So, they short more stocks that exist. OK, I will not ask why this is allowed, but how is this done?
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).
Why wouldn't it be? It sounds pretty straightforward mechanically. A short means I borrow a share from you and sell it to someone else today, buy it back some time later and give it back to you. That someone else has a bona fide stock, which they can lend to another shorter.
If you mean why the metric of "how many [shorts to] edges are active" is being tracked? I'm guessing it's the best proxy for how confident market is the stock is about to tank. Also, shorting as an abstraction is its own thing, so counting how many shorts there are is as useful as counting any other distinct market activity.
Basically it would allow credit worthy institutions to meet demand by creating synthetic shares out of thin air. As long as they pay all the associated dividends and maintain enough capital to buy back the shares.
That would remove the entire long and convoluted process of locating borrow, and remove much of the market disruptions associated with “short squeezes”
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)
There are a few different ways to be short of a stock but the most common are to sell short in which case you have a few days to buy the stock or locate a borrow before the trade settles. Other ways to be short are to write call options which you can just do by selling that option to someone, or buy put options. In certain cases you can short a contract for difference or single stock future or short the return on the stock in an equity swap. For all of these you'll need your broker to facilitate.
Brokers don't work together which is how the aggregate position of all shorts can get larger than the total number of stocks in issue. This is obviously not a healthy situation but the brokers are relying on the collateral to enable them to make good any losses.
Finally some people may have a short as a partial hedge for an overall long position (eg "Crash put protection") so may be net long overall.
In those examples the price of the stock is just a reference point used to calculate the quantity of the cash payment between the two parties so although the short will lose money if the stock rises they are not "squeezed" in the sense they are not desperately searching for stock to buy at any price.
Selling leased stuff is not allowed for a reason.
But houses are non- distinguishable. You don't need to give him back exactly that house, just an identical one.
Also, there is a difference between 100% of the stock and 100% of the float. Because in theory the institutions holding could alter their positions or lend their shares as well.
With GME both of these are abnormally high. Either of them is enough to explain the short squeeze.
Madness?
(Anyway, my actual knowledge of the stock market is limited, but is my scenario a realistic one?)