees the higher price and decides to cash out. Neither of the two owners above knows that that they both technically owned the exact same stock.

Most stocks are head by the broker who combines them all into one listing of total number of stocks owned. This is all electronic, nobody ever worries about the actual stock behind it. When the company sends out a shareholder mailing they just give the company all the addresses, not how many shares anyone has. (I'm not sure how voting is handled!)

Note that there is a loophole above. It is possible to get the physical stocks personally instead of letting your broker handle it. This can force a short squeeze as your broker will be forced to unwind everything far enough to find real shares for you, and if required will force one of the shorts to buy back shares on the market. This has happened a few times in history, but few people have the means or inclination to pull it off (and it isn't what is happening here).

Re: Shorting and Indian capital markets

#104

Post by bluGill »

treis wrote: post #101
midasuni wrote: post #55

Earlier quoted context omitted.

So if two people owned one share, they could simply pass it between each other until their shorts are covered?

Not exactly, but yes. A single share can theoretically unwind all of these short positions. If we have A lends to B who sells to C who lends to D who sells to E who lends to F who sells to G. The reverse of the process will unwind it: G sells to F who returns to E who sells to D who returns to C who sells to B who returns to A

It doesn't even have to be reverse. It can be G sells to C who sells to F->A->E->B->D just to make up a random order.

Re: Shorting and Indian capital markets

#105

Post by bluGill »

treis wrote: post #102
tikej wrote: post #42

Earlier quoted context omitted.

But aren’t the shorts for like 140% of the GME stock? That means if everyone holds with prices, sooner or later the shorters will have to buy ALL that stock anyway at nearly any price to cover for the losses and give back shorted stock.

No, because the shorts aren't due all at the same time. Say that 15% is due each day for the next 10 days. On day 1 those shorters will buy 15% of the stock and return it. The people they return it to then can sell it to the shorters that need to cover on day 2. Those people then return it and it's sold to the day 3 shorters and so on.

Shorts are rarely due at all. If those who hold the shorts have enough capital then they can just hold until the market loses interest, and then cover their shorts at $2. Or better yet, even with a sky high stock price gamestop could be forced to declare bankruptcy by their creditors. If I had shorts on gamestop I'd be looking to get all the companies bonds I could so that when the bankruptcy goes to court I can say I want the company shut down and the judge listens to me. The company could be trading at $1000/share and suddenly the judge orders it to stop trading and suddenly there is zero value in any shares.

If you want to be a conspiracy theorist, the smart thing for the insiders (those who control the board) to do would be to sell all their shares at this price, then declare bankruptcy. This would be illegal of courses, but there are lots of variations on this theme that make financial sense if you can get away with it.

Re: Shorting and Indian capital markets

#106

Post by bluGill »

foolmeonce wrote: post #96
chii wrote: post #90

Earlier quoted context omitted.

> I think the parties would just be exchanging money in lieu of stock but stocks are marked to market - the lender of the stock will ask back the market value, which if it was being pumped, is going to be high. If the shorts are settled by cash, it's not only not going to make a difference to the bottom line of those shorting, it will also not change the price of the stock.

The people shorting are screwed, but the profits will go to the people who bought the options, who will essentially be selling the contract back and trying not to own the stock. The stock should go into free fall, and the people who bought the stock are also going to be victims unless they sell to an alternate victim before the call date. It should all be convoluted by policy, settle dates, brokers selling and later…

The people shorting - if they can hold out against a margin call - win in the long run. Gamestop isn't worth these prices, and so they can cover in 6 months when interest goes away and the price drops to $2. Even if gamestop is a long term win, it won't be worth more than $10 next year.

Re: Shorting and Indian capital markets

#107

Post by bluGill »

lepton wrote: post #51
tikej wrote: post #42

Earlier quoted context omitted.

But aren’t the shorts for like 140% of the GME stock? That means if everyone holds with prices, sooner or later the shorters will have to buy ALL that stock anyway at nearly any price to cover for the losses and give back shorted stock.

140% of stock /issuance/, not outstanding. Shorting stock creates new stock. Once all shorts are closed, the 100% of issuance is still outstanding and someone's holding it. Not everyone can get out!

That doesn't mean the same people. Gamestop does have a long term plan. If it works out the company can be worth money. Buying Gamestop for $2 at the bottom in a few months might be a reasonable risk for the final person holding the bag.

Re: Shorting and Indian capital markets

#108

Post by bluGill »

dmingod666 wrote: post #34
ignoramous wrote: post #11

> While everyone is celebrating retail traders winning over a large hedge fund in this case, it rarely ever plays out this way. Most commonly, retail ends up losing money when there is excessive speculation. This is the only passage anyone with too much at stake (than they can afford) in this short needs to read. Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic i…

lol, when did the stock market reflect the fundamentals? Its post 2020, the whole economy had come to a standstill and the market was rallying like nothing happened. All this 'fundamentals' talk just sounds hollow.

Over any 20 year period the market has always reflected the fundamentals. However over any few months period it has always been a popularity contest.

Note that fundamentals include things like bonds and government manipulation.

Re: Shorting and Indian capital markets

#109

Post by bluGill »

swiley wrote: post #54
mensetmanusman wrote: post #16

I am glad they addressed the philosophical question of whether shorting the stocks should be illegal. I have more confidence in our equities markets because of the existence of short sellers. I’m glad to know there are people researching companies that are not being honest about their financials. If there were another way to incentivize finding these types of companies without short selling, I would be interested.

Put options let you take a bearish position without short selling. IMO it's a way less crazy way to do that.

The problem with puts is they have a time frame. I'm bearish, but I don't know when there will be a top. The market can remain irrational long enough for puts to expire worthless.

Re: Shorting and Indian capital markets

#110

Post by bluGill »

acd10j wrote: post #92
TeMPOraL wrote: post #23

Earlier quoted context omitted.

Stock [purchased by] A [lends to] B [shorts to] C [lends to] D [shorts to] E ... There's one stock, but when people count shorts, they're counting the [shorts to] edges. That 140% ratio is essentially the (amount of [shorts to] edges) / (amount of stock in circulation).

But Person A etc after lending no longer own stock, as they have lended it. They no longer have possesion of stock, If they now wants to sell their stock they first would need to get it it back from Person B, Which needs it back from Person C etc. Only one person can actually sell stock which is person E, as he has possession of stock. So if there is actual demand of selling a stock a high enough price, So in case pe…

Person A, and leaves it at the broker. Person B borrows not from person A, but the broker who. Person C buys the stock and again leaves it in the same broker. In the database there is 10 shares to person A, -10 to person B, and 10 to C. If A wants his stock back, then the broker just takes the stock from the pool not from person B.

Since there are a lot of people with stock at the broker there is no problem to shuffle around, it is all the same stock and an entry in the computer.

This of course leads to the real issue: you can buy stock and not leave it with your broker. This has been done, but only rarely (and not in this case)

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