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Comment by 55555 | Hacker News Reader

I know there are a lot of Wall st guys here. Can someone explain what's really going to happen here in regards to the short squeeze? Is it really so simple? How will the shorts be able to cover?

Also, is this page correct in saying that GameStop is the only stock on all listed US markets that's shorted over 100%?

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Re: 100%, yes for companies with a reasonable minimum market cap.

The one thing not really being explained enough is that short interest as reported through the exchanges is reported bi-monthly. You can imagine that with current events that is an eternity to wait for the next update.

Also worth noting is that these are the official channels, there are plenty of dark pools where there are no rules but all sorts of exotic instruments are being traded in volumes that boggle the mind.

I worked at one quite some years back.

Could you explain a little bit more about this? Or point me in a direction where I could find out more? Super curious. Thanks

A dark pool is just a private securities market. They don’t have to disclose much since the general public can’t participate but they can trade all sorts of exotic instruments without a lot of the “public focused” regulations.

They can also trade run of the mill securities in large quantities without moving the market or making known that a large position shift is happening.

> They can also trade run of the mill securities in large quantities without moving the market or making known that a large position shift is happening.

For US public equities, dark pools are still required to print all trades to the public consolidated ticker. They hide potentially huge volumes of hidden orders waiting in their order books, but they don't hide actual position shifts (trades).

what is an "exotic instrument"?

An exotic instrument is basically any contract more complicated than a simple put or call option.

For a slightly fictionalized version of why these might be useful in the real world, let's say a Finnish life insurer is selling life insurance in Hungary. So, they're doing their accounting (the numerare) in Markka (FIM), taking in payments in Forints (HUF), and exposed to changes in Hungarian mortality rates. So, for the next 30 years, this insurance company wants some secondary protection against adverse shifts in the Hungarian mortality curve, but to make that insurance less expensive, they only want protection if those losses in HUF, converted to FIM exceed 100 million FIM.

So, this insurance company goes to the structured products desk of large multi-national firm and gets a very bespoke option created. The multi-national sells this single contract to the insurance company, and hedges the individual FX components using FX options and the actuarial risk with actuarial derivatives. There's basically no market for this stuff, so the large multi-national basically commits to hedging out the other side of this contract for the next 30 years.

I've worked with optimizing risk modeling for exotics, because it turns out that for some of the more complex exotics, the daily computational costs get very expensive for basically re-calculating a first-order multidimensional Taylor approximation (the risk components) of these contracts. Every day, we then take these risk calculations and buy/sell a bunch of simple options to bring the first-order partial derivatives (risk components) back close to zero.

So I can like buy an options contract on arbitrary Hungarian deaths?

I don't know much about the structured product particulars or the details of the hedging. I'm not sure if the actuarial derivatives are mostly options or futures. I think they're mostly over-the-counter products, and rather large contract sizes. So, I think trading actuarial derivatives involves passing some certifications, getting a few million dollars, and cold-calling a bunch of large financial institutions to see what they currently have on offer, and convincing them that you're not going to go bankrupt in the next 30 years.

But, I don't really know. I know a bit about making the computers go fast, and I talked with the structurers enough to know very generally what was going on.

Funny story poking around exotic financial models: a big part of the collateral a shipping company can offer is its ships. I saw "cape size" show up in a model for the value of a ship, and imagined ships dressed up like Superman or the Green Lantern. It turns out that for the same carrying capacity, ships that are dimensioned to fit through the Panama and Suez canals are worth significantly more than those that are forced to round the Cape of Good Hope or Cape Horn ("cape size").

Don't misconstrue this as investment advice, but be careful about taking the short side. If you happen to randomly be short Hungarian lives, and genocide breaks out, and you make 3 billion dollars out of pure happenstance, there will be double-digit percentages of the population believing in conspiracy theories about you for hundreds of years. Very few people will want to live in the same city or even sell a hamburger to the alleged architect of the Hungarian Genocide. This isn't investment advice; it's life advice. It's possible to be 100% right, for the wrong reason, and lose 1000%.

I wonder if Coca Cola has an instrument like that, the more they sell in any place the lower the life expectancy will be.

I should add that I'm pretty sure the actuarial derivatives pay out based on population-level official government statistics. They aren't based on the death rate of the population actually insured by one insurer, and the insurer has to hope that their insured population is similar to the population as a whole, or is at least predictably and consistently offset from the general population so that the hedges are strongly correlated with expenses.

e.g. A custom tailored interest-rate swap[1] to hedge very specific circumstances between two parties. Or if you like cool names, maybe a gigantic Bermudan swaption[2]. Or maybe two traders want to take opposite ends of bizarre 10 leg option with unlisted strike prices...

[1]: https://en.wikipedia.org/wiki/Interest_rate_swap#Extended_de...

[2]: https://en.wikipedia.org/wiki/Swaption

The way you describe it sounds super exciting. It's like a trading speakeasy.

There are different rules, but there are rules and regulations there as well

There are higher frequency indicators capturing essentially the same dynamic derived from securities lending agents (e.g. borrow rate, availability) and option markets (estimated from end of day open interest)

Of course, but those other estimated/derived numbers are not what retail investors are looking at. Everyone tries to get an edge with math, models, or subsets of data and fill the gaps, but the official number is a reported figure.

(Edit: removed mostly wrong info, but here's an article on some stuff that goes on with voting rights and shorts that could potentially be used to vote for a capital raise and break the short squeeze by issuing new shares: https://www.wsj.com/articles/SB116978080268188623 )

> ... you generate a new fictional long position from the loaned shares which gets additional voting rights without any conservation law.

That’s not how it works. Votes don’t magically appear.

The lender gives their voting rights along with the stock to the short seller. The short seller gives it to whoever purchased the shares from them. So only the final purchaser gets to vote, the original lender lost their rights while their stock is lent out.

I believe this is actually an easy way that a true short squeeze can actually happen.

A bunch of shares are shorted, and the company announces a vote on something, which causes people to recall shares that they've loaned out (because they want the voting rights).

Then it's just a war of attrition.

It seems crazy to me that we have two bands of people warring over fake money in what could only be equally illegal ways.

Bankruptcy is certainly an option.

But in this case I imagine they have to spend all their assets on buying stock, even if they cant buy enough to get back to even, right?

There are Wall Street traders, not just guys.

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