Comment by hagy | Hacker News Reader

Comment by hagy | Hacker News Reader

Parent Full thread

When person A lends their share to person B, they no longer own a share, they own the right to receive a share from person B sometime in the future, interest payments on the lending, and collateral to ensure the borrower can make good on their obligations.

This website seems to mainly be talking about naked short selling, which is selling a stock without first owning or borrowing it. This not necessarily illegal, although can be under some conditions, including aggressive short selling. Wikipedia has a fair amount of info on the practice, https://en.wikipedia.org/wiki/Naked_short_selling

The practice of a selling a share that one does not own is supposed to be used by market neutral market makers to ensure their is always liquidity. They must then at some point in the future buy a share from the market to replace the phantom (i.e., counterfeit) share that they sold.

This practice is useful when there are suddenly more buyers than sellers and the market maker exhausts their standard supply of shares. Otherwise there may not be any bids on the stock at any price for sometime. Other argue that this is no longer necessary with many participants beyond market makers that also employ algo trading and can quickly adjust to increasing demand. Further, if lack of supply becomes a regular occurrence, investors may start regularly setting high, possibly even ridiculously high, standing sell limit orders such that there will always be bids at some price points.

Isn't selling something you don't own a fraud or the stock market has an exemption? The instance when A essentially sells the share to B accepting the right to receive the share back as a payment also wouldn't fly in any other environment, as this could just open the door to money laundering. So why is this accepted in the stock market? Or simply the law enforcement doesn't know how to tackle it?

> Isn't selling something you don't own a fraud or the stock market has an exemption?

I call up Dominos and order a pepperoni pizza. They take my order and process my credit card. They’ve just sold me a pizza that doesn’t exist. Is this fraud?

Well that's wrong analogy. The right analogy would be if you borrowed a pizza from your mate and sold it to someone.

> Is this fraud?

No because they have the raw materials and labour to make a new pizza and have entered into a contract to do so.

Short sellers don't have raw materials to make new shares.

How about if I sell a million pizzas to be delivered next month then put out articles about how Dominos has poison in their pizzas! People will forget or won't want the order and I will pocket the money. These short sellers are a scam.

That's a completely unrelated hypothetical (and also, would be illegal fraud).

There's nothing special about shorting in your imaginary scenario either. You could change your scam to "I own Dominos stock and don't order any pizzas, but I put out articles claiming I ordered a million. People will buy up the stock expecting the profits from the million-pizza-order and I will pocket the money. These long holders are a scam"

If your intel if wrong people will see it and you're done. Short reports can be true or false, so can bullish reports. Its hoped that the truth wins out in any case. I don't see the scam here.

People sell things they don’t own all the time line their house or car. When you borrow a share and sell it, you’re really renting it to find one much like someone rented it to you. It’s like subletting an apartment you’re renting from a landlord.

In the end there’s a chain and if the person who lent you the share wants it back then the person you loaned it to will need to produce it for you, etc.

This is why we have margin accounts (and limits to how much margin we get/can support).

I don't think this is the same. If you sell a house that is mortgaged you essentially pay off the mortage and therefore gain ownership and then transfer that ownership onto the buyer. The example with subletting is also wrong - the fitting analogy would be if you rented a flat and then sold it to someone.

Just tell your broker to not loan your shares. If they weren’t bought on margin then they won’t loan them out. Standard broker agreements for margin accounts state that your shares can and will be lent. Sometimes you’ll even share in the profit from loaning them as in-demand assets for shorting often have a borrowing fee.

The analogies hold though - people sell things they don’t own all the time. The important thing to understand is it is based on promises to deliver an asset/money by a certain date.

Likewise people buy assets on margin all the time. This means people can buy things they don’t have money for based on a promise they will pay that money back. Credit cards, mortgages, auto loans, bonds, etc.

This is how our finance system works and for whatever problems it has, the future promise concept isn’t one. Especially with the regulations and limits on it.

So as long as there is an agreement and plausible explanation then any crime is legal? This is fishy as hell. It seems like we are going round in circles and only argument is that "hey people die all the time, so murder ain't a bad thing if the victim consented".

Fraud requires intent to deceive. Where's the intent to deceive in short selling?

Here are some examples of how to deceive: https://youtu.be/VMuEis3byY4

Selling something you don't own.

Is a future contract fraudulent then?

If I sell you an August-settled coffee future, that's a promise to deliver you coffee in August. Is it fraudulent if I don't have the coffee right now? After all, I've sold you something I don't own.

Of course it isn't. What matters is that the contract is fulfilled, and for equity sales in the US, the contract states that a share will be delivered to the buyer 2 days after the transaction.

You are comparing apples to oranges. Paying for a product in advance is quite different from selling something you don't own.

> Paying for a product in advance

From the other end, someone is accepting payment in advance i.e. selling a product that doesn't exist.

If you intend to purchase that product (or constituents of it) from third parties, then that becomes selling a product that you don't own (the third parties you intend to buy it from currently own it).

Now you can say it doesn't yet exist, or isn't yet bought, in order to fulfill the order - but the argument for selling stocks you don't own, is that you don't yet own them. I see no reason to say a genuine intent exist when fulfilling a purchase order, but not when returning a stock; kick-starter provides enough evidence against that..

You're going to have to fill in some of the blanks explaining how paying someone to deliver a share 2 days from now is fraud but paying someone to deliver coffee 6 months from now isn't.

How about if you sell a share that you bought within the last two days. I mean, your buy trade hasn't settled yet so you technically don't own it yet. Is that fraud?

Capitalism only optimises with freely available information. As long as I know you don't have a share, and the market as a whole knows you don't have a share, then yes, it's not fraud. The fraud is you decide (with your cabal) to appear to have shares, you don't announce to the market "I'm selling 5% of STONKS but I don't own any STONKS [yet]". When I buy from you there's no shares that I bought.

It's not fraudulent if you don't have the coffee, as long as you make public that you don't, "I do not own any coffee, but will sell you a delivery of coffee for August".

Now, if you're selling share in ownership of a company, IMO it's right to disallow - by law - representations of ownership of companies that are not backed by numbered shares. It's not coffee, you can only own shares in the company itself, you can't get those shares from other origins it's not a commodity.

You make a post-harvest offer to sell me coffee from a particular plantation, then you arrange for the media to report that plantation's coffee is really inferior, maybe not even drinkable - something you had arranged in advance, of course. Tell me, why is this good for society? Now, you advertise, with your friends, lots of coffee available at low prices (after all the media said it's inferior coffee), only thing is you're offering more coffee for sale at low prices than there is coffee from that plantation ... that's driving the price down, there being lots of coffee noone wants ... only it's a lie, a trick, a fraud, just so you can manipulate the price. And now, oh look that plantation has gone out of business and you managed to buy them coffee I ordered for essentially nothing. Wow, you added so much value to the World by destroying the livelihood of that coffee plantation's workers.

You do own the stock, and when you sell it you no longer own it - the person you sold it to does. You are obliged/contracted to "return the/a stock" but there is no requirement that it be the same stock, as the agreement is wrt stock as a commodity.

Furthermore, that agreement doesn't in any way apply/affect to the stock you sold (or the person you sold it to), the obligations to return is yours alone.

That is only fraudulent if you never intend on delivering.

Reply on news.ycombinator.com