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Naked shorting: The curious incident of the shares that didn't exist (2005)

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Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#31

Post by arcticbull »

andrepd wrote: post #27
jkhdigital wrote: post #10

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

Well fractional reserve banking is accounting fraud. Widespread and legal, but fraud nevertheless. Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking . The banks' ability to create money from thin air is almost unrestrained.

No it’s not. It’s legal and permitted and therefore not fraud. It’s backstopped to prevent losses. This is a talking point with no basis.

Let’s stick to fact.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#32

Post by nayuki »

arcticbull wrote: post #23
jkhdigital wrote: post #10

The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen. This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).

Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC. Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression. As with all blockchain unless the state…

Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#33

Post by arcticbull »

nayuki wrote: post #32
arcticbull wrote: post #23

Earlier quoted context omitted.

Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC. Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression. As with all blockchain unless the state…

Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?

It’s not a bank run, it’s poor risk management and the FDIC doesn’t insure brokerages, that’s the SIPC. Poor risk management is very much not covered by any federal program. Their liabilities are between them and their brokers, and if contagion spreads, their private insurers. This is why you can only short in a margin account and are required to put up collateral.

If you sold short 140% of float and bought calls to cover, then we wouldn’t be having this conversation. Play stupid games, win stupid prizes.

Similarly if I bought a bunch of stuff on margin and it went under overnight, RIP my account. You can lose money in both directions.

“140% of float” doesn’t really mean more shares were sold than exist. There are after all only 100%. It means the same shares were sold more than once by the same or different people, and buying them back cancels the debt obligation.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#34

Post by mcgoo »

fractionalhare wrote: post #11
eloff wrote: post #9

Earlier quoted context omitted.

So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?

I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm . It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis.…

If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#35

Post by njharman »

rwmj wrote: post #16
slashdev wrote: post #7

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into…

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

> own a company

No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever.

What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#37

Post by psychlops »

njharman wrote: post #35
rwmj wrote: post #16

Earlier quoted context omitted.

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

> own a company No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever. What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold,…

> What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.

After all liabilities are deducted. Which usually means nothing.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#38

Post by jeffbee »

jeffbee wrote: post #29

Basic rule of thumb is any company where the management is whining about shorts, and about naked shorts in particular, is garbage. The reason companies get shorted over 100% of outstanding shares is because everybody agrees they are garbage. Not a conspiracy. Go look at the stock of the absurd company in question after you read this article.

Here's what Robert Simpson of ZANN Corp. was doing at the time: using his position in company A to buy his side gig company B. Whenever you dig into these guys for even 5 minutes they always turn out to be sleazy.

https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/z...

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#39

Post by dalbasal »

nabla9 wrote: post #26

Note: Shorting more than 100% of shares outstanding does not imply that there is naked shorting happening. You can re-borrowing the shares someone shorted and it happens.

It's times like this that common sense definitions of terms like "naked short selling," "market manipulation" and such turn out to be very different from the operable ones.

Re: Naked shorting: The curious incident of the shares that didn't exist (2005)

#40

Post by Lazare »

Summary:

Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times.

It's also worth noting that there's no real theoretical basis for why naked short selling would be harmful, no real empirical evidence showing it is harmful, no general laws against it, and the structure of the market allows and expects it to take place in some specific cases. If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.

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