But even in other cases it's wrong: the shares may be from Mr. A's margin account with the same broker, in which case the margin account contract included the right for the broker to lend the shares; so Mr. A has already been asked about loaning shares and accepted.
Similar analysis can be extended to the case where Mr. A is either another broker lending inventory shares to the broker lending to Mr. B or where Mr. A has a margin account with such a broker.
No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
except then Mr A does not own the shares, there is in fact a Mr Ax who lent Mr A's shares to Mr B.
> No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
as others point out, this is going to be in the small print of the brokers account
However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get? If Mr C is offering to buy future-shares then he knows that he doesn't have a share today but that isn't what happened, he understood that he has bought something not an option to buy.
Currency is also numbered. If I lend you $20, it's not fraud to give me a $20 back with a different serial number on it. It's not even fraud to give me back two $10s. Adding those kinds of restrictions would defeat much of the point of lending you $20 in the first place. It's also not fraud to spend it at Mr C's eatery for lunch, and hope you can replace it later - in fact, that's the whole point of borrowing money.
The entire idea of margin accounts, stock exchanges, etc., is that shares of the same class in the same firm are, in fact, absolutely and perfectly fungible; thats the agreement you make when you participate in those systems. If that wasn't the case, you'd have specific bid/ask prices for individual shares.
> if the company has a share register, and shares are numbered then what number does Mr C get?
The one that was borrowed, which must be replaced by the borrower with an equivalent one at the end of the specified term, per the terms of the contract under which it was borrowed (this is true for all the borrowers in the chain, however deep it may be.)
Are you limited in the amount of credit you can offer, outside of finding a willing counter party? No. This is the freedom of our financial market.
Even worse is Naked Short Selling, a practise where short sellers don't borrow the shares in the first place. This artificially creates shares and dilutes the value of the stock being shorted. Although illegal since Reg SHO was introduced, it still goes on due to lack of enforcement and comically low fines - google "Reg SHO Violations".
Some public pension funds forbid the lending of the shares they own for shorting. The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
This is straddling the line between completely untrue and highly misleading. For cash accounts, brokers cannot lend your shares without a written agreement allowing it. Although the standard agreement could include agreeing to a securities lending program, this is not common in retail brokerage contracts. Additionally, even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement. So if you have a cash account, no one is lending your shares without your knowledge, period.
Even for margin accounts, the same requirements hold for fully paid securities. So if you have a margin account, but you're not actually borrowing any money, no one is lending your shares without your knowledge.
The only case where your broker might lend your securities without your knowledge is when you have a margin account and you are actually borrowing money.
Just read my brokers agreement - they can indeed lend my shares without notifying me for any purpose.
They pay interest?
also - the interest rate is often negative : ie the lender PAYS THE BORROWER to take the shares. The borrower posts cash collateral that the lender gets to earn interest on...
it's a fun part of the market
If you agree to the broker agreement, you're implicitly giving consent.
Mr. B returns the share to Mr. A, and pockets the difference. This isn't fraud, it's relatively common.
Coordinated naked shorting attacks are real and legal. Flood the market with false shares and tiny lots of low-asks. Rapidly drop the price down to capture the easy stop-losses that retail investors might set. It is fool-proof because you know those shares can be obtained at a certain price (hedge-funds and market-makers can see the stop-losses). As soon as you acquire the stop-loss shares, pull off the selling pressure and use the shares just obtained to fulfill the short-contract. There is no borrowing.
[0]https://www.deepcapture.com/2015/07/goldman-sachs-internal-m...
- Mr. A intentionally lent out the stock (not fraud - there's no reason to lend out the stock other than to enable this kind of scheme AFAIK, Mr. A will generally not be an ignorant and deceived party here)
- Mr. A signed some fine print allowing his stock to be lent out for such schemes (not fraud)
- Mr. A signed some fine print saying some proxy (his broker?) technically owns the stock and they can lend it out for such schemes (not fraud)
- Mr. A owns his stock outright, and signed nothing allowing it to be lent out (step #2 isn't called "borrowing" in this case, it's called "theft")
[1] https://motherboard.vice.com/en_us/article/overstock-wants-t...
You make a contract that's functionally equivalent.
You think the judge is going to say "oh, well it's not _exactly_ short selling... YOU GOT ME!"? Intent is everything, those sorts of tricks don't work. You're up against judges and other humans on this sort of thing, not some AI you're trying to trick.
If there was a rule against short selling, I imagine that synthetic shorts would also have those rules applied to them unless there are enough differences to qualify them as "not short selling".
Though I guess the uptick rule already doesn't apply, so they're already seen as different in some sense?
philosophically, shorting is an emergent feature from basic property rights. I have a thing, you want to borrow it, we're both consenting adults and negotiate an arrangement.
A) Why should playing games be illegal? It's legal to spend money on UFC tickets, why not on trying to out-guess the stock market?
B) Playing games in the stock market helps improve the accuracy of pricing for everyone else.
Kind of like selling things online. You take the cash, then you ship the product. Or like the extreme form of "Lean Startup Method" -- sell the product, then build it.
I understand that this is the way it has worked for some time, but franky I don't see how this is anything but fraud.