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Comment by nayuki | Hacker News Reader

Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?

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It’s not a bank run, it’s poor risk management and the FDIC doesn’t insure brokerages, that’s the SIPC. Poor risk management is very much not covered by any federal program. Their liabilities are between them and their brokers, and if contagion spreads, their private insurers. This is why you can only short in a margin account and are required to put up collateral.

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.

From a social level, there is a huge difference between a bank run and a short squeeze. One affects regular savings, the other wipes out only those that opted into a high risk short position.

Unless those that opted in are “too big to fail”, and then everyone else pays for it.

If you’re talking about 2008, then they actually paid for it. The loans that the US government made during the crisis actually paid themselves back with some interest.

They still paid for it at the time, and that's why the ones who got themselves into risky positions did not get wiped out. My engineering degree had a great ROI but I still paid for it.

So how much do you need to reserve?

For volatile stocks like GME on IBKR right now, 300%, so very much the opposite of fractional reserve banking. Well, fractional, but the numerator is far larger than the denominator.

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