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Comment by Traktor | Hacker News Reader

I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)

I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending.

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.

In sports, we call these "side-bets," wherein the total value captured in the bets can be many times the purse prize of the event (fight/match, what have you).

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.

And what happens when the side bets begin to wag the dog - when it becomes more profitable to manipulate the underlying and pay the fines there in order to save a bigger position in the side betting market?

Except in sports, the side bets don’t inherently sway the outcome of the match (unless the players are betting too). Financial side bets do influence real asset prices.

Your car example makes for a fun scenario where you lend someone a one-of-a-kind car, and that person sells it to someone else, and you manage to buy it back from that someone else (maybe for a quite high markup). Then when the time comes for the first person to buy the car back to return it to you, you either outright refuse to sell or ask for even higher markup. What will happen then?

Why do we even allow people to sell borrowed things?

> 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.

Owners don't short, owners lend.

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.

The linked Wikipedia page has a graphic that explains it better than I can in text: https://en.wikipedia.org/wiki/Short_(finance)

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 analogy might help:

https://news.ycombinator.com/item?id=25944738

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