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?)
