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Comment by krok | Hacker News Reader

You can have a short squeeze without naked shorting. Shorts who aren't naked have borrowed the stock from someone. If that person asks for it back, they have to go out and buy it in order to return it.

At least in theory, if retail investors buy up the stock, some of the institutional investors who own it, and who have lent it out, will sell it to them. This could mean that they recall lent stock. As this happens, shorts might have to compete to buy the stock. Equally, as the price gets higher, shorts might have to cut their losses, which also means buying back the stock. If the people buying it now don't sell it and don't lend it they will withdraw a lot of the supply.

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Since you're nice and explaining things...what happens if a naked short gets called in but literally no one will sell any stock for any amount of money, so the shorter can't fulfill their obligation?

Obviously not going to happen with GME or anywhere realistically, but I'm just curious how that would be handled.

Something called a Failure To Deliver. Basically you have to pay extra to keep the stock one more day or whatever, and you have to deliver it the next day, or next settlement period.

The fee could be quite punitive, or fairly trivial depending on the market. In some markets failure to deliver would be a very big deal and multiple could lead to some sort of disciplinary action. In other markets they might be commonplace for whatever technical reason, and everyone expects that they will happen, just tries to avoid them because of the fee.

There are various theories that in certain markets everyone fails to deliver all the time and it means that there isn't enough of whatever to meet all the obligations. I can't really comment on how much they make sense.

So it seems the issue is that people have borrowing agreements that can be recalled early (seems like it functions like a margin call in a way). Call it half-naked shorting, I guess. Still seems risky. I feel like they could've just bought call options and called it a day instead. Maybe that's too naive or call options are hard to find/pricey for Gamestop?

That still doesn't explain how you know folks aren't naked shorting. Maybe you can read the trades?

I don't know they aren't, but it's illegal. Large hedge funds are unlikely to be breaking the law, and I haven't seen any evidence that they are which wasn't based on a misunderstanding of the free float numbers.

Stock borrowing is very very commonly done and renewed per-day, in the vast majority of situations this works fine.

I appreciate the explanations, thanks. I don't have the trading context. Seems like tail risk or Black Swan events yet again. I hope they made enough money on these shorts that it wasn't "picking up pennies in front of steamrollers". If not, then I wish there would be better rules to prevent the short squeeze, like requiring calls instead of stock borrowing (maybe this is too expensive). When the liability is theoretically infinite, it just seems really risky to count on the hope that you can keep borrowing the stock (which works great the vast majority of the time but every now and then you lose billions).

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