I'd love to see where this has been explained. I've not seen this anywhere.
https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha...
> As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall.
> An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares.
> More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short.
> In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.
In practice it doesn't make a big difference whether it's banned or not. Stocks almost never have a short-interest above 100%, and the larger the short-interest the less attractive it becomes to join in so there's already negative feedback built in.
Except it just happened? This is like arguing for not fixing a really weird state in code. "It's not supposed to be able to get into that state so we just ignore it."
That's not a valid analogy. The reason we fix bugs and address code smells is that the cost of doing so is relatively low and the benefit is large from both a tail-risk mitigation perspective and technical debt perspective.
If we're going to go through the rigmarole of passing new regulations in order to solve some problem, the problem should be of sufficient magnitude to justify the associated costs:
(i) The cost of compliance to industry, which would be humongous, since you now need a centralized authority to track who owns the actual float versus the shorted float, and for this information to be communicated between all stakeholders & said authority. Then each stakeholder needs to build internal processes and software around this data to ensure they are compliant.
(ii) The time & financial cost of enforcement and penalties, to both regulators (taxpayer) and industry.
(iii) Possible unintended consequences, such as corporatist corruption of the specifics in order to entrench established interests.
Evidence or reason hasn't been provided that this is even a problem, let alone a problem of any meaningful magnitude deserving of regulation.
Agreed.
> Evidence or reason hasn't been provided that this is even a problem
Strongly disagree. I realize there's lots of noise right now, but the signal is starting to shake out in the news.
> let alone a problem of any meaningful magnitude deserving of regulation
This is the interesting part I'm hoping is actually debated. But somehow I don't think it's ever really going to be discussed by the SEC, the same way I feel like 2008 was just a bunch of slaps on the wrist (what happened in 2008 was much, much, much worse than what happened recently with GME to my knowledge and I am not saying they are equivalent).
Stocks with a short interest over 100% almost never happen, and in the rare case that it does, nobody has provided a sound rationale about why this is a bad thing and not even a good thing. If you think you have a rationale as to why it's a bad thing, please present it.
I tend to lean towards the idea that naked shorting should be allowed and encouraged. I believe we'd have a healthier market with less pump and dumps, since retail won't be able to lock the float on penny stocks and cause a squeeze, because borrow supply would be greater which (i) reduces the cost of borrow, and (ii) allows large institutions to take the other side effectively and maintain efficient pricing.
Interesting. I'm not sure I agree, but I appreciate the perspective.
shorting just puts artificial pressure on the price. it’s a practice that i believe has no place in the market.
the same way that HF trading is just a big scam dressed up nicely. we need things that bring value, not scams
Why is shorting any less valuable than investing in a stock? You can speculate it will go up or down. Both are bets, both have incentives to manipulate the stock price, and without both you remove a downward pressure that stops stocks from skyrocketing like in 1929 (where a short is what crashed everything).
https://www.cbsnews.com/news/short-selling-evil-or-necessary...
I think the stock market would be much less healthy without shorting than with it.
(1) Shorting is necessary for the operation of the derivatives market due to the need to hedge Greeks.
(2) Shorting is necessary for market makers to provide quotes on both sides, which is why spreads are so tight.
(3) Shorting is a natural part of any market for a fungible product. We can't short houses (this was Elon's flawed example) because they're not fungible. We can short commodities that are fungible (which includes stock) because it's possible to create a contract where repurchase and return of said commodity by the borrower makes the lender whole. Banning shorting is an authoritarian move which says "an owner of a commodity (gold, silver, stock) is disallowed from arranging a voluntary contract to lend it to someone for a fee".
(4) Shorting is to the benefit of longs that lend stock due to borrow fees, which benefits the lender in excess of the adverse market impact.
(5) Shorting is opt-out. The float owner can prevent their float from being shorted.
(6) Shorting is fundamentally healthy for the capital markets. NKLA was only revealed as a fraud because of an incentive created to find downside possibilities in stocks. If you remove that downside incentive, you get more bubbles because everyone is incented towards hype and promotion.
So what? If there's that much interest in shorting a stock, and it can be done, why not allow it?
I mean it's a problem in the sense we want the markets to be "fair" or at least governed by the rules we've set up, aka the SEC, FTC, etcetera. That's what I mean when I say it's a problem. I don't mean this is necessarily an existential threat on our financial system, but do you agree the markets were not working as intended because of this?
Based on what we know now, it seems like Robinhood (and other brokers) should be regulated differently (not that Robinhood was exactly by-the-books before this debacle). They publicly lied about a cash flow problem which alone seems worthy of fraud (I do not see how this could possibly be interpreted otherwise). They were extremely disingenuous about margin calls, and this is important when they are specifically targeting uneducated investors. I realize nobody was expecting this squeeze and expecting Robinhood (or anyone, including Citadel) to have that foresight isn't reasonable. But why not use the power of hindsight to fix this moving forward?
Also, my main point was in regard to shorting on borrowed shares. If i'm short a company on borrowed shares I should not be able to further lend those shares out for a short.
But to my secondary point, which seems to be getting the most attention I can only say this. In a pure, utopian world it would be immoral for me to have a vested interest in a company 'Underperforming'. Without Shorting you would not have 'Only an increase in price' - thats silly. There would still be the option to sell your shares and since market dynamics dictates the price of those shares they can potentially fall to zero, thus losing money and if the shares fall enough, you could default on your credit, etc. This mechanism has the same protects a short has against fraud, mismanagement, etc.
The difference here isn't just semantics. If i don't believe in a company, i sell my shares thus lowering the value of the shares (If the market agrees).