Posted on 01/30/2021 7:09:35 AM PST by RinaseaofDs
Nope.
In this case one firm borrowed 140 percent and the other firm let them.
And in your example, two people broke the law and shorted the same share. There is still just one share.
You borrow a banana from someone and sell it to someone who then sells it to someone else, you still have one banana, and two crooks.
When you short 140 percent of a company’s stock, the goal is to eventually repay the lender with stock worth zero or something close to it.
at Ameritrade. Wonder how they’ll like that. Be a lot of overhead and accounting on their part.
Do that often enough and they’ll insist you take your business elsewhere. The are not obligated to bear an unprofitable account.
You say that only because you don't understand what else goes on to clear a trade.
The systemic problem is the allowing of naked options trading. This should not be allowed at all, by anyone. If one is trading options they must be covered (buy or sell) and that cover must be maintained until the position is closed.
Cover comes from one of three conditions:
- Physical possession of the underlying asset (stock, commodity, etc)
- An opposite option position of equal value
- A cash reserve equal to the end of day close for that position.
https://www.cnbc.com/video/2021/01/28/interactive-brokers-chairman-worried-about-integrity-of-the-market.html
Even then, if the goal is to depress the stock price as some suggest, then it is quite likely as the stock drops sales of the stock outpace buys (that's what causes downward price pressure) which causes the number of shares in the float to rise. As expiration day approaches, the %short doesn't matter because no one will actually want the shares at that prices specified in the short-sale contracts ... so the short contracts simply expire, and the contract sellers profit from the sale of the contracts (not the stock) and the buyers are out the cost of the contracts (not the stock). And life goes on,
Only in a squeeze situation where unexpected buying decreases the float and raises the price is the %short interesting. That's why they call it a "short squeeze." The short sellers are "squeezed" into buying stock they don't want at prices that they didn't expect to pay to prevent larger and larger losses by expiration day because they ultimately MUST deliver the shares if the contract is exercised. The hedge fund is not "repaying any lender" they are on the hook to buy stock to deliver it to their contract holders if the price is higher than the contract strike price. They can relatively easily fill the obligations ... the catch is they have to lose a LOT of money to entice enough holders of the stock to sell. If they can't, then they're likely out of business either from losses or the breach of contract lawsuits demanding damages.
There are broader market implications here which may have been the real reason why stops were pulled (e.g. to get the capital to buy highly inflated shares of shorted stock, the hedge fund would have to panic-sell other assets creating unexpected downward market pressure in unrelated securities.)
This is just the way the options markets work (or are broken as the case may be); but killing the little guy to save the big guy is just not right and should NOT be tolerated!! Melvin/Citadel/RobinHood should be BARRED from options trading and fined heavily ... not for their options trades, but from their manipulation of trading by retail traders to save their own asses.
The anger here should be directed at the entities colluding to restrict trading (buying) after the horses left the barn. It matters not what risks the hedge funds want to take as long as the are fully exposed to the consequences of their bets.
What I don’t get is how you can short 140% of a stock to begin with. That means there has to be dark pools of ghost stock out there that is ‘off books’.
I’m pretty sure they didn’t block all purchases. It looked like they only blocked them for some customers - the ‘common folk’. They went right on selling any stocks they could get their hands on to the institutional buyers.
How can you have MULTIPLE due dates for a short share of stock? Shorting is supposed to be borrowing a share with an option to buy it within a future date. The only way your scenario works is if you borrow the stock to short, then offer to short to someone else during the same time frame. That would give you multiple dates, and this creates the >100% short versus float position even though it is still only one share of stock, but you have leveraged the transaction to make you money. That should be totally illegal because you never own the stock. It is borrowed, so how can you offer something borrowed you don’t own to someone else to borrow? This effect is no different then naked shorting which IS illegal because you don’t actually borrow the stock.
The other way they can do this is to offer ‘fractional’ shares. That way you can get your multiple dates, but that does not account for the >100% short position versus %float. No, the only way you can get >100% is through fraud and off-book accounting. This is leveraged shorting.
Interesting explanation of short sell regulations.
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