Naked Shorting Explained
Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market. Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems.
The above is from Investopedia What is Naked Shorting?
What’s Going On?
- It is illegal to be naked short in excess of float except for market makers who have to take the other side of a trade.
- It was not the market makers who were naked short. It could be in theory, but not in this case, at least not yet.
- Hedge funds wanted to short and they have to borrow stocks to do so.
- The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.
- It should be the responsibility of the brokerages and market makes to not let hedge funds get 140% short. But they did, and I believe on purpose.
- Since the public cannot be 140% long, except via options, who was effectively long the other 40% of the shares?
- The brokerages and the market makers. To get even more shares for themselves, they restricted trading.
- So while these Redditt traders did well, the market makers also gained immensely on the meteoric rise. The more the merrier. They screwed the hedge funds big time and purposely so.
- A side artifact of points #1 and #2 is when the shorts are all squeezed out the market makers are the only ones who are short.
- When that happens, the bids plunge and the market makers cover lower.
Rule #1 The Casino Always Wins
The market makers benefit on the meteoric rise. They will be the big winners in the collapse that’s about to happen.
Rehypothecation Role in Naked Shorting
The result is still naked shorting.
You just described a mechanism as to how it happens. https://t.co/XUsbTk9sub
— Mike “Mish” Shedlock (@MishGEA) January 30, 2021
If someone borrowed them, shorted them, then were fools enough to lend them again, did they deserve to blow up?
Why aren’t shorted shares marked as unlendable? Or are they?
Regardless, who is managing the trade?
Why aren’t they watching short interest? https://t.co/bsChGX7s9G
— Mike “Mish” Shedlock (@MishGEA) January 31, 2021
Was Robin Hood manipulated into trading restrictions by Hedge Funds or the Market Makers?https://t.co/fjOztF3hLb https://t.co/AE8YoEgfZA
— Mike “Mish” Shedlock (@MishGEA) January 31, 2021
Over and Over
I said Over and Over And Over Again This Dance is Gonna Be A Draghttps://t.co/bkZXRuEaD8
— Mike “Mish” Shedlock (@MishGEA) January 31, 2021
Times Square Billboard
The New York Post notes Defiant Redditors buy Times Square Billboard as GameStop Stock Saga Rages.
“$GME GO BRRR,” blared a digital ad on the corner of 54th and Broadway in Manhattan. The ad ran for an hour on Friday and was a creation of digital billboard maker Matei Psatta.
The line refers to a popular internet meme that uses “Brrr” to signify the sound a money-printing machine makes. GME is the stock’s ticker symbol on the NY Stock Exchange.
Congressional Hearings Loom
Fox Business reports Robinhood hiring ‘federal affairs manager’ as congressional hearings on GameStop scandal loom.
If Congress wants to Investigate something, I suggest starting with my 10-point scenario and Rule #1.
Book Already Out
WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials.
Fortunes made and lost by younger generations who use the stock market like a video game, find cheat codes and exploit sophisticated instruments.https://t.co/es4Hg40Kd7 pic.twitter.com/sr7O83yDk8
— wallstreetbets (@wallstreetbets) June 24, 2020
Movie Coming Up
The book on the World’s Biggest Casino is already out . I confidently predict the movie is coming up.
Two main characters are ready identified. Vlad Tenev the founder/CEO of Robinhood and DeepF&ckingValue the 30 year old engineer in Boston on the WallStreetBets side.
The CEO and the CIO (the villains) at the Melvin and Citadel hedge funds will be part of the main cast members.
Those who produced “The Big Short” will handle this one the same way.
In a related post, please see Buy and HODL Forever, Legendary Short Seller Throws in the Towel.
Mish
This exact scenario has been happening to low float $PPBT…a promising cancer play. May karma wreak havoc on these vulture funds…especially those who prey upon companies who are trying to cure cancer.
I know that this is an old story but read this article (especially at the end) to find out the problems of having shorted shares when there is a change in ownership of the company. More shares than actually exist and you have to try to get the short holders to pay months later. link to bloomberg.com
WARNING! Wall Street Squeeeze. https://www.youtube.com/watch?v=J9-SXcPGdkg&feature=youtu.be&ab_channel=PePPeMusic
If you in a short position where over 100% of the stock has been shorted then you deserve to lose a Hell of a lot. End of story. There is no justification and no bailout.
Given what I know about SLV and metal ETF’s in general, I think the planned short squeeze on SLV is fraught with danger for anybody betting big……but I have to say that there is reason to believe there is a possibility of a big breakout.
So I am selling my one tiny stock holding (MGI, which has been doing well)….and buying SLV at the open, if they don’t trigger the market circuit breakers immediately.
No calls, just a tiny bite of SLV…..for a lottery ticket. WTF not?
“… I think the planned short squeeze on SLV is fraught with danger…”
Agree, silver’s market cap is an estimated $1.4T , vs GME’s current 23 Bil.
If WSB’s allegation that JPM is suppressing price is true, I highly doubt the WSB collective has enough capital, even with margin, to make a real dent enough to incite a squeeze.
From there, I personally avoid trading metals. aside very occasional copper or AA (Aluminum), for the lack of real demand metrics, and the volatility of supply (miner strikes…etc)
My take…..is that the whole short squeeze idea is based on pure ignorance and what amounts to an urban myth. But….that it might not matter at this particular point in time.
But I have to admit I like this trade.
Plusses would be:
A very decent chart…already in place prior to the coming whatever-it-is Reddit army assault. Short, medium, and long term charts look bullish to me.
There appears to be great support for silver at or just below these levels
Gold and silver are both in an uptrend, with silver still favored by the Gold/Silver ratio…..and the chart looks better too.
Minuses would be:
The dollar might have just bottomed and reversed.
The Fed and the Treasury will never let gold and silver get too crazy….it’s bad for the fiat.
We are at a time of year when silver often goes into a seasonal slump.
I would never risk a lot here, but I think the current market frenzy behavior make this a bet with good risk asymmetry. I do expect a wild ride. We shall see.
Are shares I hold in a brokerage account used by the brokerage company to lend to others to short sell the stock?
Yes, if you hold in a margin account. Lending out your shares is the only way your broker can fund your margin – the brokers own balance sheet is just nowhere near adequate to fund all customer margin. It’s a fee business
Yes it has to be in a margin account to lend out, but no it’s not to “fund your margin”
Yes it’s fee based, and good brokers share that fee with the account it was borrowed from. But it has nothing to do with balance sheet. The collateral fundamentally couldn’t be comingled with firm money in the first place.
Yes if it is in a margin account
No if it is in a cash account
Note: I keep most of my stock in a cash account because that is legally a safer structure.
#1 is false Mish, sorry.. Example:
Person A is long stock XYZ.
— A: +1
Person B wants to short XYZ, borrows it from A and shorts it to C (Buyer)
— A: +1, B: -1, C: +1 = Net +1, Gross, 2 shares long and 1 share short.
Person B wants to short more XYZ, borrows it from C and shorts it to D (Buyer)
— A: +1, B: -2, C: +1, D: +1 = Net +1, Gross 3 shares long and 2 short.
Ultimately, C doesn’t know that the share they own is the other side of a short, so they’re free to lend it out (presuming it’s in a margin acct, blah blah). That’s not naked though, as it’s legitimately legally borrowed.
This doesn’t happen often that short is > float, but it happens.. VXX was a great example a while back.
And in this example, C and D could very well be institutional investors/ETFs.. which is why the institutional ownership for GME is/was > 100 as well..
You’ve got a problem with your math. During your entire example the count was +1. Hence there is always just 1 share in existence.
When there is 140% of float shorted that would mean there was +1.4 shares and somewhere along the line someone shorted a single share more than 1 time.
No, the entire time the Net count was +1, the Gross counts changed appropriately. This is why the Institutional owners out there actually had >100%.. Because they were (in aggregate) long shares multiple times. After the third line, there were 300 % float long holders and 200% short holders of a 1 share company.
Ultimately, A, C, and D, don’t know they are all legally long the same borrowed share.
The float didn’t go up, but the gross exposure of all the people owning the shares always does with shorting. For every short share, there’s an extra Long share to match.
Note: where this gets messy, and ultimately the one tricky spot with shorting, is the case when A goes and sells their Long, and then B has to go and replace the shorts for C and D.. That’s where the failure to delivers come from predominately.
Mish, how does the Green New Deal and related tech work when silver is $100/ounce?
What does that mean for collateral? If shares can be loaned multiple times then they can be counted as collateral multiple times as well which means that collateral calculations are not accurate. If these calculations are not accurate then that means that risk management calculations are flawed and in some firms probably akin to Enron’s accounting practices. In short we will have to overhaul the stock clearing system if we want to have a clear idea of who owns what. What worries me is if one stock can be loaned several times at the same time can the same be said for other financial instruments like T-Bills and the like. That has some interesting implications.
Well there are disclosure requirements for encumbered assets. But without lending out customer inventory the broker cannot really finance margin – otherwise they would have huge longer term debt. So if you want margin, lending your inventory is the only way the broker can rise the money to give you credit.
The question should be more what were the risk mangers at the hedge funds doing signing off on short position in stocks where short interest is >100% of float. Let them take their losses and they’ll be more prudent in future
Many people like to have their stock in their own name instead of street name when they are long only. If you play options you have no choice.
“So if you want margin, lending your inventory is the only way the broker can rise the money to give you credit.”
The broker makes money by lending out your stock. When you borrow a stock to short you pay the lender a fee which can be quite high when the demand for it is high. It’s one of their income streams. The stock-loan business is very lucrative if you have access to the stocks.
Yes certainly their risk managers should have flagged this position however hedge fund managers are often powerful prima donnas and get their own way especially if similar positions turned out well in the past.
“
Portions of the hearings are gonna be amusing to watch. I don’t agree with much of AOC’s politics but I do like her style. 140% short interest….pulllease! I think I’m gonna convert some of my gold to silver just for fun!!!!!
Here’s some really fun reading, especially towards the end when the story gets into options. I took some big losses years ago messing around with options.
It’s Not Just Robinhood, Reddit Rebellion Has Clogged Entire Financial System’s Plumbing
Saturday, Jan 30, 2021 – 13:40
While mainstream media is juggling with just who to be angry at, and who to virtue-signal for in the WallStreetBets Reddit Rebellion and Robinhood Rout episode, the reality under the surface is that the US financial markets have just been punctured by the thin blades of truth. As CHS recently noted, “it is fatally wounded but nobody dares notice.”
…
Killing folks is illegal. So why isn’t Bush, Obama, Trump, Clinton in jail?
Robinhood have included $slv in amongst their restricted list to 1 share. What possible justification can they have for this? They claim not to be pawns of the PTB????? WTF?
A 1 share limit is legal semantics. Robinhood can claim they did not deny trading in$slv. Masterful criminals have their alibis planned before committing the crime.
Kinda humorous that the CNBC/Fox Business types were aghast at regular short sellers in 2008 when they were betting against the likes of Wachovia and Wells Fargo. Fast forward to today and not only is shorting okay, naked shorting is too!
Illegal doings on Wall Street? I’m shocked, just shocked.
It is delightful to see what absolute fukage is being consumated on the corrupt system. It will continue to be colonized until finally rectalfied.
Superb article. Thanks!
Good. “Superb article” and “vice” don’t ever go in same sentence together. I use to love vice. They are trash now.
I wouldn’t send a vice article to my worse enemy. I don’t like to torture people and lie to them. Vice is a trash bin. They use to be great. Now they r straight propaganda
Over and Over
Wall Street had no problem banning short sales of certain stocks 12 years ago. The system is full of front running algos and all kinds of sophisticated software to maximize profits on trades. Gee, how much trouble would it be to put a system together to deny shorts against excess of existing available float? Well, that must be just way, way harder. Brought to you by those really nice people that lobbied against closing the carry interest loop hole 3 years ago because they know what’s best for us. We desperately need another Brad Katsuyama.
It is possible to have 140% short
Interest. Brokers borrows to cover shorts, then delivers the shares to the buyer, whose broker then lends out the share to short again.
If the company in question has 100 million shares outstanding, and 140 million are out there, 40 million of the shares are fake…madeup
That fact pattern is common (100 million outstanding, market makers lend 40 million to hedge funds who sell them. There is now 140 million outstanding. But my reading of this article was there was 240 million shares outstanding (140 million sold short), which is impossible unless 40 million shares or more were sold without borrowing first).
Did not read this fully – no every single share sold short was borrowed. If you buy a share it is yours and free to lend irrespective whether the person who sold it to your sold it from inventory or short sold it. I am. It sure how to explain this better – but all shares sold have to be eventually delivered – but once delivered they can be lent out to short again.
Mish, you need to clarify this tongue reader – your post is misleading. It is in theory possible for short interest to be larger than the float for reasons I have explained
Apologies for the typo – should be ‘Mish, you need to clarify this to your readers…
That in principle is true for any shares sold short. But the point is it is not illegal.
Yes, its called counterfeiting.
If that’s the case you shouldn’t be allowed to re-lend someone else’s stock, particularly without their permission.
How would a person feel if they pawned a personal piece of jewellery with the intention of reclaiming it in better times, only to find it had been used as collateral for multiple subsequent cash loans by unknown lenders.
looks like an slv moonshot starting next week.
Works for me i’m already in.
This is the choice that the hedge funds are facing.
From what I’ve read the mob wants 2).
Sorry to double post but I saw robinhood is a member of FINRA i.e. there is Federal Insurance for your margin losses (that arise when the shares owed to you by robinhood on your margin account don’t arrive).
Fools rush in where angels fear to tread.
When there is a ripple in the force like this one…..I want to be on the side. But then, I’ve been on the side 99% of the tie since 2009. So yes it is amusing to see hedgies taking it in the shorts….but the idea that any of this will end well……????
Just taking a wild guess that hedge funds were unregulated during Trump admin and these funds took huge short positions all the way until January 20th. They probably even gambled Trump would stay in office. It isnt surprising or a coincidence they got blown out of the water in the first week of the Biden administration by the little guy. Joe told you he was for the little guy and he has already delivered.
Wake up, CO, that dream is over.
You do know that you can’t blame Trump for everything.
No, Biden remains will quash the small guy and defend the status quo.
Trump had nothing to do with this….the players remain the same as well as the game regardless of who is heading the adminstration Dems or Reps. Sucked they stopped the trading…
You are showing that you are out of your depth on this one but it is a valid question to ask nevertheless. Finance has been too lightly regulated since the Greenspan years. Neoliberalism was embraced by both parties after the Wall fell.
We found out what a democrats all about friday when the general market crashed. Democrats usually have an unsteady market with crashes in januarys and midsummers.
It makes it really hard for long term investors to accumulate because they can’t borrow and hold in an unsteady market.
Trump is 1000% more for the little guy. Joe is protecting Wall Street. His spokesman husband works for one of the firms. Learn before u talk. How is establishment. Trump isn’t. That’s why they hate him. And praise joe the senile old man
“The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.”
Case closed, there will be no investigations.
“Money is free speech” – Antonin Scalia.
The game was, is, and will always be rigged and those in charge turn a blind eye.
I hope the Reddit brigade go on to expose other such set-ups. Some clever kid write some code/algo to find weaknesses and exploit enmasse.
Anything in the the PM market?
Which is more fun.
a) Career politicians scared of the people, or,
b) Hedgies running to cover and having losses rammed up their ass.
should add c)
Banks running for cover.
We can be sure it won’t be allowed to continue.
Then they change rules: You can only buy 1 share. lol. Of course that stupidity will just end in tears eventually. Wallstreet just needs to be burnt down.
Way around that through options, buy a call then cash out for the 100 shares and sell off what you didn’t want
On APMEX and Provident Metals, they’re websites put up banners stating that they’re getting hammered with enormous consumer demand. I’ve never seen this happen. I think silver will blow through $30 Sunday evening when trading opens.