Comment by toast0 | Hacker News Reader

Comment by toast0 | Hacker News Reader

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I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc.

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%.

You might take aa look at the SEC's December reports of fail-to-delivers, before the GME rocket lit: there were three days with over a million shares failed to be delivered, and several more weeks with over .5%. WSB had a post encouraging everyone to file a SEC report over this back then.

You should cite the posts and resources you've mentioned, because there are a variety of caveats that approximately all the posts on WSB misinterpret. People will fly by a comment like this and just repeat it without any fact checking.

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.

1. https://www.sec.gov/data/foiadocsfailsdatahtm

2. https://www.sec.gov/investor/pubs/regsho.htm

Regarding the data in question you are completely right but the unusually high numbers reported suggest possible naked short selling or a systematic lack of liquidity for that particular stock.

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_...

> Finally - why assume a government agency is competent and has the means and resources required to act in a timely manner?

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.)

Your words aren't that reassuring, since this is the same SEC that failed to find Madhoff's Ponzi scheme.[0]

> 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

[0] https://en.wikipedia.org/wiki/Bernie_Madoff

Sure, but I'm not trying to be reassuring. I'm trying to encourage healthy skepticism of random claims on the internet.

Your comments are appreciated!

My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a particular company and it is owned by Person A. Person B then borrows the share from Person A and sells it to Person C (this is the first short). Person C now owns 1 share and Person A doesn't have a share but is contractually obligated to receive 1 share from Person B at a certain point in time in the future. Person D then borrows the share from Person C and sells it to Person E (this is the second short). Even though there only exists 1 share the short interest in this case is 200%.

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.

This is possible, not illegal, and can be simplified even further.

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.

Both parties could each do it with 500 shares. Then they'd each also owe each other the same amount.

With the total long position > 100% of issued shares, who gets denied voting rights?

Whomever is the holder record has the voting rights. If you gave your stock to someone to facilitate a short you lose your voting rights until that position is closed. You can read more about it here: https://www.investopedia.com/ask/answers/05/shortsalevotingr...

It looks like nesting got too deep, but for bkh, you are correct.

> 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.

> If you gave your stock to someone to facilitate a short you lose your voting rights...

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?

Does your broker automatically loan out your shares?

Or must you manually opt in, to allow it to be loaned out for shorting?

Some of them (or most?), but not in your favor. They will keep the profit

On a side note, if you want to vote with your shares and have a margin account, you need to let your brokerage know in advance of the shareholder meeting, so they can get those loaned shares back to you in time to vote. Otherwise, the shares showing up in your account may or may not actually be there on the day for you to vote.

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