Wow, how has nobody noticed this before? This looks seriously rotten:
> Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.
I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis.
> In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of
2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.
If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.
Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
> it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share)
This is called a reset transaction, and it is not permitted.
Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is
unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the
short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying
the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the
shares in the market, Trader A might next enter into a trade that gives the appearance of
satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain
its short position without ever delivering on the short sale. Most often, this is done through the
use of a buy-write trade, but may also be done as a married put and may incorporate the use of
short term FLEX options. These trades are commonly referred to as “reset transactions,” in
that they have the effect of resetting the time that the broker-dealer must purchase or borrow the
stock to close-out a fail. The transactions could be designed solely to give the appearance of
delivering the shares, when in reality the trader has no intention of meeting his delivery
obligations. The buy-writes may be (but are not always) prearranged trades between market-
makers or parties claiming to be market makers. The price in these transactions is determined so
that the short seller pays a small price to the other market-maker for the trade, resulting in no
economic benefit to the short seller for the reset transaction other than to give the appearance of
meeting his delivery obligations. Such transactions were alleged by the Commission to be sham
transactions in recent enforcement cases. Such transactions between traders or any market
participants have also been found to constitute a violation of a clearing firm’s responsibility to
close out a failure to deliver.
I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc.
Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots of buy interest and less sell interest, they may need to sell more shares than they normally hold. Market makers still need to have the shares in time for settlement, which may require borrowing if they have net sales more than holdings in a given day, but they don't need to locate shares to borrow before selling. Market makers are given an exception, because liquidity is valued, and they need to be registered and have specific capital requirements etc.
TL;DR, naked short selling isn't a thing anymore. There's been no reports of Gamestop shorts being naked shorts, and no reports of shares failing to deliver on time. Naked shorting isn't required for short interest to be over 100%.
You might take aa look at the SEC's December reports of fail-to-delivers, before the GME rocket lit: there were three days with over a million shares failed to be delivered, and several more weeks with over .5%. WSB had a post encouraging everyone to file a SEC report over this back then.
You should cite the posts and resources you've mentioned, because there are a variety of caveats that approximately all the posts on WSB misinterpret. People will fly by a comment like this and just repeat it without any fact checking.
The very page you describe specifically states that you can't infer when failures to deliver occurred because the data is reported in aggregate with no age statistics. [1]
Moreover failures to deliver can occur on both the long and short side, and do not necessarily represent that a naked short sale occurred. [2] And when they are associated with a naked short sale, it may still be legitimate. Market makers are legally allowed to engage in naked short sales to facilitate liquidity, and if they can't fulfill the borrow in time (which would itself happen for legitimate reasons), that failure to deliver would also be reported.
Finally - reporting an increase in apparent naked sales to the SEC by gesturing towards data on the SEC website doesn't make sense. The SEC is definitionally aware of it. There may not be an active investigation, but these kinds of datapulls are pretty manual and staffed by people familiar with the data.
Regarding the data in question you are completely right but the unusually high numbers reported suggest possible naked short selling or a systematic lack of liquidity for that particular stock.
If what’s going on is naked short selling by those who are not market makers then it’s illegal and those who are doing it need to be prosecuted.
If what’s going on is due to a lack of liquidity then it suggest that price manipulation could be occurring in the form of excessive coordinated short selling.
Finally - why assume a government agency is competent and has the means and resources required to act in a timely manner? The issue was reported though. [0]
> Finally - why assume a government agency is competent and has the means and resources required to act in a timely manner?
That's not the assumption.
The assumption is that facts manually assembled and reported by a government agency are already within the knowledge of that agency, so even if they don't have “the means and resources required to act in a timely manner”, you aren't helping by reporting those facts back to them.
(This may also be an unwarranted assumption , but it's a different assumption than you describe. I've definitely in the past—on behalf of a different government agency—frequently been involved in reporting facts assembled by one office of a government agency to the parties responsible for acting on that information in another office of the same agency who hadn't been informed of it.)
Your words aren't that reassuring, since this is the same SEC that failed to find Madhoff's Ponzi scheme.[0]
> since 1992, there had been six investigations of Madoff by the SEC, which were botched either through incompetent staff work or by neglecting allegations of financial experts and whistle-blowers
My understanding is that the following situation can lead to a short interest of over 100%. Let's imagine a hypothetical world where there exists 1 share of a particular company and it is owned by Person A. Person B then borrows the share from Person A and sells it to Person C (this is the first short). Person C now owns 1 share and Person A doesn't have a share but is contractually obligated to receive 1 share from Person B at a certain point in time in the future. Person D then borrows the share from Person C and sells it to Person E (this is the second short). Even though there only exists 1 share the short interest in this case is 200%.
Now there are obvious reasons as to why this isn't a smart thing to do as recent events with GME show but it's not necessarily illegal (as far as I know). If this is actually not true or it's illegal somebody please correct me.
This is possible, not illegal, and can be simplified even further.
It's entirely possible for me to borrow a share from you, (short) sell it back to you, and then for us to repeat that process an unlimited number of times, thereby shorting an unlimited amount of stock. This would be stupid since I'd owe you more stock than exists and you could set any price you wanted for them.
Whomever is the holder record has the voting rights. If you gave your stock to someone to facilitate a short you lose your voting rights until that position is closed. You can read more about it here: https://www.investopedia.com/ask/answers/05/shortsalevotingr...
It looks like nesting got too deep, but for bkh, you are correct.
> In this case, they retain a fraction or none of their voting rights, I presume?
If you have a margin account and want to vote with your shares, you need to let your broker know prior to the vote, so they can be sure and not have your shares loaned out when they're figuring out everyone's voting shares.
Some time prior to 2010, I heard some heads rolled at my firm because such a request was screwed up for a major client, and they had fewer votes than expected for some important vote.
> If you gave your stock to someone to facilitate a short you lose your voting rights...
Individuals do not loan stock for shorting, generally. But they do sometimes have margin accounts (for unrelated reasons), and this allows the broker to loan their shares out without their knowledge. In this case, they retain a fraction or none of their voting rights, I presume?
On a side note, if you want to vote with your shares and have a margin account, you need to let your brokerage know in advance of the shareholder meeting, so they can get those loaned shares back to you in time to vote. Otherwise, the shares showing up in your account may or may not actually be there on the day for you to vote.
There were some compounding factors for this situation, in particular a reverse split.
"Global Links was caught off guard by the events that transpired in February 2005 when it implemented a one-for-350 reverse split of its stock, the result of which would reduce its float from 350 million shares to 1.1 million. ... Some have said it is all a simple matter of broker error. Accounts showing 350,000 old shares of Global Links should have been adjusted by the broker to show 350 [sic, should be 1000?] of the new shares, but some have said that didn't happen"
Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.
Not always. Saudi Aramco went public with only 1.5% of their value, and that was 25 Billion dollars, a good amount by any measure, specially useful when you need $$$ for weapons for your war in Yemen.
Besides the money, they also wanted to test the waters before going in with a larger percentage and I don't know if the market could have handled a new 1.7 Trillion dollar company joining all at once.
If you own all the shares then you can control the company via voting control. That’d generally allow you to prevent the issuance of new shares and you could hand pick the board as their terms expire. It’s not immediate, but you’d eventually be in control of everything.
Not all shares have voting power, and even so the voting power of those shares (if they were 2% of the company for example) may be proportionally tiny compared to the founders/board/execs.
For example shareholders don't have any control at FB, since Mark controls 51% of the voting power.
It's fairly unusual to have companies with this sort of structure. Why would you ever buy shares in a company that doesn't pay dividends and where you can get infinitely diluted and have no control? (other than for speculative reasons)
Discounted future cash flow includes all of dividends, possible future acquisition, and greater fools buying it from you. The last one being what drives Tesla and cryptos.
I just checked and you are right (1835 vs 1827). Funnily, there is this:
"but unlike common shares, they do not confer voting rights to shareholders. As a result, these shares tend to trade at a discount to Class-A shares. "
Tech/growth doesn't pay dividends as dividends are a signal your business is done growing. Dividend companies would rather return capital to investors than place more bets and keep growing.
Tech and growth stocks have minted many millionaires. And sometimes overnight.
This is also why growth companies sometimes don't reach profitability. They're spending their revenue eating the rest of the market and gaining monopoly.
> no control?
People that invested in Facebook made lots of money. They were probably fine with the arrangement. If they stop being fine with it, the stock price will decline.
If you own all of the voting shares sure. But a company can have 100,000,000 shares, own 99,000,000 of them, so only 1,000,000 are trading. If you buy all 1,000,000 of those shares you don't have much power.
I think the above commenter was trying to say: you can't always own 100% of the outstanding shares with voting rights, because in most cases insiders hold many shares that they will not sell.
That's about two classes of outstanding stock with different rights held by different group of stockholders, not about stock held by the issuing company.
So then you agree that there could be situations where only a couple percent of the ownership of a company is available on the market, and if you buy all of those shares, then you would not control the company?
As in, you agree than a couple insiders could control a large majority of a company, and that this percentages of the company would not be on the open market, and therefore even if you buy all of the shares that are available on the open market (and the definition that I am using would disclude these shares owned by these insiders), you would not control the company?
> So then you agree that there could be situations where only a couple percent of the ownership of a company is available on the market, and if you buy all of those shares, then you would not control the company?
Sure, it's possible that at any given time people aren't offering to sell a majority of the voting power of stock, or (theoretically, at least) any voting stock at all (it's even possible that the only class of stock trading on the market is nonvoting; SNAP I think does that.)
I was taking issue with the particular claim, made twice in the direct chain of ancestry of this comment, that a company could simply hold the majority of it's voting stock itself, so that holding 100% of the shares not owned by the company would not give you control since the company itself (presumably, it's management) would exercise most of the voting rights. It doesn't work that way.
Fair enough, but your comment wasn't phrased specific to that example, it was a general statement about owning 100% of outstanding shares: If you have 100% of the outstanding shares, you have 100% of the voting right
I mean, this has to be true right? Otherwise the stock market doesn't function as shared ownership, it would be more like Kickstarter at scale with no recourse for failure to deliver.
Plenty of takeovers have been conducted on the open market, even without consent of the board, also known as a hostile takeover.
Class B shares with no voting rights have been a thing for a long time. When the US government bailed out the banks in 2008, they made sure to buy only Class B shares, so no one could claim the government nationalized the banks and put them under their control, rather they just injected capital.
You are both right, but you are missing the point. It is entirely possible for controlling interests to be held in other classes of shares (or even common), that is not counted in the FREE float available to trade.
Global Links was trading around 10c a share with ~350 million shares, for a market cap of around $35 million. They implemented a 350:1 reverse share split, which in theory should have resulted in them having a stock price of $35, 1.1 million shares, and a market cap of around $35 million.
For some reason, it took longer for this to shake out than expected; in the immediate aftermath it was reported that enormous quantities of Global Links stock was still trading, and the share price had actually declined to a 8 cents.
Presumably, some systems were reporting "old" numbers (pre reverse split) and some "new" numbers (post reverse split), and I'm sure an enormous amount of confusion resulted. And it was at this point Simpson reckons he bought 1.2 million shares for a bit over $5,000.
That's less than 1/3 of a cent per share, which seems wildly off (the share price was 10 cents pre reverse split, and would have been expected to be $35 afterwards), but given that it seems a lot of computer systems were not handling this correctly, who knows what he was told by his broker?
So...obviously Simpson did not purchase 110% of a company, and he definitely didn't do so for 0.01% of its market cap. I rather assume his broker had told him that he had done so, but that seems like fodder for a lawsuit between him and his broker over their buggy systems, but it doesn't tell us much else. It's possible he might have ended up owning 3.6k shares (about 1/3 of a percent of the company), but even that seems doubtful if it actually only cost him $5k.
Anyhow:
> I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.
I think the better reading of that is some guy found a bug in a broker's system that caused it to tell him he'd done that, but it would have been obvious to all concerned that whether he'd ended up with 0 shares, ~140 shares, or ~3.5k shares, he definitely didn't have 1.2m shares, since they never even existed.
Just looking at the numbers here, this could just be a case of a sign getting flipped somewhere along the way.
Global Links intends to do a reverse split, replacing 350 old shares (worth 10¢ each) with one new share (worth about $35). For the sake of argument, let's say they mixed up the ratio in their split filing. Instead of doing a reverse split, they do a forward split, replacing each share of old stock (10¢) with 350 shares of new stock (about one third of a cent, each). The shares trade at a somewhat high volume, because each share is worth a fraction of a cent.
Simpson notices that, after a 350:1 reverse split, Global Links ought to have about 1M shares outstanding.¹ He also notices that the current trading price is a fraction of a cent. Small enough to make this a worthwhile experiment. He acquires about 1.2M shares without moving the price too much. He also doesn't question how this was possible to happen within a day or two.
After the split, Global Links has some 100B shares outstanding. Simpson's position of 1.2M is less than one percent of that, so the shares continue trading as before.
¹ He might be combining multiple sources of information here. Perhaps his brokerage doesn't show reference data, so he combines the price he sees in his brokerage's app with reference data from Yahoo!finance or something.
No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever.
What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.
> What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.
After all liabilities are deducted. Which usually means nothing.
He owned the equity, and therefore theoretically had control over its management. The firm might still have a lot of debt, so be owned largely by banks (or bond holders).
Firm value = equity ("market cap") + debt + various, see
I thought most of the online brokers had it by default now? Isn't it part of the "no commission but we do literally anything else to make a buck" business model?
If not then he either doesn't own all the stock or there is some fraud here. As it is, it's the simplest explanation and one he hasn't ruled out. So he needs to check there first. It's possible they lent it by mistake or he agreed as part of the 10,000 page T&C he signed when he joined...
It's interesting. I'm a limey brit (sorry, I should have said sooner), brokers here were always able to lend stock without involving the owner. It's one of the reasons that brokers here have always been pretty cheap. It also helped Unit Trusts (ETFs etc who can do the same) take off quickly here.
His broker can recall the lent stock, so they'd recall it and have it sent to whoever bought it on their/his behalf.
I worked on a computer system to handle all this for a while. It was front office so as well as buy/sell transactions we had to process lend/return and borrow/return actions to actually understand the company position.
Within each of those are lend request messages with approval/declines etc.
I don't understand how this can work. The broker loans the share to person B. Person B sells the share to person C (as B wants to short the stock). How can the Broker recall the share: they have no relationship with the current owner of the stock. Even if the broker demanded B rebuy a share to return the stock, since the original guy owner all liquid shares, it would only take one other share holder to holdout to make the share return impossible.
The Broker calls Person B. Person B has 1 day to get the share back or they're in default. It's up to Person B to buy back from whoever is selling at whatever price they want.
It is possible for short sellers to get caught as you describe (someone owns all the stock and they have bought 1 additional share and now wont sell). But it's very rare. It requires a few things to all happen at the same time:
* 1 person has to own all the stock. This in itself is very unusual. In many jurisdictions there are a whole bunch of extra requirements once you own more than X%.
* Someone has to want to short the company. If it's small enough to be owned entirely by 1 person, it's probably too small to attract short sellers or to be lent. Unless someone BOTH wants to short this small stock, AND happens to know the broker in question has some, no one knows who to ask to borrow it.
* They have to short it over 100%. This is unlikely, since a small company that's been bought entirely by 1 person, who is left to buy more? The market is one sided as apparently the only buyer is the guy holding 100% already (if anyone else bought those shares, they could sell them back to the shorter).
It's really really rare.
Technically the short seller defaults when they cannot source the stock, he has to absorb whatever losses he's caused the broker.
But as the original stock holder what happens when if the loanee defaults? The broker just calls you up and says "you had the share in your account but we lost it, here's some money for your troubles?"
It seems like the holder wouldn't care if they were just selling it, but if you were transferring the stock out to another brokerage, they just give you the alleged ask price of the shares (which actually doesn't exist because the shares are illiquid) because they made a mistake and lost your shares?
I also find this confusing for voting rights: if my brokerage is loaning out my shares without my knowledge, then I don't actually have the voting rights that I think I do, since the share is actually held by someone else?
>The broker just calls you up and says "you had the share in your account but we lost it, here's some money for your troubles?"
Pretty much.
Devils advocate: if you know you own all the stock, and someone offers to sell you stock, you know the deal cannot actually be completed. So at best you're owed your money back for the "extra" stock you "bought".
If you own 101% you should know you cannot actually transfer or vote that stock extra 1%, it's simply not possible. All 101% means is if the stock goes up, you get 101% of the gains.
Fyi, times when votes are happening are interesting for shorted stock because a not insignificant percentage of the stock does get recalled so owners can vote it. So short sellers have to reduce their positions and then increase them again. It is one way to try and estimate short-seller impact in the stock...
Thanks for clarifying. It seems like this should be a problem for cases where not just one person owns all the stock but for any fairly illiquid stock: if someone holds 40% of outstanding shares, the brokerage loans it and then it's sold, if there's some kind of takeover or aggressive purchase then it seems like a collection of others who now hold 61% and aren't listing their shares would also cause this "lost share", right?
Isn't this also a loophole that can be used to "steal" stock from someone who otherwise doesn't want to sell: their share is loaned by their broker to B who sells it to you, and then you just refuse to sell it back to be returned, and some random middle man is on the hook and you've managed to purchase shares that weren't for sale?
I think you could definately use it to acquire shares that were not truly for sale.
You have to be a pretty big organisation and post a lot of collateral to borrow and sell stock. It's also assumed you'll sell it on exchange, if you do so you don't know the buyer though I guess you could arrange it? So a really sneaky player willing to sacrifice a lot of collateral could probably do it.
I think the main safety catch here is that if you hold a significant percentage of a company and you want those voting rights, talk to your broker to make sure its not lent without your knowledge...
It's quora but it seems pretty good. It does seem that if it's lent and not returned you get cash or wait for some to become available. Sucks if you wanted to vote the shares...
There are realistic scenarios here where the liquidity of a stock can't cover the short though, as in there being not enough shares listed for sale at any ask price.
I understand shorts are said to be unbounded risk, but surely there's some escape hatch: if the top hedge fund shorted 30% of some penny stock presumably a competitor that buys out 71% of shares doesn't get to take over the whole hedge fund by only selling that last share back at a price of 100% of the funds value: instead the fund will default on their recall responsibility and pay out some reasonable amount (and some true end stock holder just surprise loses their share?)
Recent events have a lot of people confusing high short interest with naked shorting.
A stock can have short interest greater than 100% without any naked shorting.
How is this possible? The textbook definition of a "short sale" is that someone borrows stock and then, literally, sells it short. The buyer of the stock is free and clear to do whatever they want with the stock, including re-lend it for another short sale. Wikipedia has a good primer on how this works: https://en.wikipedia.org/wiki/Short_(finance)
This has created a lot of confusion on WallstreetBets, where many participants have come to believe that Gamestop's short interest of 113% means that there are 13% more shares shorted than long positions to cover. It's not true, though, because the long interest is always greater than the short interest.
Wait, by my own calculation it seems GME had way more shares failed to deliver than that. I count over *14 million* in December using the [two data files provided by the SEC](https://www.sec.gov/data/foiadocsfailsdatahtm):
$ cat cnsfails202012[ab].txt | csvgrep -d '|' -c SYMBOL -r '^GME$' | csvcut -c 'QUANTITY (FAILS)' | sed 1d | paste -sd+ | bc -l
14276093
How many of those are the same shares failing to be delivered multiple times? Lots I don't understand...
The numbers you're looking at are aggregate data, so that includes past days I think, not just the given day. I think you have to subtract each number from the previous one.
> The figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as existing fails
Ah yes, they are aggregate indeed. The sentence just before the one you quoted also says:
> Fails to deliver on a given day are a cumulative number of all fails outstanding until that day, plus new fails that occur that day, less fails that settle that day.
So the last day we have data for is December 31, 2020:
As I understand it that means there were only 228358 shares failed to deliver at that point in time. This needs more analysis to understand how irregular it is compared to the other 12,000 symbols that had shares fail to deliver in December...
And just for completeness on your comment, a naked short is the same as a regular short, but in the opposite order. First sold short, then borrowed after the fact.
I can’t quite wrap my head around how this is possible.
Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?
Because actual delivery does not happen until settlement time three days later. The seller has until then to acquire the shares.
Naked shorting is illegal. To short the shares the seller only has to perform a “locate” first. That involves contacting someone that has the shares and is willing to lend them. Skipping the locate step is illegal. They just don’t have to actually borrow them until delivery.
Additionally, if the locate fails to materialize then it’s the sellers responsibility to borrow them from someone else before delivery. If not, that leads to a fail to deliver which locks up further transactions for the seller until it’s resolved.
Unless you're a market maker and thus exempt from the regulation, because your market making function requires buying and selling lots and lots of unsettled shares in order to provide liquidity.
Sorry it took so long to get back to you with an answer! Also no snark detected. Here is a nice overview by the SEC but it's really light on the details.
That last part is what really confuses me... what if the seller never resolves the failure to deliver? The buyer is walking around believing they own a share that the seller never actually gave them... I understand that the types of institutions that can engage in this behavior will true up their balance eventually, but why allow it in the first place? I can understand playing fast and loose with derivatives, since they are created out of nothing anyway, but securities should be treated in a manner consistent with their name.
Same as if you pay for ten tons of lumber and it doesn't show up. Stock trading grew out of traditional property trading and inherits a lot of its norms from there.
Not necessarily. But we're talking about a heavily regulated system, run by a lot of very conservative entities, that currently works pretty well on the whole; there's going to be a whole lot of "if it ain't broke don't fix it".
That's what the clearinghouse is for. They are the counterparty for both sides. So the seller's counterparty is the clearinghouse, not the buyer, and the buyer's counterparty is also the clearinghouse. The clearinghouse requires broker margin accounts so that they can close out a trade when there's a failure. And the amount of collateral depends on risk.
(This is also why GME trading was halted by some brokers--assymetrical trades and increased volatility meant there was greater risk for trades in those stocks for those brokers, so the clearinghouse demanded more collateral from the broker. Broker doesn't have that collateral right away, they can't make the trade.)
The buyer gets made whole by the broker they bought from, retail you'll never know it happened. The buyers broker makes the sellers broker make them whole, they pay whatever the buyers broker has to pay to buy the shares elsewhere plus more. Brokers
It sounds devious when you put it like that, but yes. Most things in finance are compositions of credits and debits that take time to settle. The aim is to have sufficient liquidity and price accuracy that the time between executing and settling is safe, but there's always risk that things go awry before the settlement.
I’ve never heard a simpler statement of the fundamental Achilles’ heel of modern finance: “various forms of promises”
The system has become so intertwined that when someone breaks a promise, it’s too disruptive to actually hold them to account so we just paper over it to keep the wheels of commerce rolling.
Which is a form of hostage negotiation. Promise breakers are incentivized to profit as much as possible from broken promises as long as they can hold the system as a whole hostage.
Yes, it’s like writing a check that won’t clear because you know it’ll be a few days until the money comes out of your account and even if it doesn’t, you can say “oops my bad” and fix it later.
Not necessarily. As long as the borrower commits to borrow the stock at a determined point in the future which the broker legitimately deems should have borrow liquidity (availability of shares to borrow), the short sale is not naked.
And interestingly enough, if this transaction occurs in good faith and for unforeseen reasons there is no borrow liquidity at the agreed upon time, a fail to deliver will occur despite the short sale not being naked.
That's fair - said another way you just have to have a plan in place to borrow the share but don't actually have to have it borrowed yet. And all this discussion is fairly moot given the number of shares that routinely fail to deliver and the general lack of meaningful enforcement actions.
It's not really about presentation of balance sheets, it's about liquidity. The explicit purpose of market makers is to provide liquidity, so they have a special exemption to buy and sell shares without being certain they exist. They have to have a good faith belief they will exist though. Usually they're right. Occasionally they're wrong.
Does this mean that there is still only 100% of stocks available and the ratio of iou's to total stocks 113/100?
I guess that makes sense that a person can borrow a stock, sell it, borrow it again from the second buyer, sell it again. The number of stocks floating around stay the same, however, the number of iou's increases. Likewise, a person can buy the one share, return it, then buy it again, and return it again to settle the second of the iou's.
Interesting that nobody is really explaining the mechanics of how this works. Makes me wonder if a lot of retail investors are about to get hurt.
>Interesting that nobody is really explain the mechanics of how this works.
This is another case of the more popular a thing is, the less reliable the talk about it seems to be. News outlets could very much be explaining well what is going on, but they aren't. Bits and pieces of the "real" story are coming out, and lots and lots and lots of nonsense.
I read this, but it's not clear to me there's anything to it. It has a strong aroma of crank, and not a lot of quantitative detail. Has anyone written a useful response to this?
EDIT: Specifically, I think the idea that failures to deliver create counterfeit shares is wrong. I'd love to hear from someone with intimate operational knowledge of this process. FYI, SEC SHO FAQ:
I just wanted to point out that naked shorting is very easily hidden. It’s hard to prove and the system is built for allowing shadiness. At this point how can we still give them the benefit of the doubt?
* data breaches are very easily hidden: literally anyone can walk out with a usb drive loaded with information, or download the data off an unsecured/unlogged server without a trace
* it's hard to prove: I mean, companies aren't exactly offering their logs up for public inspection
* the system is built for allowing shadiness: not sure how to quantify this one but there's definitely a problem of attribution when it comes to who did it, especially when there's multiple data brokers involved.
You read hearsay saying that company X has suffered a data breach. The company denies this. Do you give them the benefit of the doubt, or do you assume they're guilty?
I’ve seen that explained on WSB. I don’t think there’s much confusion about it. Nonetheless, SI being that high will inevitably drive the price up to unwind, and take quite some time to unwind. The evidence of naked shorts (which Market Makers are permitted to do to enable liquidity) seems primarily based on FTDs.
> What happens if a market maker fails to deliver the promised stocks due to inability to purchase stocks?
Unless volume is zero, there is no “inability to purchase stocks.” Just inability at a desired price. If a market maker fails to deliver, they get hit with fines and fees from clearing infrastructure, exchanges and, eventually, the SEC.
In addition to the shorts, when people buy call options - doesn't that mean someone else is on the hook to provide shares at a later date, and they might not hold them at the time of selling the option?
You can sell naked calls. The maximum loss is infinite and so it is hard to get a brokerage to allow you to do this, but it is done. Indeed if the price goes up you are on the hook to buy the shares and deliver them.
Calls are commonly either covered by shares you own or in a spread where you buy and sell the same ticker at different prices or dates.
Yeah but it's not like anyone would exercise out of the money options *nervous laughter*. Though theorethically, with enough options it could cause the same effect as a short squeeze, where the exercise drives up the price to make them in the money.
A lot of calls will be "covered" by whomever wrote the option initially, meaning for each contract they wrote, they hold 100 shares of the underlying security as collateral. I don't know the percentage and my Google skills are failing me, but perhaps someone more familiar with the industry can comment on the ratio of covered v. naked calls.
I've written cash-secured puts and covered calls a decent amount as an individual investor, the worst thing that happens is you end up buying something for more than it's worth or selling something for less than it's worth. However, it rarely goes wrong the first time and you've made premium from other options many times over on the same security. If you look up the Wheel or Triple Income options strategy that goes into the specifics of it. It works pretty well for high-volume, stable stocks that you want to own anyway.
They often do, but they don't have to. You can write an uncovered call, if you're brave or stupid -- after all, worst case you'll just market buy the shares to deliver on the day the option is tendered.
Liquidity providers can always just write share IOUs and find the shares to fill them later. The market running out of stock is not a thing that can actually happen.
I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending.
This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea.
Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.
In sports, we call these "side-bets," wherein the total value captured in the bets can be many times the purse prize of the event (fight/match, what have you).
That there's a great deal of betting happening on the outcome of the stock market shouldn't surprise anyone (and yet it does!). It is, after all, the biggest game on the planet.
Except in sports, the side bets don’t inherently sway the outcome of the match (unless the players are betting too). Financial side bets do influence real asset prices.
And what happens when the side bets begin to wag the dog - when it becomes more profitable to manipulate the underlying and pay the fines there in order to save a bigger position in the side betting market?
Your car example makes for a fun scenario where you lend someone a one-of-a-kind car, and that person sells it to someone else, and you manage to buy it back from that someone else (maybe for a quite high markup). Then when the time comes for the first person to buy the car back to return it to you, you either outright refuse to sell or ask for even higher markup. What will happen then?
Why do we even allow people to sell borrowed things?
> Why do we even allow people to sell borrowed things?
Unlike cars, one share in a company is as good as another, and the whole reason you borrow a share is so that you can sell it. It's kind of like how if you borrow money, you're allowed to spend it instead of just keeping it in a pile under your bed.
A owns a widget and lends it widget to B; B sells the widget to C; C lends a widget to B; C buys another widget from B.
A has 1 IOU from B and no widgets.
B has no widgets and owes one to A and 1 to C.
C has one IOU and one widget.
There you have 2 IOUs and only one widget. To settle debts, B will have to buy a widget from C, return it to him, and then buy it again and return it to A. The widget isn't "tainted" by being at one point borrowed, anybody buying it can lend it out. Doing so can create more IOUs than there are widgets.
Imagine getting in a circle with all of your friends, you have a dollar and the person on your right borrows it from you, then the person on their right borrows from them until you get around the circle and you borrow the dollar from the person on your left. There was only ever one dollar but now there are as many IOUs as people in the circle. That's of course a silly thing to happen, but if you rearrange it to make it messier the result is the same, more IOUs than there are things to be borrowed.
Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy.
In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long.
The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.
Every so often, someone gets very steamed about short selling, often with no real reason. Back in 2005, someone got very steamed about short selling, and then got a journalist to write a somewhat confused article about it. It's not clear anything was actually wrong then, but in any case, the rules have been changed a few times since then, so there doesn't seem to be any obvious relevance to current times.
It's also worth noting that there's no real theoretical basis for why naked short selling would be harmful, no real empirical evidence showing it is harmful, no general laws against it, and the structure of the market allows and expects it to take place in some specific cases. If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.
> If your mental model is that the stock market is a tool to allow people to trade a fixed number of concrete objects back and forth, this probably seems odd, but since that's not really a good model of how the stock market works or is intended to work, it's not clear that means much.
I'm pretty sure that's how the stock market is actually intended to work. This should be obvious if you consider things like dividends. There needs to be a fixed number of shares, each with a clear owner for that to work.
The reason it's a bit more complicated in practice, is because historically the technology wasn't there to do realtime gross settlement. So to limit the number of transactions that the central database had to handle, layers of delayed net settlement were set up instead.
I'm pretty sure that's how the stock market is actually intended to work. This should be obvious if you consider things like dividends. There needs to be a fixed number of shares, each with a clear owner for that to work.
This isn't really true. Let's say a company has 100 shares and they decide to issue a $1 dividend. If there is no shorting, the company just pays out $100 and everything is done.
But let's say there is shorting. Someone loans out 10 shares to a short who then sells them to someone else. All of a sudden there are 110 shares out there. So when the company pays out the $100 it's $10 short of what is required for each stockholder to get the dividend.
So where does the required $10 come from? From the party shorting the stock of course! Anyone short a stock is required to pay out, in cash, any dividends issues while they hold a short position. So it all works out.
> Someone loans out 10 shares to a short who then sells them to someone else. All of a sudden there are 110 shares out there.
No there isn't - there are 100 shares total at all times, and every time those 10 shares you mention change hands, the cap table is updated (or should be) to reflect this. First they are owned by the original owner. Then they are owned by the shorter (and a contract is in place to return the same amount of shares and any dividends to the original owner). Then they are owned by the person the shorter sells to. At no point are shares duplicated.
There are 110 long shares worth of economic interest in the company - the original owner will still report the shares they have lent out when looking at their current position.
As you point out, an IOU for a share doesn't pay out a dividend from the company, so it is not the same as an actual share. We seem to be in violent agreement that shares are not created out of thin air (but IOUs for shares can be).
> As you point out, an IOU for a share doesn't pay out a dividend from the company
Huh? They most definitely do. That's actually one of the simplest non-objections to naked shorting; in the system we have, the short seller must pay the dividend to the person who loaned them the stock. In a naked short, the short seller would pay the dividend to the person who bought the stock.
Voting rights don't transfer so cleanly; in the current system, a stock lender can't vote the loaned shares. The most natural system of naked shorting would prevent the purchaser from voting a share that was sold short, which would produce a difference between shares sold short and other shares.
Note that I said "from the company". My point was that the company only pays dividend to real shares, and the stock market intends to track ownership of those real shares. This does not prevent lenders and short sellers to replicate dividends from IOUs of shares via contractual agreements, but it is not the same thing.
So a company could discourage shorting of its stock by arranging dividends to be spread over the year? Paying out to 1/365th of shareholders each day for example.
I think you could make an argument that allowing naked shorting could in fact be beneficial. Part of what's allowing gamestop stock to explode recently is that it's next to impossible to find shares to borrow for shorting. If everyone who wanted to short the stock could do so without having to borrow shares, price discovery might work significantly better. (I assume the counter-argument would be that short squeezes could be even more intense. But perhaps they would be less likely to occur in the first place.)
If stocks were synthetic assets then sure. But common stock represents an ownership share of a company, which is a collection of real physical things. Naked shorting means you’re basically allowing anti-stock, but there’s no such thing as “anti-ownership”. Stock, like hard money, should allow debit balances only.
This is a reason why cash settled single-stock futures are useful. They have the same economic value as a long or short share of stock, but because they're just a bet on the price, they don't have any of the awkward features that come with needing to deliver an actual share.
I'm pretty certain you can trace a lot of the current fervour over short-sellers to Elon Musk's ongoing paranoid rants about how they're evil and trying to ruin Tesla. There's likely a large crossover between WallStreetBets posters and Elon Musk fans.
When it's not the purchase-a-thing model it's otherwise-disinterested third parties making large bets on possible future outcomes. It has more in common with a bookie's ledger than a warehouse of goods.
Why this is often harmful and dangerous is that the financial viability of businesses and individuals are often backing these bets. A person or company expecting financing to be predictable and stable may suddenly find it not so because their lender is desperate to cover their gambling losses.
I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting.
Except for a handful of folks, everybody loses money on them. The ones that do make money are rigging the game (à la casinos) or are just lucky. Some of the lucky ones have been lucky for decades, some even went bankrupt after being lucky for so long.
> I still don't understand why these kinds of derivatives are not banned. They're, as you described, basically betting.
Imagine I run a chain of hotels in beach resorts. When tourism is up, I make a ton of money; when tourism is down, I lose a ton of money. I'd like to flatten this so I can make a steadier, safer stream of money, budget more sensibly, and not be at risk of going under if 2-3 bad years come in a row.
What can I do? Well, maybe I look around and notice that a big spike in jet fuel prices drives ticket prices up, and when ticket prices go up people stay home and I lose money, whereas cheap jet fuel means high occupancy rates. So I might hedge by buying put options (and/or selling call options) on jet fuel. When fuel prices go up, I can offset my low revenues with cash from selling my now-valuable put options (or the cash I received earlier from selling now worthless call options). And when fuel prices go down, I can use some portion of my higher revenues to pay for the cost of the worthless puts I purchased (or to settle the now valuable calls I sold).
This sort of thing is common and healthy, not just among end users, but even more so among intermediaries working to remove and reduce the amount of risk inherent in the system.
Why are they not banned? Why would they be banned?
> Except for a handful of folks, everybody loses money on them.
That's not really how this works. Or indeed, could work.
This just seems like a complicated way to go about budgeting correctly. Save money when you have excess from increased revenues, and use that to cover yourself when revenues decrease. I don't understand what is gained by bringing puts into the equation, if they are just as cyclical as your revenues. And it seems to me that you'd need a decent understanding of what your budget should be in order to decide how much to spend on puts in the first place. What am I missing?
Saving money requires keeping cash (sometimes a lot of it) in the bank that could otherwise be put to productive use. Options contracts allow offloading of risk without keeping this excess cash sitting there doing nothing.
Call me crazy but I thought the idea is that banks would use deposits to fund loans and kick some of the profit back to the account holder in the form of reasonable interest rates.
That seems capital efficient to me, but it's apparently a quaint relic of the past now that eternal 0% interest rates are the norm.
I'm reminded of the scene from It's a Wonderful Life where George Bailey explains to all his account holders why they can't all withdraw their money at once, because it's being put to productive use by their fellow townspeople: https://youtu.be/iPkJH6BT7dM?t=49
Banks don't use deposits to make loans though, that's a widespread misconception which is perpetuated by concepts such as 'fractional reserve banking'. In the modern economy bank lending is simply adding a number to someone's account and adding an equal number to the bank's loan sheet.
The banks still do this; they leverage deposits to back the loans they provide.
However, they have little to no impetus to provide a reasonable interest rate on savings accounts; they'd much rather pay the absolute possible minimum the market (and regulation) will allow, and pocket the rest as profit.
Maybe I'm misunderstanding you, but don't options contracts introduce risk? I've never run a business -- what risk are you incurring by having the cash sitting in a bank? If the play is instead to take a (perhaps small) risk in order to increase your amount of money or keep up with inflation, I understand that. But then I still don't see why options are necessary. There's lots of ways to do that.
The original post described options as a way to make your stream of money both "safer" and "steadier". I'm struggling to understand how introducing options can be safer and steadier than keeping money in a bank and creating an intelligent budget.
But you're not offloading risk -- you're increasing risk. What if jet fuel rises for some reason other than increased usage? What if usage is increased, but, people simply aren't visiting your region?
Simply doing something with the money is not necessarily better than doing nothing with it. None of the above is productive use -- it's simply betting. Jet fuel producers don't care about your commodity-indexed fund call option.
Who says we shouldn't? In Romania, where I'm from, there is sports betting everywhere and a lot of people are addicted to it.
I think sports betting in general is on the rise, at least in Europe, and I can't imagine it having positive financial or psychological effects for the average person.
The argument in favor of allowing shorts is that they provide a strong monetary incentive for private investors to investigate and expose financially fraudulent companies.
I don't have a good general answer; it's complex. But some specific things relevant to this story:
Market makers are allowed and expected to run naked shorts in order to ensure liquidity. We want a system where you can just buy or sell an item "into the market", and then everything will get sorted out eventually. We optimise for the case where shares can be found because it's overwhelmingly common.
Stock borrowing is routine and transparent. People often have no idea if their stock has been lent out or if they own a borrowed stock; the reason for this is because the system has been designed so it doesn't matter. Shorting is common and accepted.
The volume of transactions is enormous, and the system began to freeze up under the weight of its own paperwork in the 60s and 70s. To work around this, a policy of stock immobilization was implemented to ensure that stocks don't need to physically change hands. As a result, almost all stocks in the US are actually owned by a small, obscure partnership called Cede & Co. As the excellent writer Matt Levine wrote a while back:
> Nobody owns stock. What you own is an entitlement to stock held for you by your broker. But your broker doesn't own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co., which is a nominee of the Depository Trust Company, which is a company that is in the business of owning everyone's stock for them. This system sounds convoluted but actually makes it easy to keep track of things: If I sell stock to you, I don't have to courier over a paper share certificate, or call up the company and have it change its shareholder register. Our brokers just change some electronic entries at their DTC accounts and everything is cool.
Dematerialization has been extremely helpful, but at scale, it moves us even further away from a system that deals with concrete items. Hence, eg, Levine's hilarious story "Banks Forgot Who Was Supposed to Own Dell Shares", from which my earlier excert comes from: https://www.bloomberg.com/opinion/articles/2015-07-14/banks-...
And so forth, and so on. The system, at every level, is not one where it makes any real sense to say "the company has issued five hundred thousand shares, I own twenty of them, I keep them in a drawer in my office, look, here are the serial numbers". It's more probabilistic than that, very much by design.
"Probabilistic" markets will be (and to some extent already are) re-invented on-top of the blockchain.
Current generation cryptocurrency blockchains are more similar to the post-trade settlement system, where everyone figures out who owns what after-the-fact.
Maybe smart contracts will change that, but performance will need to get a lot faster and I'm not sure how feasible it is to implement a full exchange on top of (for example) Ethereum. Would love to see it though!
Especially because the subsequent info off of page 2 gets increasingly wacky. I hope readers see this and make it to the rest of the article.
It makes me think... okay, the SEC closed that loophole, but the fact that it existed for years show how abstract and weird and unmoored the stock market is, financial games built on as much clouds as ground.
Should have a [2005] in the title. This is probably showing up on HN because naked short selling is topical, but the information in the article might be misleading if it's out of date.
/wallstreetbets are, in their own insane way, doing research into the most extreme tactics that short sellers have employed in the past.. expecting the entire arsenal to be employed tomorrow when trading begins.
Honestly when I saw this link prior to the edit it was less interesting due to how topical it was. Now it’s more interesting and carries an historical aspect.
Note: Shorting more than 100% of shares outstanding does not imply that there is naked shorting happening. You can re-borrowing the shares someone shorted and it happens.
It's times like this that common sense definitions of terms like "naked short selling," "market manipulation" and such turn out to be very different from the operable ones.
You borrow it, then you have it, but the lender still owns it (and is long one = zero physical, one lent), and you have to return it. You own zero shares (flat = one physical, one borrowed). Then you sell it, and now somebody else has it and owns it (and is long one = one physical, zero lent), while you own minus one (short one = zero physical, one borrowed).
"Common sense" may have been an overstatement... but what I meant was: Assuming that if shorts require traders to borrow the stock, shorting more than 100% of it is impossible.
>There is no special limit on shorting at 100% of shares outstanding! There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.
Yes you can have > 100% short interest without naked shorts.
But are the circumstances that lead to such a situation (regardless of nudity) economically useful, or is it just allowing parasitism to exist in our system without good reason?
There is nothing magical about 100%. If it's useful in 99% then it's useful in 101%. Short squeezes and other things happen also before 100% of stocks are shorted. Shorts relative to float seems more important.
Technically no, but shorts serve the same purpose as put options, just without the intermediary piece of paper. You're betting on future value without actually possessing the thing that may (or may not) be valuable in the future. I would argue this is a meaningless distinction in context.
And I wouldn't say futures are "obviously useful". They are "useful" in the sense that if you bet on the future and bet correctly, you win, but does the overall economy win? Or is it just a layer that creates more winners and losers without those winners actually providing more value than they otherwise would've? Futures are effectively a zero sum game, and I don't think we should in general encourage those. Futures and shorts are basically just gambling. Would you say gambling (when applied to sports / etc) is economically useful?
What we should be encouraging is positive sum games / win-wins.
AFAIK the problem with that figure aggregated so that you don't know who did it and which side they're on. That means you can't tell whether it's just background noise, or a specific person constantly failing to deliver a short.
Naked short selling is selling stock that you don't have.
In normal short selling–lending a stock, then selling it–there is always chain back to real stock. Someone is always holding the stock. If 100% of the shares are short, then there are 200% of the shares owned, but only half of them can be sold (you can't reload or sell the stock you have loaned)
The perils of fractional reserve banking can arise in any centralized custodial arrangement. As long as no one performs a physical audit—or there is no physical object to be audited in the first place—then accounting fraud can and will happen.
This is, in my opinion, the raison d’etre of blockchain. Public, immutable ledgers are immune to this kind of fraud (although they have other issues, of course).
Fractional reserve banking in the real economy is utterly irrelevant thanks to the FDIC backstopping a run. In the last [edit: 88] years nobody had lost a single penny to a bank run or default including 2008s WaMu default thanks to the FDIC.
Crypto fractional reserve like tether has no backstop and that’s a completely different beast. It’s what exacerbated the Great Depression.
As with all blockchain unless the state is 100% totally and utterly encapsulated within the blockchain, then it’s garbage in, garbage immutably recorded. Which is why the only thing you can do with crypto is currency and kitties.
> then it’s garbage in, garbage immutably recorded.
This is the major weakness of proposals to put everything on the blockchain.
In real-world scenarios, accidents happen. Records must be corrected.
Voting is a great example. If we moved voting to the blockchain, it wouldn't automatically solve fraudulent voting problems. It would just record fraudulent votes on the blockchain. If your grandma accidentally loses her private voting keys to hackers, do we just roll over and let the hackers vote as your grandma? Obviously not.
Any future blockchain solutions to anything government-related will certainly have corrective measures and overrides overlaid on top. It's not like we're going to sit back and watch people lose their house because hackers stole the private keys to their property deed, or forbid someone from selling their car because they can't remember the password to their title wallet.
>If your grandma accidentally loses her private voting keys to hackers, do we just roll over and let the hackers vote as your grandma? Obviously not.
It's not obvious to me why not. It's a trade-off. You put the responsibility on the user to keep their keys but you save a lot by not spending anything on solving fake or real issues like this.
In this case if you want assurances like this you can trust a third party that handles that stuff for you.
We do things according to what our goals is. Tinkering around technically just for the sake of it provides no value on its own.
In this case, someone losing their voting ability because of the system on a regular basis is not acceptable. That's the obvious why not. We want to make a system to count the people's votes. If it bars a voter from casting their vote, it's a failure.
You’ll note that most people purchase things with credit cards and checks. Trying to buy your daily latte with a gold coin will get you some very strange looks and a manager trying to figure out what to do.
Things like that are more closely associated with heist movies (or their more mundane analogue, "used notes", with run-of-the-mill crime) than legitimate commerce.
It's less than 100 years since thousands of banks collapsed in the early 1930s and most depositors lost their money. The FDIC was created in 1933 and has prevented losses since.
Short-selling shares is basically a form of fractional reserve banking. A short squeeze is essentially equivalent to a bank run. Where is the FDIC helping to backstop a run on shares?
It’s not a bank run, it’s poor risk management and the FDIC doesn’t insure brokerages, that’s the SIPC. Poor risk management is very much not covered by any federal program. Their liabilities are between them and their brokers, and if contagion spreads, their private insurers. This is why you can only short in a margin account and are required to put up collateral.
If you sold short 140% of float and bought calls to cover, then we wouldn’t be having this conversation. Play stupid games, win stupid prizes.
Similarly if I bought a bunch of stuff on margin and it went under overnight, RIP my account. You can lose money in both directions.
“140% of float” doesn’t really mean more shares were sold than exist. There are after all only 100%. It means the same shares were sold more than once by the same or different people, and buying them back cancels the debt obligation.
From a social level, there is a huge difference between a bank run and a short squeeze. One affects regular savings, the other wipes out only those that opted into a high risk short position.
If you’re talking about 2008, then they actually paid for it. The loans that the US government made during the crisis actually paid themselves back with some interest.
They still paid for it at the time, and that's why the ones who got themselves into risky positions did not get wiped out. My engineering degree had a great ROI but I still paid for it.
For volatile stocks like GME on IBKR right now, 300%, so very much the opposite of fractional reserve banking. Well, fractional, but the numerator is far larger than the denominator.
The whole point of inflation is to encourage investment as money is only worth something as it flows through the economy.
You’re not supposed to save money under the mattress you’re supposed to save value by purchasing assets. A hundred years ago buying roughly speaking any asset would have preserved your entire wealth or created tons of new wealth.
Wages have on average kept pace with inflation.
You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
- CPI(-U) is not a suitable measurement of inflation anymore since it discarded fixed basket goods somewhere in the 90s and that
- inflation measures with "old-school" fixed baskets report inflation rate in the range of 6-10%/year
- production of goods became much more efficient but instead of being reflected in cheaper prices it increased shareholder profits and wealth inequalities?
My take on it re CPI is that I don’t know enough to know whether CPI is a suitable metric or not. I defer to economists here which is something you’re free to hold against me.
Re (2) I’d be very interested in learning more about the delta between CPI and these baskets. Do you happen to have a reference? I’m always down to learn more.
Re (3) I agree that inequality has gotten worse but I see that as a social and fiscal policy matter and not a monetary policy matter. If we’d been using gold, the same trend would have manifest. Poor people don’t hold onto money anyways they’re hand to mouth. And any extra they happen to hold onto could have been invested anyways. Frankly minimum wage over the period hasn’t been indexed to inflation either!
I’m a huge advocate of decreasing the gap between the rich and poor, I have more than I need to be sure, and the best way to do that is taxation.
This gap between rich and poor really started widening after the Reagan era tax cuts and trickle down economics. If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%. Estate tax the same. If you reduce that to 37%, rich people get richer because they keep more and more of their wealth. A practically 0% estate tax ensures the next generation starts on a monopoly board where there’s a hotel on every square. To me that’s a much clearer correlation than the spooky action at a distance of this 2% (a figure you admittedly contested) inflation rate. Do the ultra wealthy really hold cash? Do the poor? Does anyone?
CPI matches other measures of inflation like http://bpp.mit.edu pretty well. People who think inflation is high are cranks - the history of cranks goes from Austrians, to Shadowstats, and currently is on Chapwood Index.
If we had inflation at 10% the economy would be smaller now than it was in 2010. It's under 2% and we can't get it up no matter how hard we try (not that hard so far.)
> If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%.
Note that the effective rate was nothing like this because there were also lots of deductions.
To be fair I actually thought that inflation was measured using a fixed basket of goods.
Apparently that was changed in the 90s. An example I read (of which I am not sure if it is entirely accurate) was: "if steaks become too expensive, its weight in the basket will be reduced because people are expected to buy more chicken instead. this results in lower inflation estimates".
If true, why do you feel a fixed basket should not be used to determine inflation even though it is probably what most people would expect in such a measure?
In your example of steak, there are macroeconomic changes which may well cause the specific commodity to change in price substantially over time. Inflation isn't determined as a function of "steak" but rather as a function of "protein."
For instance, industrial agriculture, the farm bill subsidizing corn to below the cost of production starting in 1933, and many other things may change the relative cost of beef over time as compared to, for instance, pork and chicken. That's not inflation, and as such it doesn't really make sense to define inflation in terms of these factors which affect only a specific industry.
> In your example of steak, there are macroeconomic changes which may well cause the specific commodity to change in price substantially over time. Inflation isn't determined as a function of "steak" but rather as a function of "protein."
I don't think this applies to the general population's understanding of inflation. The layman's interpretation would be "how much more expensive would it be today if I bought the exact same things 1/2/5/10 years ago". This is actually how inflation was measured up until the 90s.
"Removing" (i.e. reducing the weight) of a good when it becomes more expensive is contradictory to measuring the price increase of an average basket of goods. Especially if you do it on short timeframes. CPI-U is reweighed every 2 years and C-CPI-U is reweighed every month. How are you expected to measure inflation* beyond those timeframes? Housing too expensive? Rent. Cars too expensive? Public transport. Steaks too expensive? Eat chicken. Chicken too expensive? Ramen. Ramen too expensive? Food stamps.
The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same. They can't protect themselves via buying stocks or other assets because they need their money to survive months by month. All the while, the riches are getting richer by pocketing efficiency gains and bailouts.
People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome. So the inflation measure was changed to a dynamic basket in which expensive items are reduced, cheaper items are increased and magically inflation* is around or even below 2%. Nothing to see here, nothing to worry about - we always had 2% and 2% is fine. Except the poor are getting poorer and more desperate and susceptible to fascism.
So the idea people have about "inflation" as the increase of costs of a fixed average basket of goods is as obsolete as the idea of "money" being backed by gold.
> I don't think this applies to the general population's understanding of inflation. The layman's interpretation would be "how much more expensive would it be today if I bought the exact same things 1/2/5/10 years ago". This is actually how inflation was measured up until the 90s.
The layman's interpretation of a lot of things isn't right or useful - just ask antivaxxers. As our standards for what luxury is change, what we're willing to pay for them (in the supply and demand sense) changes.
Things that used to be "poor-mans food" like lobster and caviar are now high-end food. Monkfish, oysters, foie gras. Even sushi was street food. Skirt steak was crap meat! Now they're incredibly expensive. Is that inflation? Of course not, that's a change in tastes.
Similarly, spices like clove, nutmeg, cinnamon and pepper used to be hugely expensive but are now dirt cheap. Is that deflation? Of course not, that's a change in productivity and availability.
The fact that the basket wasn't adjusted seems like a huge oversight to me.
> The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same.
This is a completely unfounded leap. You have not presented any evidence for a cause-effect relationship, just simply asserted it. Correlation is not causation.
This is a social policy issue and not a monetary policy issue. Even if we pretend for a second that the situation was exacerbated by monetary policy, it doesn't matter - it's still a social policy issue to resolve.
> People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome.
Sure only if you ignore that that's not how inflation is calculated and for a good reason.
Haha, that's not what I'm saying, however. Although bugs are a delicacy in a number of cultures! [0]
Just that factors outside inflation influence the pricing of certain commodities. Nobody's guaranteed a specific commodity forever, and the definition of luxury, and commodity expectations, changes over time.
For instance, pig feet are having a moment (or at least were pre-pandemic). They used to be discarded as waste, but now you'll find them in haute cuisine. [1] Sweetbreads too!
Tastes change, expectations change, cost structures change. The world isn't static, and nor should our metric be.
The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place.
If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ?
Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
>>>>>>You’re not supposed to save money under the mattress, s you’re supposed to save value by purchasing assets.
This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
>>>>Wages have on average kept pace with inflation.
I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
>>>>>>>You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
The gold window was closed because gold was garbage money. A money supply you can’t adjust cannot respond to shocks and it can’t respond to changes in the economy or society. The crash in 2008 and again now would have been much much much worse without an ability to control supply. Inflation is defined in terms of supply and velocity. Velocity plummeted so supply was raised to offset and lo and behold the fed nailed its 2% inflation target in 2020 in spite of epic global chaos. Gold would have ruined us.
Yes wealth inequality is a problem, that’s a fiscal and social issue not a monetary policy issue. Tax the rich.
>>>> slush fund
Nobody’s stealing anything. The inflation target is public and goaled on. Inflation has a purpose. You don’t like that purpose maybe because you don’t understand it maybe because you do, but it’s not theft. There is every chance we’d all be worse off under a 0% inflation environment because it would drastically reduce the liquidity that underlies the entire global economy.
Think about it: if poor people have no money and real salary has kept pace with inflation what wealth is inflation reducing? And if we use a 0-inflation or negative inflation currency, what’s to say wages wouldn’t stay flat or go down.
Again if you want to help the poor and narrow the gap, tax the rich, this inflation thing is just the game, and railing against it is tilting at the wrong windmills.
> The gold window was closed because gold was garbage money.
The gold windows was closed because the French decided to redeem their dollars for gold, and due to the rampant debasement of dollars, there wasn't enough gold available to do so.
Mises had a few things to say on the subject of what makes money “good” or “bad”. You might learn something if you read The Theory of Money and Credit.
>Wages are up 10% since 1963 on an inflation adjusted basis
And they're down 5% since 1970. Claiming that chart shows growth is a gross misreading of that source. The slope of the trendline since 1963 is practically zero.
>The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place.
Hyperinflation is what happens when the economy collapses and you are deep in debt both at the same time. When people talk about inflation as a policy goal they usually talk about a moderate amount like 2% or maybe 4% if you have an appetite for risk but also greater potential gains.
Hyperinflation is never a policy goal, it's what happens when things have gone wrong entirely.
>If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ? Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
Too much inflation is a bad thing. It means there are not enough workers/there is not enough production capacity to meet all needs. Interest rates reduce inflation and thus demand for workers by making sure only the most productive investments stay on the market. A dead company can just borrow money to hire people and waste their time if interest rates are negative. If interest rates are low like 3% then your company has to make a moderate profit. They have to put people to good use. If interest rates are too high it means only the most productive companies can even make it in the market. Some industries like agriculture have low yields (as in dividends) that cannot afford high interest rates but they are extremely important for our society. We must hit a balance between a non productive and too productive economy and interest rates can contribute to this.
>This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
The reality is that if someone has 20 years of salary in their bank account and another person is unemployed for 20 years the value of your money is gone because that person that owed work for your money didn't work during that time. Food rots, people age. Your money exists purely as a representation of labor and its products and thus even money has to rot.
If your money doesn't rot but there are less apples in the future then you can still buy the same number of apples (or more) and thus your share of apples grows even though you have done nothing to deserve them. People save with precious metals, real estate and stocks (technically just the land) because they do not deteriorate. Well, that's not entirely true. If you save in gold you are betting that an economy will exist in the future that can give you apples in exchange for gold. If you save in land you are betting that people will gather around you and live and work around your plot of land. If you save in stocks you are betting that the company will not go bankrupt in the future.
How do you make sure that people will work both work today and tomorrow? You just pay them more tomorrow. That's why inflation is a policy goal.
>I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
Inflation is generally driven by a shortage of labor and a shortage of labor drives salaries. There are some exceptions. You can build an economy that is unable to employ everyone but that's not an argument against inflation. It's an argument against specific policies. The government can just ban work and everyone will agree that this is stupid. There are less nefarious policies that can have the same harmful but lesser effect.
Inflation is down because there is a complete lack of domestic demand for a certain segment of the population. College educated people tend to do far better than those with just a high school diploma. There are two reasons for this. Globalization makes unskilled labor unnecessary domestically. That means less work where you can sell your body but the work where you use your brain hasn't moved. That portion is actually growing. The second problem is that employers have absolved themselves of the responsibility to train their workers. That means you are now responsible for your own education. This means people must go to college but it also means there are some unfortunate souls that did not acquire the right skills for the current labor market.
>This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
That's not savings. That's rotting paper. It's not even stealing because you can get interest on your savings if inflation is high.
Not OP, but USDT / Tether is an example of something which exists as a proxy for something off-chain; so auditing the chain is obviously not going to work to see how much USD they actually have. Though it is possible to provably audit exactly how many USDT are in circulation at any point.
I think OP's point was more about things which exist entirely on-chain, i.e. the idea of having stock ownership tracked directly there (rather than as a proxy for real shares tracked somewhere else).
In that frame, a better example is something like the DAI stablecoin, which is backed by assets that are on-chain. So at any block, you can audit exactly how many DAI there are, exactly which assets exist to back it, and exactly what the last reported oracle prices are for those assets.
While Tether's bank accounts being private is a problem for auditing, even if that were removed, you'd still have to somehow "snapshot" all the bank accounts an transactions, freezing things in time so you could ensure there wasn't a shell game going on while you audited.
This just isn't feasible with a federated system where each bank has their own ledger, and asynchronously tries to align it with a bunch of other ledgers.
Blockchains overall reduce throughput compared to this model, because they enforce a single ledger. But they do this while still preserving decentralized control, resulting in a tradeoff where you lose some scalability, but also remove need for a trusted mediator(s), and now anyone can audit a snapshot of the state at their leisure.
In which case of course the trading has to happen on totally unaudited, unauditable exchanges like Bittrex’ (GME:USDT) pair and settled on the blockchain - which is absolute free for all in terms of shenanigans.
Blockchain doesn’t keep up with Bitcoin trading either, but you can always withdraw your assets to a private wallet and not have to worry about getting Mt. Gox’d. There’s no way to “withdraw” securities from the opaque financial system, so you are always at risk of fraud.
Well fractional reserve banking is accounting fraud. Widespread and legal, but fraud nevertheless.
Also fractional reserve banking is a thing of the past. We've now evolved to no reserve banking. The banks' ability to create money from thin air is almost unrestrained.
It is legal, yes, that is indeed what I said. But it's legalised accounting fraud. Can I pay for a car by crediting my assets with 30.000$ plus creating an (interest-free) liability for 30,000$? No, but that is what the banks in effect do.
Depends on the wealth of the friends you have who trust you.
I can pay occasionally my lunch by crediting my assets with $10 plus creating an interest-free liability for $10. Yes, and that is what the banks in effect do. And no, it is not a fraud, just a massively misunderstood thing.
It's a fraud because they can do it but I can't do it.
Say I have a network of businesses and individuals who trust each other, or that agree to establish some way to maintain trust with each other. Say we wish to do away with banks. So a person wants to open business A, needs to buy things to get their business up and running. Rather than begging the bank for access to capital [0], I buy things from my fellow businesses in this community on credit. They agree to give me their goods in exchange for my promise to pay back (and in exchange I do the same for their goods).
This still doesn't work because of one simple reason: dollars (or your local currency) are legal tender, and you need legal tender to pay taxes. You cannot legally function on "community credits" alone.
[0]: Which in itself it's a pretty wretched thing that this is in the hands of private individuals, who can decide who gets to start businesses and who remains a wage-slave.
> It's a fraud because they can do it but I can't do it.
That's not what fraud means.
"In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right."
The reason some things are illegal and others aren't is because for the system to function, certain powers and responsibilities are delegated to certain entities. You can't own nuclear warheads, you can't kidnap people, and you can't print money. The act of doing those things isn't illegal. What makes that act illegal is the context. If those who were delegated that power are doing it, it's not crime, it's your responsibility. If you decide to build a reactor in your back yard, that's crime.
Just because someone else can do something you can't doesn't mean it's fraud.
> As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
> The stock borrow programme at the DTCC, they allege, enables the naked shorting of shares to the extent that the number of shares in circulation of some companies is now several times in excess of that issued. Even companies listed on the NYSE, could have been affected. As Wes Christian, partner in law firm Christian, Smith & Jewell in Houston, and lead lawyer on several of the cases, explains: "With the revelation of the Regulation SHO Threshold Securities list and the Leslie Boni report, published in November 2004 [see glossary], it is now crystal clear that this problem of naked short selling is systemic in Wall Street, and virtually impacts every business sector on every exchange including numerous billion-dollar companies listed on the NYSE and other companies listed on the Amex."
When I was in PFG Marketer Services I saw million dollar double payout fuckups all the time and a shady SQL Server database for "manual over-rides" on commissions to brokers that seemed like an un-audited slush fund.
Someone reading that might be wanting to ask the same hoping to hear salacious "hookers and blow" Wolf of Wall Street legendary stories, but usually the reality is pretty mundane. Corruption is endemic to highly successful niche adaptations, but their yields rarely give rise to outlandish behavior. We see that a lot in breathless news stories, but that's just what sells ads.
Most corruption happens in a matter-of-fact, business-as-usual, we're-all-in-this-together atmosphere. And the proceeds don't usually lead to blowout lifestyle extravaganzas, as most participants are clever enough to realize that draws unwanted scrutiny. That is what makes corruption so insidious and difficult to root out. The rot spreads slowly, and inspection is commonly asymmetrically more difficult and costly to mount than undertaking the corruption act itself.
The most reliable way of rooting out corruption I've seen is an organizational culture that nurtures trust between leadership and organizational members, equitable gains sharing (so members feel they have skin in the game), and fiercely protecting whistleblowers (where the vast majority of human organizations utterly fail). Personally, Dunbar's Number appears to be some kind of (hopefully) local optimum but I'm curious how Geoffrey West's findings of scaling square with corruption incidence and scale.
In your opinion, what is sketchy about dark pools. I have a couple answers (pertaining to marketing, but not operations of the pool), but am curious about what the popular perception of these pools are.
Well for me, it's taking information flow off of the table. Not having access to the trade at execution (and how long it was an order) puts me at a disadvantage. I'd take the market impacts to have greater transparency.
Dark pools have deceptive marketing imo: to investors they advertise how no HFT ppl will be around to eat you alive while simultaneously giving a totally different presentation describing all the benefits of the dark pool to the HFT firms.
When the number of shares trading is no longer bound by the number of shares issued by the companies they're supposedly shares of, their value and thus price becomes completely meaningless.
Perhaps you could normalize the price using short interest %, but that's not even reported real-time and would be an approximate at best estimation of how much inflation fuckery is going on with the # of shares.
This whole thing reeks of corruption and manipulation IMHO, I'm shocked this isn't explicitly illegal and it's making me lose all interest in participating.
No, they are evidence of people who woke up to find out that they owe you their shirt, in addition to six decades of indentured labour of their children, grand-children, and yet-to-be-born great-grandchildren... Deciding that maybe they aren't going to pay you right this instant.
If you're shorting on margin, and the market moves too far before your position gets closed... Your position might get wiped out, your margin might get wiped out, and you may owe an unbounded number of dollars to your counterparty.
Generally speaking, your broker will then sue you for that money... But lawsuits take a long time to resolve. And to a bystander, this sort of thing looks just like a naked short falling apart.
Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300.
When shares are traded out from under a short, and there’s no where left to borrow them from, and the hedge funds can’t meet collateral requirements for their short interest, and the broker needs to liquidate their position but they come up about $20 billion dollars short...
That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.
> Whether the shorts were naked or not before this started, the shorts are unquestionably bankrupt with GME at or above $300.
That is not correct.
You have no idea whether or not the shorts currently open, as of today, were opened when GME was worth $12, $50, or $400.
It's entirely possible that many of the $12 shorts closed when the stock first rallied.
> That’s when you have massive failure to deliver and the whole corrupt organism goes into CYA mode and tries to shut down buying and bring the stock price back in-line with their models.
The reason trading on shitty retail brokerages like RobinHood was shut down was because the clearinghouse collateral requirements went through the roof, and shitty retail brokerages like RobinHood weren't able to instantly come up with a couple of billion dollars to wire to the clearinghouses. (They did, eventually, which is why buys resumed on Friday.)
You get what you pay for with brokerages. They are an abstraction layer over a highly technical, 19th-century layer of physical settlement of stocks. When the market isn't going crazy, this abstraction works, with minimum collateral requirements. When the market is going crazy, this abstraction stops working, and their counterparties start demanding billions of dollars in collateral.
I agree with everything you said except one nit: Robinhood still hasn't fixed their liquidity issues because they only let each account buy a maximum of one (1) GameStop share on Friday.
This seems like it should be easily monitored. You're not allowed to sell short shares that you don't actually have access to. How is that not an easy thing to determine during the transaction?
Basic rule of thumb is any company where the management is whining about shorts, and about naked shorts in particular, is garbage. The reason companies get shorted over 100% of outstanding shares is because everybody agrees they are garbage. Not a conspiracy. Go look at the stock of the absurd company in question after you read this article.
Here's what Robert Simpson of ZANN Corp. was doing at the time: using his position in company A to buy his side gig company B. Whenever you dig into these guys for even 5 minutes they always turn out to be sleazy.
Yes “naked shorting” is a technical failure that hasn’t been a real problem in forever, but us frequently cited by shady CEOs as cover for why their stock price fell. Patrick Byrnes is one famous example.
From this very article: “ Alan Sporn, former president and major shareholder of OTC bulletin board company Trident Systems, is suing a group of brokers who, he claims, utilized a number of techniques, including the stock borrow program, to undermine the price of Trident's stock. This attack on the value of the company's stock virtually destroyed the company, both in terms of raising capital for growth, and in depressing the value of the shareholders' investments to virtually nothing, claims Sporn.”
Sporn case was so weak the judge ruled for sanctions against him and he had to negotiate an agreement to avoid being stuck with defendants court costs.
I borrow a share and I sell it and the buyer lends it to someone and they sell it. Now two borrowers owe two lenders the same share of stock. It's real straightforward when you think about it. Also has nothing to do with "naked shorting" which is when you sell the share before you are able to borrow it.
The most important aspect of naked short selling is why it's a thing. Naked short selling is used as a weapon by short sellers. The purpose is to push down the stock price by artificially increasing supply relative to demand, perpetuating the sell spiral. Thereby, the short sellers can further increase their profit on short sales.
> Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.