Hacker News Reader

There's nothing illegal about 140%, because the same share can be loaned out multiple times.

Anna lends Bob a book, Bob lends Charlie the book, now the book is 200% lent out. It's arguably risky and stupid to be Bob, because now he's in trouble if Anna wants the book back and Charlie doesn't want to return it, but there's nothing illegal about this.

Isn't the book example broken, because only one person can have the book? In shorting, it sounds like you can sell the same share to 2 different people.

At the end of the day, after the stack of promises has been popped, only one person can have the share as well.

It’s not broken, it’s just simplified because nobody’s selling the book, just lending it out.

> In shorting, it sounds like you can sell the same share to 2 different people.

You have to obtain (buy or borrow) the share twice in order to sell it twice.

This isn't how short selling works.

If I short a stock, I borrow the share and the sell it on the market. If I loan the share to someone else and they sell it then it is still only sold once.

In my opinion it's more likely that people were either selling naked calls (which would convert into an IOU for stock) or that people were selling shares that didn't actually exist on the open market.

I don't know enough about settlement to verify the latter claim, but there are some reports of shares taking an excessively long time to settle. Those kind of irregularities should probably be more closely investigated.

> If I short a stock, I borrow the share and the sell it on the market. If I loan the share to someone else and they sell it then it is still only sold once.

The share can then, afterwards, be loaned out and sold again. This causes it to be “double sold” and you’ll see something like the 140%.

Alice loans share to Bob, Bob sells to Carol, Carol loans to David, David sells to Eve.

Bob and David are both short sellers. There is only one stock. It has been sold twice.

>The share can then, afterwards, be loaned out and sold again.

I've seen the same argument more than once this weekend but this flood [1] (also linked from the TFA) says otherwise:

In order to meet legal requirements, the broker has to find un-lent shares (so the same shares aren’t lent twice). The PB will “tag” those shares, indicate to the client the prevailing cost to borrow, and provide the client a “locate ID” that guarantees that client those shares.

[1] https://twitter.com/compound248/status/1355276755980980225

I think you’re misinterpreting the linked statement - they’re saying A can’t lend the same share to both B and C at the same time. If B borrows the share and then sells to C, C has a share with a clean title and can then lend to D. Otherwise there would be two different prices for lent and unlent shares, since you can make interest off one but not the other.

I’m not 100% sure this is correct though, someone please let me know if I’m wrong.

That’s interesting… people in that thread have the same questions, but they are not answered. Perhaps we will eventually find out after the SEC investigation… or perhaps someone will just stop by and explain it.

You’re missing the point. The same share can be repeatedly loaned and sold by different people: A lends to B who sells to C who lends to D who sells to E, etc. No one in the chain did any naked short selling.

This is what I've been reading and lead me (I guess incorrectly?) to believe that there was naked shorting happening

Not currently illegal but I'd bet good money that it will be after this fiasco

How would you make it illegal?

> but there's nothing illegal about this.

Is there a reason why it isn't, other than the obvious one that Wall St corrupted the US govt a long time ago through bribery (lobbying)? Eg. Biden's treasury secretary has already been bribed (colloquially called "speaking fees") to the tune of $7.2M.

The basic principle is that when something is made illegal, the law has to be enforced. This is done by taxpayers and/or participants in the economy spending money to hire police officers and various other agents. Therefore, laws should be deployed sparingly and only when positively justified, to keep the burden of enforcement as low as practical.

There is no reason to make this illegal and put effort towards banning it. Eg, I'm not losing any money and it is entertaining. If I think the price after the shorts get involved is too low I can buy the asset in question. Why should I, in my capacity as a taxpayer, be getting involved and spending money through my government?

Go far enough back in the past and everything was legal. The history of the stock market is the history of new rules being added, new laws being passed, all to restrict how you can buy and sell stocks.

Back in the 1920s I could make a company, issue a bunch of stock, and then go around telling people how amazing and profitable my company is, selling stock door to door.

Is there a reason why it should be illegal?

> What else do you call shorting 140% of a company's stock?

Unusual, but a thing that can happen, and not at all illegal.

140% short interest is illegal? Are you sure?

The answer is no, it is not illegal.

It feels disingenuous for you to not mention a disclaimer that you're invested in GME.

and you believe I am because...? I'm watching this along with everyone else

there have already been so many explainers for how this shorting > 100% of float thing already happened i don't understand why it is still bandied about like it's some proof of naked shorting; it isn't.

I mean this as a genuine question:

What law would shorting 140% of a company’s stock break?

Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things.

But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal

The number of shares reported is the number of shares existence -- not because of naked shorting or not.

Naked shorting would not increase the number of share available to be bought. But not the total number of shares in existence.

This is the same way banks use deposits to make loans. The dollar is the same dollar, but can be spent multiple times. Hence the money multiplier effect. The number of dollars in circulation is a constant. The number of times a dollar can be spent can be more than one.

At some point the loan still has to be paid off, which requires me, eg, to acquire a dollar somehow, then pay it back to the bank -- with interest.

Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.

Perhaps the issue there is that in this scenario (I have a share; you borrow it from me and sell it to me; then you boroow it from me once more and sell it to me again) currently it's treated as if I own three shares (though two of them have marks on them that they can't be lent).

Perhaps it should be explicitly treated as if I have one share, and two "claims on shares" which are likely to materialize, but are not guaranteed to do so - to make that distinction clear, to ensure that the lending for a short actually involves the lender temporarily giving up that share instead of just marking it as "used".

Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they are long on the company and only want to hold their shares.

How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.

Well, in that case the shorter can't settle up their positions, so they don't - that's not a crime, that's not illegal, they simply can't fulfil a part of their contract so they owe some amount of money as compensations to whomever they borrowed that stock from.

What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.

Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis...

The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history:

> At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade.

> In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.

As other comments have said, this is not illegal. Matt Levine explains better than I could here [1].

1 - https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...