Eg. those who shorted stock because they expected covid-19 to cause a market dip, sent a giant signal to the entire world that covid was going to be a big problem.
Imagine an economy of 3 people, A, B and C.
A has $5.
B borrows $5 from A.
C borrows $5 from B.
A borrows $5 form C.
The economy started with $5 and $0 debt, the economy ends with $5 and $15 debt. Despite the fact that the society's total debt is now 300% the size of its economy, it is no different than how it started. Debt isn't inherently bad. Debt is a tool that allows us to collaborate.
Some of the short sales refer to the same shares; say there's one share in the company and it's (borrowed and) sold short thrice. The company's one share has been sold three times, but there haven't been sales of more shares than there are in the company - the three (short) sellers need to get that (same) one share back to close their position in sequence.
I am somewhat torn on where to stand on this. On one hand I do see why we would want regulation against insider trading & pump and dumps, on the other hand I worry that regulation isn't preventing either, and society quickly would become inoculated if we legalized it.
When I read Robin Hanson's paper on insider trading and prediction markets, I became much more uncertain about whether we should regulate this area than I used to be.
https://www.researchgate.net/publication/228340813_Insider_T...
Shorting a company itself isn't so bad. Orchestrating bad PR to boost your short option earnings is bad.
So legit question, lets flip this around. Lets pretend that I am super confident, and have strong evidence to believe, that company $ABC, currently trading at $100/share, has been committing fraud and is drastically over-valued because of it. Lets say, I don't know, it was intentionally skipping numbers during the day to give the appearance of higher volume[0]. I've determined this by investing a bunch of resources in research to determine that reported numbers don't line up with the actual number of customers, or don't line up with other available data from other sources.
So I take a short position. But I'm not allowed to say anything about it. I keep silent.
Now 3 years later, the fraud is uncovered elsewhere, I make a killing, and my only response is "Ya, I knew they were fraudulent years ago, and here is all of my proof. But I didn't say anything for 3 years."
Would you argue that I'm not complicit in that fraud for all the years I knew about it?
[0] https://www.bloomberg.com/news/features/2020-07-29/luckin-co...
There are very few true obligations to report in the US. All I'm aware of are tied to specific occupations/licenses.
[citation needed]; is this actually true or is this just part of the WSB sales pitch?
The deeper issue is the SEC not cracking down on the fail to delivers and naked short selling.
I think Robinhood and other brokerages are the scape goats here. Their hands where tied when the companies that processed their orders refused to process trades for those stocks.
The whole debacle has exposed a lot of corrupt, fraud and other nasties while showing the SEC is completely unwilling to do their job.
You can still get a short interest above 100% without selling naked calls/shorts.
The main difference between a conspiracy theory and a valid theory is that a conspiracy theory is non-falsifiable; any evidence to the contrary is dismissed as "fake news" or "the deep state is hiding the evidence".
In your example here of "they testified to Congress under penalty of perjury", the response will be "Ya, they lied, because they knew the whole system would back them. They faked all of the records that show that they didn't actually do it!".
Now this isn't to say that a conspiracy theory can't be right in the end, but that still doesn't make it a valid theory.
Likewise: if you're debating a claim with someone who is being intellectually honest, they'll receive your evidence and consider it critically on the merits. If you debate a claim with a conspiracy theorist, they will use any evidence you provide them to support the idea that the conspiracy theory is even bigger than they could have imagined - more parties are corrupt, more people are in on it, etc.
It's exhausting.
No they didn't. Naked short selling is different from short selling while the short interest is high.
Seller A borrows a share, sells it to buyer B. Buyer B then leases the share to Seller C, who then short sells it. This is not a naked short, but a plain ol' short sale.
A naked short would be where Seller A doesn't own a share, but sells one to Buyer B anyway, with a contract stipulating the time the seller must buy and deliver the share. With the exception of market makers, this is illegal but ridiculously easy to detect, since Seller A's sales exceed the number of shares purchased. There is zero evidence any of the hedge funds were short selling.
Do you mean, this is legal for market makers?
Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?
Yes, market makers are allowed to sell short without having a locate.
It should be noted that the market makers will attempt to zero out their total exposure by the end of the trading session.
Yes. They need to be able to make naked shorts, as this is what allows traders to buy a share without having a willing seller at any given moment and vice versa.
> Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?
As I mentioned, It's perfectly cromulent to have multiple non-naked shorts on the same shares, so the short interest as a percentage of float can certainly exceed 100% without any illegal behavior. I imagine the reason for this misconception is that people think of a short as an "anti-share" that can't exceed the number of shares being traded, when it's really a more abstract investment tactic or contract.
It may be in the national interest to impose "reserve requirements" on brokerages in order to prevent too much perversion of market prices.
[1] https://en.wikipedia.org/wiki/Enron_scandal#Timeline_of_down...
They do deserve a lot of negative attention for running a brokerage in a way that invited a lot of risk-ignorant retail traders to instantly trade into leveraged positions for which they should never have been qualified in the first place. Robinhood has the valuation it does because it brought leveraged day trading to the masses. As someone who worked at a brokerage and designed trading tools, leveraged day trading isn't for the masses.
Your first investments should never be in individual shares - start with an tracker ETF for a few years before branching out to active management or even individual shares.
They clearly did not have the finances available to provide the service they offer. Regardless of whether that was forced on them, the outcome was RH's failures manipulating a market.
RH should be fined and sued out of existence.
I also don't see the value in short selling. Seems like a way to gamble legally in all 50 states.
I'm glad we aren't creating SEC rules based off of peoples' feelings.
Even if it wasn't intentional, it was artificial.
Of course, it creates a perverse incentive. A short-seller who is invested in a company's failure will spew tons of FUD around the company, whether it's true or not. TSLA used to be one of the most shorted companies on the market, and many bloggers that were highly critical of Tesla were short-sellers, and the noise it created made it difficult to figure out how bad the problems were.
> Seems like a way to gamble legally in all 50 states.
You could say the exact same about long positions, which is nothing more than gambling on the success of a company, the same way a short is a gamble on the failure.
https://news.ycombinator.com/item?id=25962906
Or the suicide from the kid who didn't understand his position wasn't actually extremely negative.
The fact that it's "normal convention" to represent positions this way is a problem with the convention, not with retail investors.
If I say that someone stole the Declaration of Independence, then I would only need to provide evidence it was stolen, not evidence that shows some particular person stole it.
In this case, evidence of illegal shorts is what one would need to provide to back their claim, not evidence that a specific firm engaged in illegal shorts.
Okay, what's the evidence of illegal shorts?
It's quite clear naked short selling is possible and thus happens sometimes. I'm very dubious it's the case in Gamestop's specific situation. My specific claim is "naked short selling is a thing that exists", which is readily provable.
There isn't actually any evidence the named hedge funds were engaged in naked short selling. For the most part, people seem to misinterpret short interest and failure to deliver data as an indication naked short selling occurred.
Robinhood has normalized pay for flow, a service that is literally shaving cash off each order in exchange for “free trading”. Pff can only generate net revenue by making traders pay more per trade than actual best execution, which Robinhood is suppose to be legally required to deliver. The SEC in the 90s and 2000s thought the practice amounted to middle manning traders and should be illegal.
Basically: Robinhood gives stock purchases to a third party, who pays Robinhood for each transaction in “rebates”. If you have a free trading account other than fidelity, you are paying insane transaction fees that are hidden from you by the pff. It’s middle manning, and Robinhood is paid to enable it.
Not a fall guy, just not all the guys that need to fall.
Making Robinhood just less bad than the rest.
[0] https://piper2.bluematrix.com/sellside/EmailDocViewer?encryp...
https://efipm.medium.com/zero-commission-brokers-selling-ord...
Then RH can sue them. As the consumer interface, the buck either stops with them, or they pass it along.
I'd genuinely shocked to see someone say they think Robinhood didnt do anything wrong. Unless I'm misunderstanding you.
And also, they were offering customers a courtesy to use unsettled funds to buy stocks immediately, rather than waiting two business days for funds to clear. Most customers generally appreciate this feature (I certainly do!).
The only thing I'd say they did wrong (but not illegally so) was not having finer-grained controls ready to go to be able to shut down purchases of shares using unsettled funds and/or margin, while still allowing purchases by users with settled funds. This is a feature that some other brokers already have, i.e. you can buy large caps with unsettled funds but penny stocks require the use of settled funds.
Robinhood was still responsible for the clearinghouse-mandated deposit requirements, whether the purchase was from settled or unsettled funds.
My understanding is that the deposit funds, and the funds-fronted-on-margin, are two different groups of money.
IIRC the deposit requirement was raised to 100%.
Even if the customer funds were settled, and the customer wanted to buy 1 share of GME for $300, Robinhood would have to post $300 of it's own money, just in case. Now would Robinhood get that money back? Most likely, but that doesn't mean they don't have to have it to deposit in the first place.
the question becomes - who/what had the power to raise this deposit ratio, and did parties that would stand to lose a lot if GME continued to rise had influence in making this deposit requirement higher?
The DTCC wouldn't care one way or another if GME went up or down. They're goal is to make sure that different parties are able to settle their obligations with a very high degree of certainty, and ensure that investors won't lose their money with solvent brokerage firms or other intermediaries.
If you're arguing that the DTCC is beholden to the whims of a (relatively) miniscule hedge fund, you're crossing into conspiracy theory territory.
I wonder if it may be a good idea to remove computers from trading except for execution enacted by humans because of human research. Should Bloomberg terminals be legal? Should everyone effectively have the same hardware? I wonder how someone in Oklahoma can compete with a large bank. Should they be able to?
https://www.institutionalinvestor.com/article/b1qdq0y5b79rzb...
I'm also interested in discussing whether or not ETFs should exist. I wonder at some point if you just kind of eliminate price discovery and prop up zombie companies.
i assume you mean passive index investing (via the instrument called ETF).
And no, it won't eliminate price discovery unless there's some 80-90% of the transactions that is only passive. And if that's the case, an enterprising active manager would spot this discrepency, and profit from the abitrage.
So in effect, passive investing is piggy-backing off the price discovery of active managers, and this reaches a balance.