Hacker News Reader

Comment by Anadorr | Hacker News Reader

600% from what? Price discovery is broken when large market participants and market makers have access to mechanisms that enable unlimited shorting.

Current price is, in part, driven by asymmetrical risk/reward - there's a small potential loss (size of one's position in GME) and subjectively high chance of having a real stock squeeze (and having a 10/100/1000x reward) assuming that original 120%+ short interest was not closed and is still held in the form of various derivatives.

The assumption hasn't been disproved so far, partly because current regulatory environment is very lax on reporting (which makes it very hard to disprove the thesis using public data) and partly due to other indicators (like retail owning over 10% of float as of last earnings report).

View on HN

> The assumption hasn't been disproved so far

This assumption is disproved every day by publicly available short interest data. If you operate on the assumption that all official data is false you can make all the wild claims you want, but you're not being serious and your theory is unfalsifiable.

> If you operate on the assumption that all official data is false

This is a strawman. It is possible to believe (and there is motive and opportunity in this case) that one "official" statistic is manipulated or does not show the whole picture without being a raving conspiracy theorist who trusts no official.

It's entirely falsifiable in multiple ways: (1) a voluntary share recall triggered by GameStop would force an accurate share count; (2) an extraordinary action triggered by shareholders for a formal accounting; (3) a special dividend with no equivalent cash value (eg NFT); or (4) a majority of shares getting direct registered (DRS) with the company's transfer agent (ComputerShare) rather than through brokerages so that the unique market maker powers at the Depository Trust Company (DTC) cannot mask the underlying share count.

I will also say: you can read SEC sources about RegSHO limitations about how short interest can be manipulated and masked through "Failures to Deliver" (FTD). So this is not exactly an assumption, more of a preposition about magnitude.

> Price discovery is broken when large market participants and market makers have access to mechanisms that enable unlimited shorting.

Actually, it's the other way round: you can only have accurate price discovery if people can take both long (buy) and short positions (short sell). If shorting is restricted, price discovery is much less likely, since only current owners of the shares can sell them. That's like only allowing current owners of the shares to buy more of them.

I think it's more that by law, long positions require disclosures, while short positions can be, and mostly are, opaque.

The more opaque information discovery is in general, the less accurate markets are in the short term.

The OP you are replying to here is obviously talking about shorting MORE than 100% of the float, which indeed should not be possible.

Shorting more than 100% is absolutely possible and the reason it is possible and normal is explained in the SEC report.

You need to stop getting your information from wsb conspiracy theorists. Here's an example of perfectly possible 200% float short:

Acme Corp has exactly 1 share of float, owned by Alice.

Bob borrows the share from Alice and sells to Charlie.

Diana borrows the share from Charlie and sells it to Eve.

Bob and Diana are each short 1 share for a total of 2. Total short position is 200% of float.

The better indicator of sketchy activity is FTDs, which may indicate that people are selling short without a locate.

600% from where it sat before the craze, which was the market price for a failing company. The company has seen revenue decline by 40%, lost roughly half a billion dollars in both 2019 and 2020, their EBITDA is negative, cash flow is negative, their margins are negative and falling. Their only plan to turnaround the ship so far seems to be entering the NFT market...

> subjectively high chance of having a real stock squeeze

Ha, that explains a lot. The only way to believe the stock will go up, is the fairy-tale short squeeze. The current valuation is extremely generous based on reality.

>market makers have access to mechanisms that enable unlimited shorting.

Uhh, what?

Market makers are allowed to be temporarily naked short because it's required for them to do the job they're supposed to do - provide liquidity. A market maker can sell short if they don't have any stock because they will almost certainly be buying it soon after. There's no evidence that any market makers are abusing this privilege with GameStop.

Yeah; it's not exactly what I'd called "unlimited shorting"; all of the pre-borrow and closeout requirements from Regulation SHO apply ... plus, as you say, the market maker exception is specifically there to stabilize markets by providing liquidity in the face of sudden rushes to buy.

I guess one man's price stabilization is another man's market manipulation.

This poster knows what they're talking about. The market making exception is there to prevent liquidity completely evaporating as it did during the flash crash. It's not there to encourage them to bend the rules -- it's to compel them to trade when it might be unprofitable.

Every trade has to be marked correctly, whether it's short with a physical locate or short on a riskless principal basis. Equity swaps trade and are marked as riskless principal trades (ie. they're fully hedged positions and the short position is the market maker's aggregate short position). That information gets aggregated at client level and reported to regulators.

After Dodd Frank equity swaps and rehypo became even more heavily restricted. Swaps go through a clearing house and rehypothication was basically dead the last time I worked in the industry (though that might have changed).

I'm 99% sure that the speculation about the "elites" and their sinister role in GME's trading activity is simply caused by booking errors and/or aggregation mistakes.

I think it's also worth pointing out that when selling short (naked or not), there's a big difference between adding liquidity and taking liquidity, and market makers are primarily (if not exclusively) in the business of adding liquidity.

If you're taking liquidity (i.e. "I want to sell right now"), you're directly applying downward price pressure to the market, by removing shares from the buy side.

If you're adding liquidity ("I'm selling, but I'm waiting for a buyer"), that's likely to have much less (if any) effect on the price.

It also needs to be mentioned that the entire business of MMs is to capture the spread by buying at the bid and selling at the offer. As such, they are passive market participants who will only transact if someone executes a marketable order against one of their resting orders. This means, they can only be as (naked) short as someone else is willing to buy from them. But they are also not interested in having directional exposure and will go to great lengths in order to balance their inventory.

The idea that MMs would somehow use their privilege to actively sell massive amounts of non-existent shares into the market in order to manipulate the price downwards is preposterous. That is literally the opposite of their business model and such activity would certainly be flagged by regulators.

Right - the entire Volcker reporting framework would instantly reveal anything of that nature.

Honestly it feels like a lot of the conspiracy theories around these meme stocks are based on reading a lot into a very narrow slice of regulatory text without any real understand of the whole.

> a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares

It's literally called the "madoff rule" and the "madoff exemption" because he's the one that pushed the SEC to allow it.

https://www.sec.gov/investor/pubs/regsho.htm

Reply on news.ycombinator.com