Comment by nowherebeen | Hacker News Reader

Comment by nowherebeen | Hacker News Reader

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If the stock was <100% shorted, it would be a pump and dump. The moment it was >100% shorted, the hedged fund exposed themselves to financial risk.

No matter how much people buy, they can't buy >100% of the shares on the market unless GameStop issues new shares. The people buying are betting that when these hedge funds need to cover, they will be covering ~120% of the number of shares (the amount of shorted stock) on the market. That covers everyone that has shares right now.

So right now, its a tug of war (hence the volatility). Its a zero sum game where one side will definitely lose. You can argue that the company isn't worth anything and that buyers will get hurt, but only when <100% of the stock is shorted.

edit (below):

The loser will be the one holding 100% of the stock. At that point the stock would plummet because all the buyers have left. Meaning if the hedge fund loses, they are not just covering at a higher price (and thus continuing to drive it up even more), they will effectively be buying worthless stock.

I consider this a battle of trading strategies. The fundamental value of the company is beside the point. Hedge funds have done this to each other before, that's why there's an existing term for it - short squeeze. Its definitely covered in a textbook for first year business school students.

There isn't something "magical" about > 100% short interest. It should be stated a ratio to be less confusing, rather than a percentage. It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares, so there will certainly be bag holders at the end of this since the shorts don't actually need to buy up "all the shares", only 54% of them in this case.

Now, of course, some of those shares are locked up by funds tracking, say the Russell 2000 index, which cannot liquidate their holdings (and may even be required to buy more as GME climbs) in order to maintain it's percentage in the fund. Other shares are held by other funds or institutions, and so on. So the reality is it is difficult for the shorts to cover quickly.

This isn't a problem during "normal times" because the volatility of the stock is relatively low and thus the short margin interest that you have to pay to keep borrowing the stock is a small percentage. But as the price runs up, that interest and collateral requirements grow dramatically since the broker needs to be sure you can pay up if you have to buy the shares at the current market price.

>It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares

Can someone please explain how the original 100 shares turned into 220? Does this mean that after borrowing a share and shorting it, the original owner and the one who shorted can both sell it?

It's not unlike fractional reserve banking.

Imagine three participants: Alice, Bob, and Charlie. Alice owns a share of Foo Corp, the only such share that exists. Bob decides to short Foo Corp, and borrows a share from Alice's broker (Alice's broker gets paid for this).

At that moment, there are two shares that exist. If Alice logs into her brokerage account, she sees a share of Foo Corp, but it's really an IOU for a share of Foo Corp. If Bob logs into his account, he also sees a share of Foo Corp (that he borrowed from Alice). At that point, there are two "shares" of Foo Corp that exist.

To make money on the short, Bob has to sell the share and buy it later, so he puts it in the market and sells it to Charlie. At this point, there are two shares: a share owned by Charlie and an IOU to Alice from Bob.

Bob could be very confident about shorting Foo Corp, so he could also borrow a share from Charlie's broker, at which point there would be three shares in existence: an IOU to Alice, an IOU to Charlie, and the sole share that exists. Each of these participants, if they log into their brokerage account, do see a share.

These phantom shares can't exist forever though: Bob is paying both Alice's and Charlie's brokers. Keep in mind that either Alice and Charlie can decide to sell their share, which Bob could then buy, at which point he could cover the remaining IOU, and everything would settle.

But then, what if both Alice and Charlie just bought the share and weren't planning to sell it? Bob would be in a position where he owes two shares but there are zero to buy on the market. Normally, that doesn't happen because shares are traded often enough, but in certain scenarios (short squeeze, collusion between participants) there might be issues. At that point, Bob can decide to keep on borrowing the shares until one sells, or maybe he runs out of cash to borrow shares and closes his account.

That's when things get a bit dicey. At this point, there are two "shares", one actual share and one IOU for a share. What happens is that Bob's broker is in a fail to deliver position. They're supposed to deliver a share of Foo Corp to close the IOU but there's no such share to deliver.

> Keep in mind that either Alice and Charlie can decide to sell their share

This is the thing I have been thinking about the last day. In theory if all the shares are bought, these buyers would technically be price setters and list an arbitrary high price. Could they?

If the buyers decide to hold their shares, then yes they could corner the market. I believe the broker could just elect to not pay the price and fail to deliver on the IOU. The SEC keeps a list of FTDs and publishes it twice a month [0].

If the shareholders decide to corner the market, the company could issue more shares or the SEC might step in and say "no you can't do that" to either the broker, the shareholders, or both.

I don't think the SEC looks very highly on people cornering the market, be it hedge funds colluding or individual investors colluding. The SEC is supposed to look for all investors, not just the ones that decided to corner the market in one security.

[0] https://www.sec.gov/data/foiadocsfailsdatahtm

If an index fund wants to maintain the same portfolio percentage of GME when GME’s stock price rises, wouldn’t the fund sell GME, rather than buy?

Isn't it actually neither buy nor sell? Most common indices (by AUM) are market-cap weighted. If a total market ETF contains 0.25% of it in GME, and GME doubles in value, it's GME it holds is now 0.50%, and that's how much it should hold now, according to market-cap weight. No buying or selling.

Of course there's many ETF's that aren't market-cap weighted, but the majority of funds/value is.

That’s right, I misspoke. It could possibly require other funds that were tracking, say, the top 1000 stocks by market cap to buy, not ones tracking the regular index.

Not if it's a cap-weighted index fund.

You mention it should be stated as ratio then go on to discuss it as percentage.

I've seen this argument several times and I don't understand it. Why can't they buy >100% of the shares in exactly the same way they were able to sell >100% of the shares? They buy some shares, return them to their owners, and then buy them up again?

They don't even need to buy up 100%. They only need to buy up 20%. Then they're back in the situation of being under 100% shorted, and problem no longer applies.

With such a large short interest it means that a motivated or coordinated buyer can force them to cover it at highly inflated prices, and that's their fault. But doesn't seem to be impossible just because the interest is >100%, merely very expensive (perhaps bankruptcy expensive).

Am I missing something?

I don’t think you are missing anything. This magic 100% number is somewhat of a meme going around.

> Am I missing something?

A few things. I'm not an expert, but:

> They don't even need to buy up 100%. They only need to buy up 20%. Then they're back in the situation of being under 100% shorted, and problem no longer applies.

They're still in a very tough position. Buying 20% will raise the cost of the stock further, since they're buying it at market price which would drive up the price. And raising the price makes maintaining the rest of their shorts more expensive. That's ultimately the goal - make and maintain a higher share price, which would force shorts to buy instead of continue to pay to maintain their position, which in and of itself would make the stock price grow.

This is also why /r/wsb is interested in other large but not greater than 100% short interest stocks. They might not get squeezed as much as GME but the pressure would still result in a similar situation with lesser gains.

This becomes much less possible as the short interest shrinks or the lower impact you have on the share price.

> Why can't they buy >100% of the shares in exactly the same way they were able to sell >100% of the shares

When a company issues shares, there is a finite amount. It determines the the percentage of the company someone owns. So if there is 100 shares, you own 20, it would mean you own 20%. When a company goes public, they typically give, say 10%, to the market. So those 10 shares exist only. You either stock split or issues more shares. But issuing more shares would mean you own less percentage (and who would do that to themselves without a payoff).

You can buy more than 100% if you buy a financial instrument that has its underlying value tied to the company stock price (i.e. vanilla equity derivative), but its price is determined by the stock and not the other way around.

> Then they're back in the situation of being under 100% shorted

Let's say now there are 5 hedge funds that hold GameStock. Each has 20% (because hedge funds bet big, not small). The first one to cover will lose the least. You never want to be the last one because you lose the most and liquidity would be scarce because no one is willing to sell you their shares since its going up, meaning you would be double screwed. With each player that leaves, it causes a cascading effect.

> With such a large short interest it means that a motivated or coordinated buyer can force them to cover it at highly inflated prices, and that's their fault.

Yup.

edit:

The only people that can issue more shares without dilution is the Federal Reserve. They have a count of how much money is in flow, and can print money when need. But that only works if people believe in it. It hasn't been backed by gold in a long time. Otherwise, you will be in the same situation as some European countries prior to WW2 - hyperinflation (i.e dilution).

FYI the equity derivative might solve the money pit problem in theory but not if the instruments are in separate net margin accounts — then you may still get margin calls from one counter-party even when the other is showing you a gain.

Seems like they opted for purchasing long call options and short put options; effectively, locking in their losses. Will be interesting to see how this ends. Either the price drops back down to a reasonable price, they can exit their position, or they will continue to delay closing their position. Either way, it will be awhile because this plays out.

so theres several different ways to buy calls and put.

Theres calls and covered calls. Some brokers will only let you sell the later due to the margin needed. With a covered call you have to own the stock and hold it in your portfolio. With a non covered call, if your option gets exercised you then buy the stock at market value and sell to the executor at the agreed upon price.

basically when people are saying they shorted over 100% of the stock they are saying that its a non covered PUT contract and there isn't enough stock to cover the volume of all the PUT options contracts.

BUT what we don't know is when this PUT options contracts expire, which could basically make all of this worth fairly worthless. If the shorts option contracts don't expire til next year then this really doesn't matter to them.

Generally the P&L dept will make them stagger the options contracts over dates spanning the next year or so though.

I would recommend reading up on call and put options for more information.

These shorts aren’t options. They are real (borrowed) shares - which is what makes it much harder for the short sellers to wiggle out, and every price increase makes them lose more money. (If it were puts, they’d lose the premium paid but wouldn’t care about price going up further)

You're also missing the fact that these hedge funds are bleeding interest per day. So buying 20% only will not suffice.

I take it the interest is based on the current price? If so, that would make some sense: if they're paying (say) .1% per day on a stock that is worth 100x the amount you got for shorting it, you'll gradually burn through all of the cash you got for the short.

You're still in a kind of race to see whether it will stay that high for long, or if people will eventually want to take their profits. But it definitely puts pressure on you to reduce your exposure to that, even at the inflated price.

This may help:

https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha...

Exactly. Short seller buys 100 shares, return shares to lender, lender sells back to short seller, repeat as many times as needed to close

Except that the lender is seeing the price skyrocket, so they're not selling it back.

Surely the price is soaring because that's what it takes for the seller to keep selling it back?

If I understand what you're saying is that what WSB is doing isn't anything new but something hedge funds has been doing against each other before? The novel part of it is that their "attack" is organized through a Reddit community and requires lots of people pooling their money together? If they "win", they get their money back?

The VW squeeze happened because Porsche wanted to acquire VW which means it is not going to sell shares because that would prevent the acquisition. In this case you have irrational people who decorate their broker apps with GME stocks like people decorate their rooms with wallpaper.

I think too many people are underestimating WSB users. It really shows from comments like these.

Disclaimer: I am not one.

I spent some time with that community in last days. A fascinating bunch.

There's some very well written analysis between emojis. I guess some professionals are involved, that enjoy the attention and influence they get there.

Lots of inside jokes and repeated text blocks (that smell like broadcast propaganda). VERY positive energy overall.

But according to statements from e.g. Melvin Capital they closed their position at a loss already. It's very hard to tell if this is actually the case but assuming it's true that ought to change the situation, no?

It is pretty easy to tell that Melvin was lying through their teeth when they said this... the volume for them to cover was not there, and most estimates was that it would take 6-8 days for them to actually exit their position.

the 6-8 days to cover is based on historical volume is my understanding. If volume spikes 10x in a day they cover much faster. Besides, this assumes 100% covering, why would they do that vs. just incrementally?

This was exactly my thinking, why wouldn't they utilize these days of extreme volume trading to their advantage. It's their bread and butter, no?

Exactly. Hedge funds love volatility. They aren’t mutual funds. Hedge funds typically make the most and lose the most money during these times because they can take any side of the position as they see fit. People that invest in hedge funds know this.

They are not magicians. They are on the losing side of what turned out to be a few billions dollar bet (real money. Not notional).

They usually profit from switching side quickly or making informed bets you can’t easily make - like shorting stocks.

Except, they dug too deep this time. We’re seeing another LTCM meltdown in process, albeit smaller and so far more contained.

Because while volume went up the price did also, so it’s costing them 10x to 20x to cover.

They would be fined minimally for lying about closing their position, peanuts compared to how much they would lose if they have to cover their shorts.

If a stock is shorted, someone else bought the shorted shares, creating extra supply to cover with. Percentage >100 doesn't mean they cannot cover, in theory.

I don’t see how that term is applicable to a grassroots phenomenon when it purports to describe an explicit corporate strategy.

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