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?
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"
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.
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).
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.
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.
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?
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..
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.
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.