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Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

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Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#61

Post by konschubert »

sanxiyn wrote: post #20
konschubert wrote: post #12

Shitty companies failing is a necessary and important mechanism of a functioning economy. Look at the Soviet Union for an example of what happens when no companies ever go bankrupt. Short activists expose shitty companies and as such, they play an important role in the economy. Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers. Maybe shorting, in particular naked shorting, is not id…

Japan banned naked shorting (of course Japan did not ban shorting) and seems to be doing fine. US probably can ban naked shorting without much problem too.

I am not sure Japan is doing well. (Not saying this is due to the lack of naked shorting)

https://www.economist.com/finance-and-economics/2020/09/24/w...

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#62

Post by konschubert »

dandanua wrote: post #40
konschubert wrote: post #32

Earlier quoted context omitted.

> Why let people have incentives to ruin other people lives? We should build safety cushions for people, not companies. > Why do you feel you need to help it to go down? https://en.wikipedia.org/wiki/Wirecard_scandal

Fraudulent company is not a general case. Such companies must be closed by regulators, not short sellers. Do you think it is a good idea to help Intel go bankrupt because it's shitty right now in comparison to AMD?

No company goes bankrupt because of a low stock price.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#63

Post by kebman »

jb775 wrote: post #22
kebman wrote: post #16

Can't this simply be done with leverage?

I'd say the difference is that they're doing it over and over.

Sorry, I got it wrong, so I tried to delete my comment. Leverage is when you're loaned money, so you can buy more stocks than you could with just your own money, with certain automated stops as security against loss for the creditor (such as margin calls). It's a deal between you and a creditor, and the stocks purchased remain real. A naked short, on the other hand, is when a broker is exploiting the system to make it seem like there are more shares available than there actually is. Thus when people buy a non-existing share, the money is deposited for a short time, but the purchase “bounces,” which again can create slippage and volatility (fake “liquidity”), depending on how the system is set up.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#65

Post by ZephyrBlu »

sokoloff wrote: post #49
irjustin wrote: post #45

Earlier quoted context omitted.

While in the specific scenario it's similar, in theory the 2nd scenario can be repeated an infinite number of times since it doesn't need to be tied to a "physical" share. This creates the illusion that there's a LOT of people who believe the stock will go down in price, which can affect market sentiment and actually cause real movement when in reality that wouldn't be possible if every short was in fact backed by a…

There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.

Yeah this is the explanation I've seen people give.

It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#66

Post by praeter »

"Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover. (Click here for more on Pulling Margin)."

http://counterfeitingstock.com/CS2.0/CS8PullingMargin.html

Sounds a lot like Thursday and Friday, no?

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#67

Post by JumpCrisscross »

hlandau wrote: post #58
JumpCrisscross wrote: post #39

Earlier quoted context omitted.

> it seems like if a large number of people suddenly started demanding share certificates, this could cause problems for DTC No it wouldn’t. You would be delivered shares within two days as is required. Lots of institutions don’t hold their shares “in street name,” i.e. they hold them in their own. And some people still demand physical certification. (Not every issuer supports this, largely due to exchange rules.)

If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this?

> If the number of share certificates being requested exceeds the number of share certificates existing, how would they do this?

When a stock has 140% short interest, there are net 40% of the float of holders who have loaned out their shares. They wouldn’t have the right to certificate until they called back their shares. If literally everyone asked for delivery, you’d wind up with the naked shorts needing to pay up to some of those taking delivery to settle their positions. If everyone refuses to sell, those naked shorts would FTD, and the appropriate processes would take over.

Long story short, nothing intrinsic to the DTCC creates net over or under allotment. Companies go private all the time, which is a functional case of all of a company’s shares being taken out of the DTCC.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#68

Post by sokoloff »

ZephyrBlu wrote: post #65
sokoloff wrote: post #49

Earlier quoted context omitted.

There’s no difference. If you’re going to allow B to borrow A’s share and sell it to D, now both A and D own a share. D can lend their share to E, who sells it to F. (D has no idea they bought some special share, because they didn’t.) Now, F to lend to G who can sell to H, etc.

Yeah this is the explanation I've seen people give. It's kind of weird to distinguish "naked" shorting from this when they're functionally the same.

Right. Same reason people are flipping out when a stock goes from 199.99% floating to 200.01% floating. (They call it “over 100% shorted!!!”)

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#69

Post by woofie11 »

woopwoop wrote: post #28
sanxiyn wrote: post #23

Earlier quoted context omitted.

The second activity is dangerous because A can fail to deliver. I agree there's not much to be outraged by the first activity.

A can fail to deliver in the first activity, too. More generally, when you agree to have someone give you something of value at a later time, you take on some risk that they will fail to do so.

There's a very different risk profile for me (an individual investor) if I'm buying shares from someone who doesn't have them, and merely promises to deliver them, than if they're backed by real shares. I'd like my brokerage to be holding real shares on my behalf for real dollars I gave them. I don't want them loaning my shares out either.

They're mine.

If there are naked shorts floating around (or shorts covered by my stock without permission), someone else is making money off of risk I am taking on, but didn't agree to. There can be a cascading set of failures which lands with me not having my shares.

It's the difference between taking out a $300,000 mortgage on a $500,000 house, versus borrowing $300,000 with no collateral. You'll get a different interest rate, if you can get a loan at all. And this resembles someone taking a $300,000 mortgage, only missing the house.

Yes, there's always a risk, but that risk profile is very, very different (esp. in the case of catastrophic events, like a stock market collapse or similar, when many institutions might be going down at the same time).

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#70

Post by woopwoop »

dannyw wrote: post #56
woopwoop wrote: post #18

The author seems to be really upset about this, but I don't understand why. Nothing they are describing, if you ignore histrionic language like "counterfeiting", seems especially nefarious. Maybe I am misunderstanding. Basically, a short is when A borrows from B a share of corporation C with the promise to return a share of corporation C at a later time, plus some cash interest. A naked short is where instead B gives…

You are a company looking to raise money through the public markets. You have issued 10 million shares; but the market is trading with 15 million because of counterfeit stocks. The bankers and the hedge funds have got to dilute you; actively hurting your fundraising ability, and of course; your stock price (which you may own as a founder).

This doesn't distinguish between shorting and naked shorting. But in either case I don't understand why I'm supposed to be upset. Is it because the stock price goes down?
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