Naked shorting: The curious incident of the shares that didn't exist (2005)
euromoney.com
euromoney.com
> Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.
As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010...
> In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.
This is called a reset transaction, and it is not permitted.
Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver.
https://www.sec.gov/about/offices/ocie/options-trading-risk-...
(Start at the bottom of Page 7)
Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots of buy interest and less sell interest, they may need to sell more shares than they normally hold. Market makers still need to have the shares in time for settlement, which may require borrowing if they have net sales more than holdings in a given day, but they don't need to locate shares to borrow before selling. Market makers are given an exception, because liquidity is valued, and they need to be registered and have specific capital requirements etc.
TL;DR, naked short selling isn't a thing anymore. There's been no reports of Gamestop shorts being naked shorts, and no reports of shares failing to deliver on time. Naked shorting isn't required for short interest to be over 100%.
The very page you describe specifically states that you can't infer when failures to deliver occurred because the data is reported in aggregate with no age statistics. [1]
Moreover failures to deliver can occur on both the long and short side, and do not necessarily represent that a naked short sale occurred. [2] And when they are associated with a naked short sale, it may still be legitimate. Market makers are legally allowed to engage in naked short sales to facilitate liquidity, and if they can't fulfill the borrow in time (which would itself happen for legitimate reasons), that failure to deliver would also be reported.
Finally - reporting an increase in apparent naked sales to the SEC by gesturing towards data on the SEC website doesn't make sense. The SEC is definitionally aware of it. There may not be an active investigation, but these kinds of datapulls are pretty manual and staffed by people familiar with the data.
> since 1992, there had been six investigations of Madoff by the SEC, which were botched either through incompetent staff work or by neglecting allegations of financial experts and whistle-blowers
If what’s going on is naked short selling by those who are not market makers then it’s illegal and those who are doing it need to be prosecuted.
If what’s going on is due to a lack of liquidity then it suggest that price manipulation could be occurring in the form of excessive coordinated short selling.
Finally - why assume a government agency is competent and has the means and resources required to act in a timely manner? The issue was reported though. [0]
[0] https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...
That's not the assumption.
The assumption is that facts manually assembled and reported by a government agency are already within the knowledge of that agency, so even if they don't have “the means and resources required to act in a timely manner”, you aren't helping by reporting those facts back to them.
(This may also be an unwarranted assumption , but it's a different assumption than you describe. I've definitely in the past—on behalf of a different government agency—frequently been involved in reporting facts assembled by one office of a government agency to the parties responsible for acting on that information in another office of the same agency who hadn't been informed of it.)
Now there are obvious reasons as to why this isn't a smart thing to do as recent events with GME show but it's not necessarily illegal (as far as I know). If this is actually not true or it's illegal somebody please correct me.
It's entirely possible for me to borrow a share from you, (short) sell it back to you, and then for us to repeat that process an unlimited number of times, thereby shorting an unlimited amount of stock. This would be stupid since I'd owe you more stock than exists and you could set any price you wanted for them.
Individuals do not loan stock for shorting, generally. But they do sometimes have margin accounts (for unrelated reasons), and this allows the broker to loan their shares out without their knowledge. In this case, they retain a fraction or none of their voting rights, I presume?
> In this case, they retain a fraction or none of their voting rights, I presume?
If you have a margin account and want to vote with your shares, you need to let your broker know prior to the vote, so they can be sure and not have your shares loaned out when they're figuring out everyone's voting shares.
Some time prior to 2010, I heard some heads rolled at my firm because such a request was screwed up for a major client, and they had fewer votes than expected for some important vote.
Or must you manually opt in, to allow it to be loaned out for shorting?
For example shareholders don't have any control at FB, since Mark controls 51% of the voting power.
Tech/growth doesn't pay dividends as dividends are a signal your business is done growing. Dividend companies would rather return capital to investors than place more bets and keep growing.
Tech and growth stocks have minted many millionaires. And sometimes overnight.
This is also why growth companies sometimes don't reach profitability. They're spending their revenue eating the rest of the market and gaining monopoly.
> no control?
People that invested in Facebook made lots of money. They were probably fine with the arrangement. If they stop being fine with it, the stock price will decline.
"but unlike common shares, they do not confer voting rights to shareholders. As a result, these shares tend to trade at a discount to Class-A shares. "
https://www.investopedia.com/ask/answers/052615/whats-differ...
That's not the hypothetical that was posed.
Let's chalk it up to a miscommunication.
If you have 100% of them, you have all voting rights.
Plenty of takeovers have been conducted on the open market, even without consent of the board, also known as a hostile takeover.
As in, you agree than a couple insiders could control a large majority of a company, and that this percentages of the company would not be on the open market, and therefore even if you buy all of the shares that are available on the open market (and the definition that I am using would disclude these shares owned by these insiders), you would not control the company?
Sure, it's possible that at any given time people aren't offering to sell a majority of the voting power of stock, or (theoretically, at least) any voting stock at all (it's even possible that the only class of stock trading on the market is nonvoting; SNAP I think does that.)
I was taking issue with the particular claim, made twice in the direct chain of ancestry of this comment, that a company could simply hold the majority of it's voting stock itself, so that holding 100% of the shares not owned by the company would not give you control since the company itself (presumably, it's management) would exercise most of the voting rights. It doesn't work that way.
Besides the money, they also wanted to test the waters before going in with a larger percentage and I don't know if the market could have handled a new 1.7 Trillion dollar company joining all at once.
No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever.
What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.
After all liabilities are deducted. Which usually means nothing.
Firm value = equity ("market cap") + debt + various, see
Except, for example, if there were different share classes with voting rights or if the "float" is small [0].
[0] https://www.investopedia.com/articles/basics/03/030703.asp
Global Links was trading around 10c a share with ~350 million shares, for a market cap of around $35 million. They implemented a 350:1 reverse share split, which in theory should have resulted in them having a stock price of $35, 1.1 million shares, and a market cap of around $35 million.
For some reason, it took longer for this to shake out than expected; in the immediate aftermath it was reported that enormous quantities of Global Links stock was still trading, and the share price had actually declined to a 8 cents.
Presumably, some systems were reporting "old" numbers (pre reverse split) and some "new" numbers (post reverse split), and I'm sure an enormous amount of confusion resulted. And it was at this point Simpson reckons he bought 1.2 million shares for a bit over $5,000.
That's less than 1/3 of a cent per share, which seems wildly off (the share price was 10 cents pre reverse split, and would have been expected to be $35 afterwards), but given that it seems a lot of computer systems were not handling this correctly, who knows what he was told by his broker?
So...obviously Simpson did not purchase 110% of a company, and he definitely didn't do so for 0.01% of its market cap. I rather assume his broker had told him that he had done so, but that seems like fodder for a lawsuit between him and his broker over their buggy systems, but it doesn't tell us much else. It's possible he might have ended up owning 3.6k shares (about 1/3 of a percent of the company), but even that seems doubtful if it actually only cost him $5k.
Anyhow:
> I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.
I think the better reading of that is some guy found a bug in a broker's system that caused it to tell him he'd done that, but it would have been obvious to all concerned that whether he'd ended up with 0 shares, ~140 shares, or ~3.5k shares, he definitely didn't have 1.2m shares, since they never even existed.
Global Links intends to do a reverse split, replacing 350 old shares (worth 10¢ each) with one new share (worth about $35). For the sake of argument, let's say they mixed up the ratio in their split filing. Instead of doing a reverse split, they do a forward split, replacing each share of old stock (10¢) with 350 shares of new stock (about one third of a cent, each). The shares trade at a somewhat high volume, because each share is worth a fraction of a cent.
Simpson notices that, after a 350:1 reverse split, Global Links ought to have about 1M shares outstanding.¹ He also notices that the current trading price is a fraction of a cent. Small enough to make this a worthwhile experiment. He acquires about 1.2M shares without moving the price too much. He also doesn't question how this was possible to happen within a day or two.
After the split, Global Links has some 100B shares outstanding. Simpson's position of 1.2M is less than one percent of that, so the shares continue trading as before.
¹ He might be combining multiple sources of information here. Perhaps his brokerage doesn't show reference data, so he combines the price he sees in his brokerage's app with reference data from Yahoo!finance or something.
I worked on a computer system to handle all this for a while. It was front office so as well as buy/sell transactions we had to process lend/return and borrow/return actions to actually understand the company position.
Within each of those are lend request messages with approval/declines etc.
It is possible for short sellers to get caught as you describe (someone owns all the stock and they have bought 1 additional share and now wont sell). But it's very rare. It requires a few things to all happen at the same time:
* 1 person has to own all the stock. This in itself is very unusual. In many jurisdictions there are a whole bunch of extra requirements once you own more than X%.
* Someone has to want to short the company. If it's small enough to be owned entirely by 1 person, it's probably too small to attract short sellers or to be lent. Unless someone BOTH wants to short this small stock, AND happens to know the broker in question has some, no one knows who to ask to borrow it.
* They have to short it over 100%. This is unlikely, since a small company that's been bought entirely by 1 person, who is left to buy more? The market is one sided as apparently the only buyer is the guy holding 100% already (if anyone else bought those shares, they could sell them back to the shorter).
It's really really rare.
Technically the short seller defaults when they cannot source the stock, he has to absorb whatever losses he's caused the broker.
It seems like the holder wouldn't care if they were just selling it, but if you were transferring the stock out to another brokerage, they just give you the alleged ask price of the shares (which actually doesn't exist because the shares are illiquid) because they made a mistake and lost your shares?
I also find this confusing for voting rights: if my brokerage is loaning out my shares without my knowledge, then I don't actually have the voting rights that I think I do, since the share is actually held by someone else?
Pretty much.
Devils advocate: if you know you own all the stock, and someone offers to sell you stock, you know the deal cannot actually be completed. So at best you're owed your money back for the "extra" stock you "bought".
If you own 101% you should know you cannot actually transfer or vote that stock extra 1%, it's simply not possible. All 101% means is if the stock goes up, you get 101% of the gains.
Fyi, times when votes are happening are interesting for shorted stock because a not insignificant percentage of the stock does get recalled so owners can vote it. So short sellers have to reduce their positions and then increase them again. It is one way to try and estimate short-seller impact in the stock...
Isn't this also a loophole that can be used to "steal" stock from someone who otherwise doesn't want to sell: their share is loaned by their broker to B who sells it to you, and then you just refuse to sell it back to be returned, and some random middle man is on the hook and you've managed to purchase shares that weren't for sale?
You have to be a pretty big organisation and post a lot of collateral to borrow and sell stock. It's also assumed you'll sell it on exchange, if you do so you don't know the buyer though I guess you could arrange it? So a really sneaky player willing to sacrifice a lot of collateral could probably do it.
I think the main safety catch here is that if you hold a significant percentage of a company and you want those voting rights, talk to your broker to make sure its not lent without your knowledge...
I wonder if this has ever happened?
Edit:
I spent some time googling and found this:
https://www.quora.com/What-happens-to-a-short-seller-who-can...
It's quora but it seems pretty good. It does seem that if it's lent and not returned you get cash or wait for some to become available. Sucks if you wanted to vote the shares...
I understand shorts are said to be unbounded risk, but surely there's some escape hatch: if the top hedge fund shorted 30% of some penny stock presumably a competitor that buys out 71% of shares doesn't get to take over the whole hedge fund by only selling that last share back at a price of 100% of the funds value: instead the fund will default on their recall responsibility and pay out some reasonable amount (and some true end stock holder just surprise loses their share?)
If not then he either doesn't own all the stock or there is some fraud here. As it is, it's the simplest explanation and one he hasn't ruled out. So he needs to check there first. It's possible they lent it by mistake or he agreed as part of the 10,000 page T&C he signed when he joined...
"Global Links was caught off guard by the events that transpired in February 2005 when it implemented a one-for-350 reverse split of its stock, the result of which would reduce its float from 350 million shares to 1.1 million. ... Some have said it is all a simple matter of broker error. Accounts showing 350,000 old shares of Global Links should have been adjusted by the broker to show 350 [sic, should be 1000?] of the new shares, but some have said that didn't happen"
https://www.forbes.com/2006/08/25/naked-shorts-global-links-...
A stock can have short interest greater than 100% without any naked shorting.
How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale. Wikipedia has a good primer on how this works: https://en.wikipedia.org/wiki/Short_(finance)
This has created a lot of confusion on WallstreetBets, where many participants have come to believe that Gamestop's short interest of 113% means that there are 13% more shares shorted than long positions to cover. It's not true, though, because the long interest is always greater than the short interest.
Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy.
In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long.
The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.
This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea.
Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.
That there's a great deal of betting happening on the outcome of the stock market shouldn't surprise anyone (and yet it does!). It is, after all, the biggest game on the planet.
Why do we even allow people to sell borrowed things?
Unlike cars, one share in a company is as good as another, and the whole reason you borrow a share is so that you can sell it. It's kind of like how if you borrow money, you're allowed to spend it instead of just keeping it in a pile under your bed.
A owns a widget and lends it widget to B; B sells the widget to C; C lends a widget to B; C buys another widget from B.
A has 1 IOU from B and no widgets.
B has no widgets and owes one to A and 1 to C.
C has one IOU and one widget.
There you have 2 IOUs and only one widget. To settle debts, B will have to buy a widget from C, return it to him, and then buy it again and return it to A. The widget isn't "tainted" by being at one point borrowed, anybody buying it can lend it out. Doing so can create more IOUs than there are widgets.
Imagine getting in a circle with all of your friends, you have a dollar and the person on your right borrows it from you, then the person on their right borrows from them until you get around the circle and you borrow the dollar from the person on your left. There was only ever one dollar but now there are as many IOUs as people in the circle. That's of course a silly thing to happen, but if you rearrange it to make it messier the result is the same, more IOUs than there are things to be borrowed.
Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?
Naked shorting is illegal. To short the shares the seller only has to perform a “locate” first. That involves contacting someone that has the shares and is willing to lend them. Skipping the locate step is illegal. They just don’t have to actually borrow them until delivery.
Additionally, if the locate fails to materialize then it’s the sellers responsibility to borrow them from someone else before delivery. If not, that leads to a fail to deliver which locks up further transactions for the seller until it’s resolved.
Unless you're a market maker and thus exempt from the regulation, because your market making function requires buying and selling lots and lots of unsettled shares in order to provide liquidity.
https://www.sec.gov/investor/pubs/regsho.htm#_ftn4
You can also look through FINRA's regulations here:
https://www.finra.org/rules-guidance/rulebooks
The wikipedia article on Regulation SHO is also fairly relevant:
https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...
It's pretty long and tedious and not really targeted to your question though. I'll try to remember to post a better resource here when I find one.
There could be some archaic processes that are not electronic but are there inherent good reasons why they cannot be converted?
(This is also why GME trading was halted by some brokers--assymetrical trades and increased volatility meant there was greater risk for trades in those stocks for those brokers, so the clearinghouse demanded more collateral from the broker. Broker doesn't have that collateral right away, they can't make the trade.)
The system has become so intertwined that when someone breaks a promise, it’s too disruptive to actually hold them to account so we just paper over it to keep the wheels of commerce rolling.
And interestingly enough, if this transaction occurs in good faith and for unforeseen reasons there is no borrow liquidity at the agreed upon time, a fail to deliver will occur despite the short sale not being naked.
So that kind of points towards a possibility of naked shorts, if I understand correctly (although by itself it doesn't prove it's happening).
SETTLEMENT DATE|CUSIP|SYMBOL|QUANTITY(FAILS)|DESCRIPTION|PRICE
20201215|36467W109|GME|170655|GAMESTOP CORP (HLDG CO) CL A|12.72
$ cat cnsfails202012[ab].txt | csvgrep -d '|' -c SYMBOL -r '^GME$' | csvcut -c 'QUANTITY (FAILS)' | sed 1d | paste -sd+ | bc -l
14276093
> The figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as existing fails
> Fails to deliver on a given day are a cumulative number of all fails outstanding until that day, plus new fails that occur that day, less fails that settle that day.
So the last day we have data for is December 31, 2020:
SETTLEMENT DATE,CUSIP,SYMBOL,QUANTITY (FAILS),DESCRIPTION,PRICE
20201231,36467W109,GME,228358,GAMESTOP CORP (HLDG CO) CL A,19.26
I've written cash-secured puts and covered calls a decent amount as an individual investor, the worst thing that happens is you end up buying something for more than it's worth or selling something for less than it's worth. However, it rarely goes wrong the first time and you've made premium from other options many times over on the same security. If you look up the Wheel or Triple Income options strategy that goes into the specifics of it. It works pretty well for high-volume, stable stocks that you want to own anyway.
Calls are commonly either covered by shares you own or in a spread where you buy and sell the same ticker at different prices or dates.
EDIT: Specifically, I think the idea that failures to deliver create counterfeit shares is wrong. I'd love to hear from someone with intimate operational knowledge of this process. FYI, SEC SHO FAQ:
* data breaches are very easily hidden: literally anyone can walk out with a usb drive loaded with information, or download the data off an unsecured/unlogged server without a trace
* it's hard to prove: I mean, companies aren't exactly offering their logs up for public inspection
* the system is built for allowing shadiness: not sure how to quantify this one but there's definitely a problem of attribution when it comes to who did it, especially when there's multiple data brokers involved.
You read hearsay saying that company X has suffered a data breach. The company denies this. Do you give them the benefit of the doubt, or do you assume they're guilty?
Is it though? Regulation SHO seems to make it quite hard for brokers to hide it these days. What makes you say it's easily hidden?
Pardon the question - thing is, i don't know if you have expertise in this, or if you're just another random internet guy expressing his biases.
I guess that makes sense that a person can borrow a stock, sell it, borrow it again from the second buyer, sell it again. The number of stocks floating around stay the same, however, the number of iou's increases. Likewise, a person can buy the one share, return it, then buy it again, and return it again to settle the second of the iou's.
Interesting that nobody is really explaining the mechanics of how this works. Makes me wonder if a lot of retail investors are about to get hurt.
This is another case of the more popular a thing is, the less reliable the talk about it seems to be. News outlets could very much be explaining well what is going on, but they aren't. Bits and pieces of the "real" story are coming out, and lots and lots and lots of nonsense.
Unless volume is zero, there is no “inability to purchase stocks.” Just inability at a desired price. If a market maker fails to deliver, they get hit with fines and fees from clearing infrastructure, exchanges and, eventually, the SEC.
Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times.
It's also worth noting that there's no real theoretical basis for why naked short selling would be harmful, no real empirical evidence showing it is harmful, no general laws against it, and the structure of the market allows and expects it to take place in some specific cases. If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.
Why this is often harmful and dangerous is that the financial viability of businesses and individuals are often backing these bets. A person or company expecting financing to be predictable and stable may suddenly find it not so because their lender is desperate to cover their gambling losses.
Except for a handful of folks, everybody loses money on them. The ones that do make money are rigging the game (à la casinos) or are just lucky. Some of the lucky ones have been lucky for decades, some even went bankrupt after being lucky for so long.
Imagine I run a chain of hotels in beach resorts. When tourism is up, I make a ton of money; when tourism is down, I lose a ton of money. I'd like to flatten this so I can make a steadier, safer stream of money, budget more sensibly, and not be at risk of going under if 2-3 bad years come in a row.
What can I do? Well, maybe I look around and notice that a big spike in jet fuel prices drives ticket prices up, and when ticket prices go up people stay home and I lose money, whereas cheap jet fuel means high occupancy rates. So I might hedge by buying put options (and/or selling call options) on jet fuel. When fuel prices go up, I can offset my low revenues with cash from selling my now-valuable put options (or the cash I received earlier from selling now worthless call options). And when fuel prices go down, I can use some portion of my higher revenues to pay for the cost of the worthless puts I purchased (or to settle the now valuable calls I sold).
This sort of thing is common and healthy, not just among end users, but even more so among intermediaries working to remove and reduce the amount of risk inherent in the system.
Why are they not banned? Why would they be banned?
> Except for a handful of folks, everybody loses money on them.
That's not really how this works. Or indeed, could work.
It can be much more capital efficient.
That seems capital efficient to me, but it's apparently a quaint relic of the past now that eternal 0% interest rates are the norm.
I'm reminded of the scene from It's a Wonderful Life where George Bailey explains to all his account holders why they can't all withdraw their money at once, because it's being put to productive use by their fellow townspeople: https://youtu.be/iPkJH6BT7dM?t=49
However, they have little to no impetus to provide a reasonable interest rate on savings accounts; they'd much rather pay the absolute possible minimum the market (and regulation) will allow, and pocket the rest as profit.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Simply put a bank with zero deposits could still lend money, the only constraints are risk and regulation.
Simply doing something with the money is not necessarily better than doing nothing with it. None of the above is productive use -- it's simply betting. Jet fuel producers don't care about your commodity-indexed fund call option.
The original post described options as a way to make your stream of money both "safer" and "steadier". I'm struggling to understand how introducing options can be safer and steadier than keeping money in a bank and creating an intelligent budget.
I think sports betting in general is on the rise, at least in Europe, and I can't imagine it having positive financial or psychological effects for the average person.
It's a predatory business.
Market makers are allowed and expected to run naked shorts in order to ensure liquidity. We want a system where you can just buy or sell an item "into the market", and then everything will get sorted out eventually. We optimise for the case where shares can be found because it's overwhelmingly common.
Stock borrowing is routine and transparent. People often have no idea if their stock has been lent out or if they own a borrowed stock; the reason for this is because the system has been designed so it doesn't matter. Shorting is common and accepted.
The volume of transactions is enormous, and the system began to freeze up under the weight of its own paperwork in the 60s and 70s. To work around this, a policy of stock immobilization was implemented to ensure that stocks don't need to physically change hands. As a result, almost all stocks in the US are actually owned by a small, obscure partnership called Cede & Co. As the excellent writer Matt Levine wrote a while back:
> Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them. This system sounds convoluted but actually makes it easy to keep track of things: If I sell stock to you, I don't have to courier over a paper share certificate, or call up the company and have it change its shareholder register. Our brokers just change some electronic entries at their DTC accounts and everything is cool.
Dematerialization has been extremely helpful, but at scale, it moves us even further away from a system that deals with concrete items. Hence, eg, Levine's hilarious story "Banks Forgot Who Was Supposed to Own Dell Shares", from which my earlier excert comes from: https://www.bloomberg.com/opinion/articles/2015-07-14/banks-...
Or for another even more hilarious story (also by Levine), "Dole Food Had Too Many Shares": https://www.bloomberg.com/opinion/articles/2017-02-17/dole-f...
And so forth, and so on. The system, at every level, is not one where it makes any real sense to say "the company has issued five hundred thousand shares, I own twenty of them, I keep them in a drawer in my office, look, here are the serial numbers". It's more probabilistic than that, very much by design.
Current generation cryptocurrency blockchains are more similar to the post-trade settlement system, where everyone figures out who owns what after-the-fact.
Maybe smart contracts will change that, but performance will need to get a lot faster and I'm not sure how feasible it is to implement a full exchange on top of (for example) Ethereum. Would love to see it though!
I'm pretty sure that's how the stock market is actually intended to work. This should be obvious if you consider things like dividends. There needs to be a fixed number of shares, each with a clear owner for that to work.
The reason it's a bit more complicated in practice, is because historically the technology wasn't there to do realtime gross settlement. So to limit the number of transactions that the central database had to handle, layers of delayed net settlement were set up instead.
This isn't really true. Let's say a company has 100 shares and they decide to issue a $1 dividend. If there is no shorting, the company just pays out $100 and everything is done.
But let's say there is shorting. Someone loans out 10 shares to a short who then sells them to someone else. All of a sudden there are 110 shares out there. So when the company pays out the $100 it's $10 short of what is required for each stockholder to get the dividend.
So where does the required $10 come from? From the party shorting the stock of course! Anyone short a stock is required to pay out, in cash, any dividends issues while they hold a short position. So it all works out.
No there isn't - there are 100 shares total at all times, and every time those 10 shares you mention change hands, the cap table is updated (or should be) to reflect this. First they are owned by the original owner. Then they are owned by the shorter (and a contract is in place to return the same amount of shares and any dividends to the original owner). Then they are owned by the person the shorter sells to. At no point are shares duplicated.
Huh? They most definitely do. That's actually one of the simplest non-objections to naked shorting; in the system we have, the short seller must pay the dividend to the person who loaned them the stock. In a naked short, the short seller would pay the dividend to the person who bought the stock.
Voting rights don't transfer so cleanly; in the current system, a stock lender can't vote the loaned shares. The most natural system of naked shorting would prevent the purchaser from voting a share that was sold short, which would produce a difference between shares sold short and other shares.
The "self-replenishing pool" missing image is available here: https://web.archive.org/web/20201104113520im_/https://cdn.eu...
It makes me think... okay, the SEC closed that loophole, but the fact that it existed for years show how abstract and weird and unmoored the stock market is, financial games built on as much clouds as ground.
/wallstreetbets are, in their own insane way, doing research into the most extreme tactics that short sellers have employed in the past.. expecting the entire arsenal to be employed tomorrow when trading begins.
That is wrong assumption. More than 100% of a company’s shares can be shorted without naked short.
Matt Levine explains. https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...
>There is no special limit on shorting at 100% of shares outstanding! There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.
Yes you can have > 100% short interest without naked shorts.
But are the circumstances that lead to such a situation (regardless of nudity) economically useful, or is it just allowing parasitism to exist in our system without good reason?
Futures are derivatives and seem obviously useful.
And I wouldn't say futures are "obviously useful". They are "useful" in the sense that if you bet on the future and bet correctly, you win, but does the overall economy win? Or is it just a layer that creates more winners and losers without those winners actually providing more value than they otherwise would've? Futures are effectively a zero sum game, and I don't think we should in general encourage those. Futures and shorts are basically just gambling. Would you say gambling (when applied to sports / etc) is economically useful?
What we should be encouraging is positive sum games / win-wins.
I’d be shocked if the median American can even define short selling let alone naked short selling?
Is that not an apter description?
Although, I think you'd be hard pressed to define the gray area of (possibly infinite) fractional share ownership and naked short selling.
In normal short selling–lending a stock, then selling it–there is always chain back to real stock. Someone is always holding the stock. If 100% of the shares are short, then there are 200% of the shares owned, but only half of them can be sold (you can't reload or sell the stock you have loaned)
This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).
2. Cough, Tether audits, cough.
I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else).
In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited.
This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers.
Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.
Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression.
As with all blockchain unless the state is 100% totally and utterly encapsulated within the blockchain, then it’s garbage in, garbage immutably recorded. Which is why the only thing you can do with crypto is currency and kitties.
If you sold short 140% of float and bought calls to cover, then we wouldn’t be having this conversation. Play stupid games, win stupid prizes.
Similarly if I bought a bunch of stuff on margin and it went under overnight, RIP my account. You can lose money in both directions.
“140% of float” doesn’t really mean more shares were sold than exist. There are after all only 100%. It means the same shares were sold more than once by the same or different people, and buying them back cancels the debt obligation.
This is the major weakness of proposals to put everything on the blockchain.
In real-world scenarios, accidents happen. Records must be corrected.
Voting is a great example. If we moved voting to the blockchain, it wouldn't automatically solve fraudulent voting problems. It would just record fraudulent votes on the blockchain. If your grandma accidentally loses her private voting keys to hackers, do we just roll over and let the hackers vote as your grandma? Obviously not.
Any future blockchain solutions to anything government-related will certainly have corrective measures and overrides overlaid on top. It's not like we're going to sit back and watch people lose their house because hackers stole the private keys to their property deed, or forbid someone from selling their car because they can't remember the password to their title wallet.
It's not obvious to me why not. It's a trade-off. You put the responsibility on the user to keep their keys but you save a lot by not spending anything on solving fake or real issues like this.
In this case if you want assurances like this you can trust a third party that handles that stuff for you.
> It's a trade-off. You put the responsibility on the user to keep their keys.
Just like for driving or flying or almost any important occupation, we don't only "put responsibility on the user". We have laws against abuse.
As for gold, gold is a commodity, and one that has industrial utility. You can use it for things, so of course, it’s not particularly controlled.
In this case, someone losing their voting ability because of the system on a regular basis is not acceptable. That's the obvious why not. We want to make a system to count the people's votes. If it bars a voter from casting their vote, it's a failure.
Debasement of the currency, however, has been…high.
So you didn't "lose" that dollar from a hundred years ago, it's just worth about a penny now. Where'd the other $0.99 go?
The whole point of inflation is to encourage investment as money is only worth something as it flows through the economy.
You’re not supposed to save money under the mattress you’re supposed to save value by purchasing assets. A hundred years ago buying roughly speaking any asset would have preserved your entire wealth or created tons of new wealth.
Wages have on average kept pace with inflation.
You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
This is ECON101.
The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place.
If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ? Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
>>>>>>You’re not supposed to save money under the mattress, s you’re supposed to save value by purchasing assets.
This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
>>>>Wages have on average kept pace with inflation.
I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
https://en.wikipedia.org/wiki/File:Number_in_Poverty_and_Pov...
>>>>>>>You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
The gold window was closed because gold was garbage money. A money supply you can’t adjust cannot respond to shocks and it can’t respond to changes in the economy or society. The crash in 2008 and again now would have been much much much worse without an ability to control supply. Inflation is defined in terms of supply and velocity. Velocity plummeted so supply was raised to offset and lo and behold the fed nailed its 2% inflation target in 2020 in spite of epic global chaos. Gold would have ruined us.
>>> wages have kept pace with inflation.
Wages are up 10% since 1963 on an inflation adjusted basis (https://www.google.com/amp/s/www.pewresearch.org/fact-tank/2...). Google is your friend.
Yes wealth inequality is a problem, that’s a fiscal and social issue not a monetary policy issue. Tax the rich.
>>>> slush fund
Nobody’s stealing anything. The inflation target is public and goaled on. Inflation has a purpose. You don’t like that purpose maybe because you don’t understand it maybe because you do, but it’s not theft. There is every chance we’d all be worse off under a 0% inflation environment because it would drastically reduce the liquidity that underlies the entire global economy.
Think about it: if poor people have no money and real salary has kept pace with inflation what wealth is inflation reducing? And if we use a 0-inflation or negative inflation currency, what’s to say wages wouldn’t stay flat or go down.
Again if you want to help the poor and narrow the gap, tax the rich, this inflation thing is just the game, and railing against it is tilting at the wrong windmills.
The gold windows was closed because the French decided to redeem their dollars for gold, and due to the rampant debasement of dollars, there wasn't enough gold available to do so.
Source: history.
And they're down 5% since 1970. Claiming that chart shows growth is a gross misreading of that source. The slope of the trendline since 1963 is practically zero.
Believing in freedom of choice has never stopped anyone from believing that there are bad choices.
Hyperinflation is what happens when the economy collapses and you are deep in debt both at the same time. When people talk about inflation as a policy goal they usually talk about a moderate amount like 2% or maybe 4% if you have an appetite for risk but also greater potential gains. Hyperinflation is never a policy goal, it's what happens when things have gone wrong entirely.
>If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ? Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
Too much inflation is a bad thing. It means there are not enough workers/there is not enough production capacity to meet all needs. Interest rates reduce inflation and thus demand for workers by making sure only the most productive investments stay on the market. A dead company can just borrow money to hire people and waste their time if interest rates are negative. If interest rates are low like 3% then your company has to make a moderate profit. They have to put people to good use. If interest rates are too high it means only the most productive companies can even make it in the market. Some industries like agriculture have low yields (as in dividends) that cannot afford high interest rates but they are extremely important for our society. We must hit a balance between a non productive and too productive economy and interest rates can contribute to this.
>This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
The reality is that if someone has 20 years of salary in their bank account and another person is unemployed for 20 years the value of your money is gone because that person that owed work for your money didn't work during that time. Food rots, people age. Your money exists purely as a representation of labor and its products and thus even money has to rot.
If your money doesn't rot but there are less apples in the future then you can still buy the same number of apples (or more) and thus your share of apples grows even though you have done nothing to deserve them. People save with precious metals, real estate and stocks (technically just the land) because they do not deteriorate. Well, that's not entirely true. If you save in gold you are betting that an economy will exist in the future that can give you apples in exchange for gold. If you save in land you are betting that people will gather around you and live and work around your plot of land. If you save in stocks you are betting that the company will not go bankrupt in the future.
How do you make sure that people will work both work today and tomorrow? You just pay them more tomorrow. That's why inflation is a policy goal.
>I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
Inflation is generally driven by a shortage of labor and a shortage of labor drives salaries. There are some exceptions. You can build an economy that is unable to employ everyone but that's not an argument against inflation. It's an argument against specific policies. The government can just ban work and everyone will agree that this is stupid. There are less nefarious policies that can have the same harmful but lesser effect.
Inflation is down because there is a complete lack of domestic demand for a certain segment of the population. College educated people tend to do far better than those with just a high school diploma. There are two reasons for this. Globalization makes unskilled labor unnecessary domestically. That means less work where you can sell your body but the work where you use your brain hasn't moved. That portion is actually growing. The second problem is that employers have absolved themselves of the responsibility to train their workers. That means you are now responsible for your own education. This means people must go to college but it also means there are some unfortunate souls that did not acquire the right skills for the current labor market.
>This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
That's not savings. That's rotting paper. It's not even stealing because you can get interest on your savings if inflation is high.
- CPI(-U) is not a suitable measurement of inflation anymore since it discarded fixed basket goods somewhere in the 90s and that
- inflation measures with "old-school" fixed baskets report inflation rate in the range of 6-10%/year
- production of goods became much more efficient but instead of being reflected in cheaper prices it increased shareholder profits and wealth inequalities?
Re (2) I’d be very interested in learning more about the delta between CPI and these baskets. Do you happen to have a reference? I’m always down to learn more.
Re (3) I agree that inequality has gotten worse but I see that as a social and fiscal policy matter and not a monetary policy matter. If we’d been using gold, the same trend would have manifest. Poor people don’t hold onto money anyways they’re hand to mouth. And any extra they happen to hold onto could have been invested anyways. Frankly minimum wage over the period hasn’t been indexed to inflation either!
I’m a huge advocate of decreasing the gap between the rich and poor, I have more than I need to be sure, and the best way to do that is taxation.
This gap between rich and poor really started widening after the Reagan era tax cuts and trickle down economics. If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%. Estate tax the same. If you reduce that to 37%, rich people get richer because they keep more and more of their wealth. A practically 0% estate tax ensures the next generation starts on a monopoly board where there’s a hotel on every square. To me that’s a much clearer correlation than the spooky action at a distance of this 2% (a figure you admittedly contested) inflation rate. Do the ultra wealthy really hold cash? Do the poor? Does anyone?
If we had inflation at 10% the economy would be smaller now than it was in 2010. It's under 2% and we can't get it up no matter how hard we try (not that hard so far.)
> If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%.
Note that the effective rate was nothing like this because there were also lots of deductions.
Apparently that was changed in the 90s. An example I read (of which I am not sure if it is entirely accurate) was: "if steaks become too expensive, its weight in the basket will be reduced because people are expected to buy more chicken instead. this results in lower inflation estimates".
If true, why do you feel a fixed basket should not be used to determine inflation even though it is probably what most people would expect in such a measure?
For instance, industrial agriculture, the farm bill subsidizing corn to below the cost of production starting in 1933, and many other things may change the relative cost of beef over time as compared to, for instance, pork and chicken. That's not inflation, and as such it doesn't really make sense to define inflation in terms of these factors which affect only a specific industry.
Live in the pod! It's still shelter.
Fuck the computer peripheral! It's still sex.
Dystopian. At least the official inflation metric is low.
Just that factors outside inflation influence the pricing of certain commodities. Nobody's guaranteed a specific commodity forever, and the definition of luxury, and commodity expectations, changes over time.
For instance, pig feet are having a moment (or at least were pre-pandemic). They used to be discarded as waste, but now you'll find them in haute cuisine. [1] Sweetbreads too!
Tastes change, expectations change, cost structures change. The world isn't static, and nor should our metric be.
[0] https://recipes.timesofindia.com/us/articles/food-facts/thes...
[1] https://www.jancisrobinson.com/articles/pierres-worldfamous-...
I don't think this applies to the general population's understanding of inflation. The layman's interpretation would be "how much more expensive would it be today if I bought the exact same things 1/2/5/10 years ago". This is actually how inflation was measured up until the 90s.
"Removing" (i.e. reducing the weight) of a good when it becomes more expensive is contradictory to measuring the price increase of an average basket of goods. Especially if you do it on short timeframes. CPI-U is reweighed every 2 years and C-CPI-U is reweighed every month. How are you expected to measure inflation* beyond those timeframes? Housing too expensive? Rent. Cars too expensive? Public transport. Steaks too expensive? Eat chicken. Chicken too expensive? Ramen. Ramen too expensive? Food stamps.
The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same. They can't protect themselves via buying stocks or other assets because they need their money to survive months by month. All the while, the riches are getting richer by pocketing efficiency gains and bailouts.
People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome. So the inflation measure was changed to a dynamic basket in which expensive items are reduced, cheaper items are increased and magically inflation* is around or even below 2%. Nothing to see here, nothing to worry about - we always had 2% and 2% is fine. Except the poor are getting poorer and more desperate and susceptible to fascism.
So the idea people have about "inflation" as the increase of costs of a fixed average basket of goods is as obsolete as the idea of "money" being backed by gold.
The layman's interpretation of a lot of things isn't right or useful - just ask antivaxxers. As our standards for what luxury is change, what we're willing to pay for them (in the supply and demand sense) changes.
Things that used to be "poor-mans food" like lobster and caviar are now high-end food. Monkfish, oysters, foie gras. Even sushi was street food. Skirt steak was crap meat! Now they're incredibly expensive. Is that inflation? Of course not, that's a change in tastes.
Similarly, spices like clove, nutmeg, cinnamon and pepper used to be hugely expensive but are now dirt cheap. Is that deflation? Of course not, that's a change in productivity and availability.
The fact that the basket wasn't adjusted seems like a huge oversight to me.
> The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same.
This is a completely unfounded leap. You have not presented any evidence for a cause-effect relationship, just simply asserted it. Correlation is not causation.
This is a social policy issue and not a monetary policy issue. Even if we pretend for a second that the situation was exacerbated by monetary policy, it doesn't matter - it's still a social policy issue to resolve.
> People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome.
Sure only if you ignore that that's not how inflation is calculated and for a good reason.
Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking. The banks' ability to create money from thin air is almost unrestrained.
Let’s stick to fact.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Not fraud though, because "When the president does it, that means it is not illegal"
I can pay occasionally my lunch by crediting my assets with $10 plus creating an interest-free liability for $10. Yes, and that is what the banks in effect do. And no, it is not a fraud, just a massively misunderstood thing.
Say I have a network of businesses and individuals who trust each other, or that agree to establish some way to maintain trust with each other. Say we wish to do away with banks. So a person wants to open business A, needs to buy things to get their business up and running. Rather than begging the bank for access to capital [0], I buy things from my fellow businesses in this community on credit. They agree to give me their goods in exchange for my promise to pay back (and in exchange I do the same for their goods).
This still doesn't work because of one simple reason: dollars (or your local currency) are legal tender, and you need legal tender to pay taxes. You cannot legally function on "community credits" alone.
[0]: Which in itself it's a pretty wretched thing that this is in the hands of private individuals, who can decide who gets to start businesses and who remains a wage-slave.
That's not what fraud means.
"In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right."
The reason some things are illegal and others aren't is because for the system to function, certain powers and responsibilities are delegated to certain entities. You can't own nuclear warheads, you can't kidnap people, and you can't print money. The act of doing those things isn't illegal. What makes that act illegal is the context. If those who were delegated that power are doing it, it's not crime, it's your responsibility. If you decide to build a reactor in your back yard, that's crime.
Just because someone else can do something you can't doesn't mean it's fraud.
> The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, explains: "With the revelation of the Regulation SHO Threshold Securities list and the Leslie Boni report, published in November 2004 [see glossary], it is now crystal clear that this problem of naked short selling is systemic in Wall Street, and virtually impacts every business sector on every exchange including numerous billion-dollar companies listed on the NYSE and other companies listed on the Amex."
Most corruption happens in a matter-of-fact, business-as-usual, we're-all-in-this-together atmosphere. And the proceeds don't usually lead to blowout lifestyle extravaganzas, as most participants are clever enough to realize that draws unwanted scrutiny. That is what makes corruption so insidious and difficult to root out. The rot spreads slowly, and inspection is commonly asymmetrically more difficult and costly to mount than undertaking the corruption act itself.
The most reliable way of rooting out corruption I've seen is an organizational culture that nurtures trust between leadership and organizational members, equitable gains sharing (so members feel they have skin in the game), and fiercely protecting whistleblowers (where the vast majority of human organizations utterly fail). Personally, Dunbar's Number appears to be some kind of (hopefully) local optimum but I'm curious how Geoffrey West's findings of scaling square with corruption incidence and scale.
Well for me, it's taking information flow off of the table. Not having access to the trade at execution (and how long it was an order) puts me at a disadvantage. I'd take the market impacts to have greater transparency.
https://www.euromoney.com/article/b1320xkhl0443w/naked-short...
Perhaps posting an archive.org URL adds a certain mystique, though?
Perhaps you could normalize the price using short interest %, but that's not even reported real-time and would be an approximate at best estimation of how much inflation fuckery is going on with the # of shares.
This whole thing reeks of corruption and manipulation IMHO, I'm shocked this isn't explicitly illegal and it's making me lose all interest in participating.
With GME there isn’t evidence of naked shorting. There are legitimate ways for shorts to be greater than the float. See https://seekingalpha.com/instablog/6850771-bachhandel/554975... for an explanation
If you're shorting on margin, and the market moves too far before your position gets closed... Your position might get wiped out, your margin might get wiped out, and you may owe an unbounded number of dollars to your counterparty.
Generally speaking, your broker will then sue you for that money... But lawsuits take a long time to resolve. And to a bystander, this sort of thing looks just like a naked short falling apart.
When shares are traded out from under a short, and there’s no where left to borrow them from, and the hedge funds can’t meet collateral requirements for their short interest, and the broker needs to liquidate their position but they come up about $20 billion dollars short...
That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.
That is not correct.
You have no idea whether or not the shorts currently open, as of today, were opened when GME was worth $12, $50, or $400.
It's entirely possible that many of the $12 shorts closed when the stock first rallied.
> That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.
The reason trading on shitty retail brokerages like RobinHood was shut down was because the clearinghouse collateral requirements went through the roof, and shitty retail brokerages like RobinHood weren't able to instantly come up with a couple of billion dollars to wire to the clearinghouses. (They did, eventually, which is why buys resumed on Friday.)
You get what you pay for with brokerages. They are an abstraction layer over a highly technical, 19th-century layer of physical settlement of stocks. When the market isn't going crazy, this abstraction works, with minimum collateral requirements. When the market is going crazy, this abstraction stops working, and their counterparties start demanding billions of dollars in collateral.
Since GME, has anybody heard again the old canard "blockchain? What can it do that a database can't?"
Block chain type code can prevent the excess being issued.
https://www.lawinsider.com/contracts/Xj9WHIykaxCDFh0BX4XNQ/z...
From this very article: “ Alan Sporn, former president and major shareholder of OTC bulletin board company Trident Systems, is suing a group of brokers who, he claims, utilized a number of techniques, including the stock borrow program, to undermine the price of Trident's stock. This attack on the value of the company's stock virtually destroyed the company, both in terms of raising capital for growth, and in depressing the value of the shareholders' investments to virtually nothing, claims Sporn.”
Sporn case was so weak the judge ruled for sanctions against him and he had to negotiate an agreement to avoid being stuck with defendants court costs.