Good explanation on how margin gets created in an account because of the clearing time. 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’. This is how the system has been corrupted. That is clearly used to ONLY benefit the hedge funds to monnkey hammer down a stock and make money only for the hedgies. This is NOT the textbook NORMAL world that the little investor lives in, and explains why the little guy gets screwed by the big brokers. A perfect example of this is the precious metals market manipulation. What WSB did was find a loophole to play in the hedge fund world and give the hedgies a wedgie.
https://www.sec.gov/rules/final/2008/34-58774.pdf
As I understand it, which isn’t that extensive ATM, you can get there like this. I loan you a share that you are going to sell, but instead of selling it, you in turn loan it to someone else. So, it’s 1 “real” share that shows up as 2 shares being shorted. So that extra 40% in the 140% represents shares that have been “double-loaned”.
I'm assuming you mean the conspiracy stories where the big banks like JPM are massively short gold and silver, depressing the price? If so, you should know that 99.99% percent of those short positions are actually from precious metal miners who use the big banks to go short in the futures markets for them. The metals producers will always be short because they are delivering physical metal against those short contracts. Physical metals buyers are long, and take delivery from the miners (who are short) at contract expiration.
Don't be a sucker of the gold bug sites telling you that the price of their over priced coins they sold you will one day skyrocket when the big evil banks lose control of those short positions, getting squeezed out.
The shorted shares were loaned from the "float" of shares: shares that exist in-between actual ownership of a shareholder. Our markets work because a third party (market-maker or clearinghouse) serves as a middle man to make trades at or near market price happen even if an actual buyer/seller pair might not exist at the time of the transaction. The middle man holds/tracks a pool of shares to facilitate buys and replenishes the pool on sales. The pool is generally much smaller than the total stock issued by a company (and mostly off the market in the hands of actual shareholders.)
Generally naked shorts are facilitated by selling call options: a promise to deliver shares at a fixed price to the contract buyer by a specific date regardless of the market price. The contract buyer is betting the stock will rise; the seller is betting the stock will fall. The sale of the contract is revenue to the contract seller. The Short-sale-bet made by the seller (Melvin/Citadel) is that the stock price will decline over the term of the contract so that at expiration, the buyer of the contract will not want to take delivery of the shares. If indeed the market price of the shares is less than the call option contract price of the shares, it's cheaper to just buy shares on the open market. So, the contract expires and the contract seller (Melvin/Citadel) keeps that contract fee as profit ... and no actual share are traded.
In this case, it seems clear that there was an INTENT to create massive fear in the market for GME stock by setting up a MASSIVE short position on the stock. Melvin ties up a good portion of the float with short sale call options. Once word of this got out and folks started buying the stock, the float dried up as open market purchases were settled. It's hard to work out the exact timing of things, but I suspect the 140%-of-float number comes from the dwindling of the float pool as buying activity outstripped selling activity ... and Melvin was STUCK in its contract positions. It was on the hook for contracts that promised to deliver shares at prices that were BELOW the market price and trending even higher ... so they tried buying to cover some of their obligations ... which shrank the float even more ... and they had to pay even higher prices to encourage anyone to sell! They faced a bankruptcy event ... and should have failed: they took a big risk and got caught. Stupid should hurt.
Ironically, not a bit of this is illegal ... some might say massive short selling is unethical, but so far it's not illegal.
What this episode exposed was the ugly side of market risk. BOTH sides in this saga took massive risk: short sellers took the risk that unless the market price of the stock declined, they would lose; GME buyers took the risk that unless the market price rose, they would lose. Both sides were betting on herd behavior to either profit from panic selling (real shareholders selling shares before the price went even lower)or panic buying (short sellers buying to cover their short contract with real shares before the price went even higher). Both sides dug in, but the retail buyers has TWO significant advantages:
1. The Market is REQUIRED to settle legitimate stock trades (buys) ... regardless of the position of options contracts betting on stock future prices.
2. The short sellers had already dug themselves into a big hole from which they could not exit until their contracts expired.
In short, Melvin dug themselves into a fixed position and their adversary (the retail buyers) saw an opportunity to use that position to make a profit by bidding UP the stock with a squeeze ... also quite legal. The REAL crime here is NOT by Melvin nor the Retail buyers: It is the corrupt connections in the trading systems that PROTECTED the insiders and SCREWED the retail buyers. The ONLY fair actions here, if indeed certain structural components of the broader market workings were at risk would to been to either allow the blood bath to happen, or FREEZE ALL trading activity in GME et.al., let Melvin/Citadel fail after the contracts expired, and let the Retail Buyers take their lumps after the short squeeze pressure was eliminated. Like I said, stupid should hurt. Unless the Melvin's of the world have to face their consequences of their risky behavior, they'll keep doing it.
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’.