A member here on FR posted this:
The Hedge Funds are in trouble. Not just a little financial trouble, but a lot of legal trouble.
What triggered the buying of Gamestop was people on Reddit noticing that short sellers had sold 140% of the actual amount of Gamestop stock. The hedge funds not only sold stock they didn’t have (Naked Short Selling, which is illegal, at least when mere mortals do it), but 40% more than exists.
This is why many brokerage houses have halted retail investers ability to buy Gamestop
Much of the volume of Gamestop trading involves stocks which do not actually exist. The trades cannot be cleared. The trades cannot be settled by the clearing firms..
And once this becomes painfully obvious to the general public, too many uncomfortable questions are going to be asked.
What is Clearing?
Clearing is the procedure by which financial trades settle - that is, the correct and timely transfer of funds to the seller and securities to the buyer. Often with clearing, a specialized organization acts as intermediary and assumes the role of tacit buyer and seller in a transaction, to reconcile orders between transacting parties. Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets as parties can make transfers to the clearing corporation rather than to each individual party with whom they transact
At least 40% of that 140% was an illegal transaction.
One thing we know for sure. The Big Money will come out of this OK. The government will see to that.
The little guys are not allowed to play the same games the big guys do. And they will be taught a lesson.
There is a bit of a difference between selling stock that you don’t own (naked shorts) and selling stock that doesn’t exist (fraud). And if the politicians can’t bail out their owners, fraud might well be exposed.
I’m not sure that the brokers, exchanges, and regulators can afford for fraud to be exposed.
Gamestop just needs to issue and sell more shares...
I will defer to others, but I don’t believe this is illegal. This is done via derivatives. Speculators may buy puts (the right to sell at price), or sell uncovered calls.
The notional stock volume of these derivatives could be many times the outstanding float. In a normal market, these get “unwound” as options approach their expiration dates as traders balance positions, but in a very bizarre, illiquid market, like we have now, these turn into time bombs waiting to explode
This is the first thing my stock market savvy son told me; that there were more shorts than available stock. That’s where institutions will be in legal jeopardy. Some Reddits may not clear the profits they expected. I’m hoping the smart Reddits just put themselves at risk with a few hundred dollars. Entertainment dollars you know.
I'm not so sure there is a legal problem here. If the same 10 shares of GameStop stock changed hands twice in one day, I think it may show up in the financial records as 20 transacted shares. That would mean it's legitimately possible for short-sale shares to be reported as more than 100% of the actual number of company shares on the market.
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“What is Clearing?
Clearing is the procedure by which financial trades settle - that is, the correct and timely transfer of funds to the seller and securities to the buyer. Often with clearing, a specialized organization acts as intermediary and assumes the role of tacit buyer and seller in a transaction, to reconcile orders between transacting parties. Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets as parties can make transfers to the clearing corporation rather than to each individual party with whom they transact”
Shouldn’t then a transaction be not allowed to start with if it can’t be cleared wnen the time comes to close it?