This doesn't distinguish between shorting and naked shorting. But in either case I don't understand why I'm supposed to be upset. Is it because the stock price goes down?
It’s because I believe in ownership of what you make. If you founded a company, sold 10% on public markets for float, and magically 20% of your cap table now exists on the NYSE; something is horrifically wrong.
And yes, you would have suffered negative financial outcomes because of the counterfeiting.
If you can't it is because you are making mental gymnastics as soon as the word is some magical word Wall Street made up. Sure it is correct that you can but it shouldn't be and can't be fixed fast enough.
But thank you to everyone who gave me GME money with their mental gymnastics <3
Does this mean that I've found an infinite supply of free burgers and should go into competition with McDonald's? No. Because I'm going to have to buy the burgers from McDonald's to supply to my children. They own two new paper burgers, but I'm short two burgers. So the net total world supply of burgers is unchanged.
So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it. So what you're saying is that you shouldn't sell things you can't possibly fulfil? Hence the argument against this kind of trading.
A regulated entity might have capital requirements which would limit the no of burgers promised to money held. Another might be a contract with mcdonalds for N burgers, or a warehouse full of burgers - shorted stocks require the lender to actually sell a stock, and the shorter to actually sell it (and buy it back later) but there will need to be security/"deposit" on the returning of the stock - there exist a risk that the lender will not get their stock back, which is part of the reason for the premium.
Since you/I are not regulated financial institutions, not may would trust us to deliver 1 trillion burgers on paper; so the flaw exists in "What if they take their future 1 trillion burgers and sell half" - sell to whom? They'd have to find someone willing to buy. "What if you walk into McDonalds to claim the 1 trillion burgers" - the "paper burger" is an agreement between you and some third-party, not mcdonalds. You couldn't pre-order items from one shop, and go to another store with you invoice and demand they fulfil it - your contract is not some general/official currency, there is no obligation to accept it.
> So you're saying it's okay to promise burgers as long as it's an amount that actually exists and McDonald's can fulfil it.
It's a promise that you will supply N burgers, so the criteria for ok-ness is that you can supply N burgers, that McDs can provide that many is necessary-but-not-sufficient alongside:
- you can pay for N burgers - you can transport N burgers (on time)
but when I say "ok", I mean from a "morality of making personal promises" perspective, not "financial promises/obligations made by a regulated financial institution" perspective. Individuals are not financial institutions, and financial institutions are regulated as such.
Person D borrows Person C’s burger and sells it to Person E.
Still seems to work? Then, tomorrow Person B and Person D owe burgers to Person A and Person C.
If there is only one burger in existence, this will create demand pulling prices up I’d think.
What can happen in real life is Person A and Person C are given a digital receipt confirming delivery of the burgers they were owed and that is the end of the transaction. To shield themselves from revealing potential fraud, the brokerage will charge a $500 fee if either of them ask for proof of their burger.
Now, while there may only be one burger in existence, it appears as though there are two, keeping demand artificially flat.
So how could you do this? Well you could create a burger delivery service that sells other peoples burgers. But you sell them for a bit more than what you pay for them and you can begin you’re offering “all the burgers” and connecting the sellers with the buyers. Now you’re creating burgers out of thin air to people buying them from you and you’re delivering the burger they ordered even though you don’t even own a grill. Congrats, you just created a burger exchange that sells promises of future burgers on margin out of thin air.
If you’re even smarter you’d use other people’s money (which is key) to capitalize this venture instead of your own and keep an outsized share of the profits. This is what investment banks and hedge funds do. Other people’s money is key to winning and not really losing.
Horrifically wrong! Heavens to Betsy!
What went horrifically wrong is the company went public with a clueless CFO. For all corporate actions—reporting, dividends and buybacks—that additional float is meaningless. It’s only relevant for short-term holders and short-term metrics.
You never look at the value of a dollar as the % of total dollars in circulation. The value of a dollar is rather defined by how many goods/services/other currencies you can get in exchange for it.
With stock it matters a lot more how many % of a company is represented by a single share.
Similar, each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back.
Again, to be super clear: for everyone but market makers, the law is you have to locate the borrowed share before selling short. Market makers can naked short to provide liquidity in a buying frenzy. Given they're shorting into a buying frenzy, they tend to be quite motivated to immediately cover themselves.
We have lots of people shorting GameStop. We have zero evidence anyone is improperly naked shorting.
I think naked shorting would be a perfectly valid thing to allow every investor to do, you clearing house would just want to ask for pretty high margin requirements.
Very similar to how there are covered call options, but also naked call options. And the economy hasn't collapsed either.
My understanding is that naked shorting can be used to artificially lower the stock price by increasing the supply with the ultimate goal of driving the company into bankruptcy.
So on one side you have illegal(?) market manipulation benefiting sophisticated traders and on the other you have companies that are presumably creating jobs and generating something of value being destroyed as a result of financial engineering.
You can decide if that's upsetting or not.
Why?
A owns a share, loans it to short seller B. B sells the loaned share back to A. Then A loans the share again to B, B sells it back to A. Now repeat the process a million times.
You can get arbitrarily high amounts of shorting without any naked shorts. (And usually, A and B don't know each other. It's all done via exchanges and clearing houses etc.)
That's why I said "Interestingly, in both cases the short interest can be greater than 100%"
But in the situation you're describing the total number of shares on the market is still equal to float.
If we altered your example to have naked shorting it would be: B sells a share it hasn't borrowed to C, A sells a share it hasn't borrowed to D. The total number of shares that can now be traded is equal to the float + 2. Hence the claims of 'counterfeit shares' which is not a great description.
Naked shorting can only be done by market makers. The argument is that it helps to create liquidity and that these actors will have the ability to later borrow the shares without issue. The problem is that, as I understand it, there are not strict rules dictating when they must actually borrow the shares to back the shares that they sold short.
There are some indications that this has happened with GME. For example Michael Burry said in a now deleted tweet[0]:
"May 2020, relatively sane times for $GME, I called in my lent-out GME shares. It took my brokers WEEKS to find my shares. I cannot even imagine the sh*tstorm in settlement now. They may have to extend delivery timelines. #pigsgetslaughtered #nakedshorts"
[0] https://web.archive.org/web/20210130030954/https://twitter.c...
In the “A loans to B who sells to C” scenario, C is the one who gets to vote.
Why? Imagine there exists one share of GME, owned by Alice. Bob borrows it from Alice and sells it to Charlie. Now both Alice and Charlie own one share, and no naked short sale ever happened, as far as I understand that term.
In the only-one-share-exists situation, there's no real way out of that. In a situation where more than one share exists, Bob could, say, obtain a call option so that he at least has a plausible way to acquire a share in the future to make Alice whole.
In your example Alice doesn't own the share at this point, she owns an agreement that says she will be returned a share in the future and is paid interest on it in the meantime.