> A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available.

This is a common misconception, but fundamentally wrong. Every short sell has an equal but opposite buy. Therefore every share shorted creates a new synthetic long share. Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.

Therefore it's easily possible for short interest to be well over 100% of the float. There's no upper limit, it could literally be 10,000% of float. Shares sold short, can then be re-borrowed for new short sellers in an arbitrarily long chain. It's the same way that fractional reserve banking creates money out of thin air. It starts with a small set of "hard assets", then lends, say 90%, of them out to other banks. Those banks then lend out 90% to other banks. And so on, until the system has 10 times the money supply it started with.

Now, the reason that high short interest may result in a short squeeze is because usually some percent of longs at any given time tend to be long-term investors who are unlikely to sell. If, say 66% of investors are long-term holders, then short-interest above 50% could create a squeeze. If float's a million shares, then they'll be 1.5 million shares long and 500 thousand shares held short. But 1 million of those shares will be held by long-term investors. Therefore there won't be enough immediate buyers if all 500 thousand short sellers liquidate in a short period.

But... With Gamestop this logic makes no sense. At $300 per share, no one is a long-term investor. Nobody is buying or even holding at that price because they think the company is worth $10 billion (more than five times higher than its 2007 peak). Since there are always more shares held long than short, and since every share held long is held in anticipation of a short squeeze event, then even in the event of a massive unwind there will still be more sellers than buyers, and the price will fall, not rise. In fact during this whole price runup, short interest has actually increased. So clearly it's not short squeeze driving the melt-up.

The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price. That attracted even more attention, more buyers, and higher price. Like any classic bubble it requires an ever-widening net of greedy but foolish patsies to jump in at the bottom of the pyramid.

> The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble.

If only. This has no signs of being "classic". People on WSB realize that if many people purchase and hold on to GME stock for long periods of time, there will be an increase in stock price. If/when this occurs, this increases the annual cost for GME short sellers through increases in both Margin Interest and Stock Borrowing Costs, which is a direct percentage of the GME stock price. This depends on the short type, but either by a certain timeframe or if the lender desires, short sellers will be forced to buy back their GME stocks. Buying back GME can also be forced through a Margin Call. When this happens, you will see a short squeeze.

> People on WSB realize that if many people purchase and hold on to GME stock for long periods of time

You have a lot of faith in a bunch of people not wanting to realize their profits on a stock that everyone knows is going to tank sooner or later. I'm sure some of them who got in on the run early won't make a dime because they'll hold on too long and then not give up even on the way back down, but some will want to make sure it's real money for them and then this thing is going to go down fast.

You obviously know nothing about the folks at wallstreetbets. It's not just a bunch of random people doing pump and dumps. Their methods and DD might be questionable at times but they base them on something and at times try to stick to that thesis.

Thesis in this case being “let’s protect GME from vultures and make some money on the side?” I have a hard time believing that is anything but PR. I’d hardly call the denizens of r/WSB altruistic. Sanctimonious, energetic, and smart? Absolutely. But they aren’t there because they want to empower the meek against the mighty.

Having lived through a number of cryptocurrency boom/bust cycles I’ve seen first hand how everyone is coordinated and holding the line...until those who have profit in their sights decide to find a bunch of bag holders to cover their exit. Poof.

> Having lived through a number of cryptocurrency boom/bust cycles

Strange statement. Everyone here has lived through the same, you aren't some special snowflake in this regard. Paying more attention than others to the daily price or memes means absolutely nothing in the end.

> base them on something

All the talk of short squeezing and sticking it to the hedge funds and Wall Street aside, they are really basing it on the belief that someone will buy it at a higher price than it is now which will be true until it's not.

Unlike Tesla or Bitcoin which many think are bubbles, this is a case where absolutely no one believes in Gamestop (being a $24 billion company, at least). There's not anyone who thinks holding it forever is a good idea at this price (or even at a fraction of the current price). In these cases when the stock stops going up it implodes very very quickly.

Additionally... Tulip-mania was driven up by false scarcity. People are buying up GME on principal as punitive action against hedge funds. SWJs + Day Trading = /r/WSB

I understand how this short sale "chaining" can result in a stock being over 100% shorted without any illegal naked short selling taking place, but why wouldn't this chaining not result in a short squeeze and therefore bid up the price?

I'll walk through an example and maybe someone can point out what I missed.

Let's say we have a market for some stock. There are only 5 traders (Alice, Bob, Chuck, Dave, Eli) and 100 shares that are all owned by Alice. Bob borrows all 100 shares from Alice and sells them to Chuck. Dave borrows the 100 shares from Chuck and sells them to Eli. Thus, Alice and Chuck are each owed 100 shares, Bob and Dave are in debt for 100 shares, and Eli owns the 100 shares.

Thus, Bob and Dave must now compete for the 100 shares owned by Eli, which then drives up the price.

I don't know how the synthetic long shares mentioned fit into this.

I believe that this is correct. The parent comment sounds very sure of themselves but I don't think the statement "there will always be more shares held long than short" is necessarily true.

After researching a little more I've found I was incorrect. There are always more long shares than short shares. However, the "long" shares are not necessarily real shares in the company. They could be ones that have been lent out as described above.

I think the misconception is thinking that shares, once loaned, are somehow locked. In the above scenario, Alice and Chuck open their Robinhood account and see 100 shares just the same as Eli or any other long.

In reality their shares are actually on loan, but they're probably not even aware of it. If and when they go to sell their positions, it will instantly execute, and the broker will recall the shares before settlement (which occurs three days after the trade's executed.)

So, in fact Bob and Dave now have their pick of the litter and can buy back from either Alice, Chuck, or Eli.

You are not wrong, but you are also missing the part where risk management departments will forcibly unwind shorts of institutional investors, option gamma creating massive amounts of reflexivity and the Weaponized autism of /r/WSB and the viral network effects of its memes encouraging even more reflexivity.

I have no doubt this will end in tears for investors on both sides.

GME's management would be wise to issue 1-200% of new equity at a substantial discount to present market value to short holders (this lets them cover at a lower loss) and sit on the cash to transform their businesses strategic outlook.

Except that would potentially make GME complicit in activity that regulators are already making threatening "market manipulation" noises about. Also, if they were to issue more shares, the mere news of this would likely pop the bubble hard before they would realize any gains.

GME doesn't care if they pop the bubble though. They know their shares aren't actually worth $350 and they're not making strategic decisions based on them being worth that much. They'd much rather issue more shares, take the increase they get, and get back to their own business.

is that fair to say? certainly some of them are buying at $350 now? Some people are selling now and others are buying, setting the market price. From a selfish standpoint, it makes sense to sell now, if for nothing else, to take those profits to manipulate some other poor company, no?

This is the exact thing I have been trying to convince people of since this began. It started with a kernel of truth and a case to be made for a potential short squeeze but at some point along the way transitioned from a squeeze to a bubble with more and more chasing gains out of fomo and some ridiculous concocted story about the little guy vs the big bad Wall Street. This is further evident from the spillover effect seen in amc, Nokia, and many others.

All that said you do need to understand that if your impulse is to short or buy puts you’re almost certainly early as bubbles always go much further than anyone thinks possible and the extraordinary IV of the options makes it very difficult to profit from.

It's literally impossible for it all to be retail money.

What I think people are missing is that in about a month we'll find that "Wallstreetbets" and "retail" were also other fund managers like Ackman.

This is not the first time one fund manager messed up with their short and got absolutely eaten up by other fund managers (see, famously, Herbalife where Ackman and Icahn were direct adversaries). Melvin Capital clearly messed up - their losses exceed any reasonable risk-managed short position and it's clear there was some naked shorting in there because you cannot lost 30% of your fund in a week unless you're being reckless.

The media - in classic post-Trumpian mentality - is just fabricating a reality about market insurrections, how male traders are incels, or how Trumpism has spread into the market. The reality is we're witnessing another classic short squeeze between fund managers - and sure - retail got in on this one too, but they are at best a spark, rather than the gun powder.

Here here. It’s plainly obvious from the large block buys happening in extended hours trading that most retail doesn’t have access to. This is substantial money moving. Retail isn’t the driving force, but they’re riding shotgun and being used as a scapegoat for risk management failures.

Some guy makes 50mm (mostly unrealized at this point). Where do you think the rest of the 14 billion is owed? Probably institutional investors and HFT guys that have been playing market volitility, as they do.

There's a couple guys that are fucked, but most of that money is going back into the pockets of 'the big bad fund managers'

Same with Tesla, I don't think the institutions that profited handsomely in that run up think it's worth the price, but they think that the real gains are good for their funds.

Also note, retail guys are still probably pretty close to the one percent. Who else has 50k lying around for something like this. Sure he might not be a hedge fund, but he's probably not working a minimum wage job and fixing inequality with his trades.

I don’t recall saying anything about retail money. There are many things at play- short squeezing, gamma squeezing, retail buying, trend based algo buying. Trying to attribute a move to any one thing is folly because it’s never one thing.

But, when you get mass hysteria around a certain asset class and frenzied buying with the expectation said asset will just keep going up without regard for the fair value (in this case heavily shorted stocks), that’s a bubble. Just because you’re a large institutional buyer doesn’t make you immune from participation.

First I’ve heard this conspiracy theory and... I love it!

I'm really confused because wouldn't that require a filing with the SEC to authorize shares? Wouldn't that number become part of the float?

I looked into "fails" data, and I'm a bit lost [0].

Is Alice's IOU sellable as a security with voting rights? Who gets to vote on those 100 shares? There are now 200 votes? That's very strange.

I've heard of synthetic longs before but in options [1]

[0] https://www.sec.gov/data/foiadocsfailsdatahtm

[1] https://www.theoptionsguide.com/synthetic-long-stock.aspx

I can't answer most of your questions, but I think I can answer the voting part.

There are 100 shares, Alice owns all of them, but loans them all to Bob so Bob can short them. Bob sells all of them to Charlie.

So Alice owns 100 shares and Charlie owns 100 shares even though only 100 real shares exist. (Bob owns -100 shares.) But Alice can't use her shares for voting because she loaned them out, only Charlie can vote.

That's not correct. Alice does not own anymore the shares, only Charlie does.

There are 2 steps involved:

1) shares borrowing

2) shares selling

Shares borrowing: Bob will borrow 100 shares from Alice. Bob will have to give Alice a collateral, valued at 100% value of the shares + a percentage. Bob also has to pay a borrowing fee to Alice, daily.

At this point, Bob owns the shares, not Alice. Alice does not receive dividends directly from the company that issued the shares and Alice does not have any voting rights.

If those shares produce dividends, then Bob has to pay those dividends to Alice. If Alice invests the collateral and that produces profit, Alice needs to pay some of it to Bob.

When Bob thinks all is said and done, he has to return 100 shares (not particularly the same shares, but the same type and amount). At that point, Alice will return the collateral. Alice regains the voting rights and will get dividends.

Shares selling: Bob sells 100 shares to Chuck. Chuck owns 100 shares (the ones previously owned by Alice), has the voting rights associated with the shares and will receive dividends (if the shares generate that).

There are no extra shares generated by this process.

Alice is not a person, but a financial institution, most likely a bank.

https://www.investopedia.com/terms/s/securitieslending.asp

Right, which when the float is short any significant amount... is when things can get sticky.

Bob sees the name go up, and instead of buying the 100 shares to close the position, he goes back to Alice. Alice says, 'sure, I'll lend you another 100 shares.' But Alice doesn't have any at the moment, so she buys the 100 from Chuck (from Bob, from Alice), and now....

200 shares short on the original 100 shares?

If Bob wants to close out (or must close out)... there must be many more people with shares for this to work out nicely.

However, if it's all through puts, none of this matters!

I think my description was pretty close to this, just a bit off in the terminology.

No, your explanation is wrong. You said:

> So Alice owns 100 shares and Charlie owns 100 shares even though only 100 real shares exist.

which is wrong, Alice does not own any more shares.

Sounds like a linked list! I wonder if stock market is or could be made Turing complete.

The board of GameStop doesn’t have to do this. Don’t forget they own a ton of shares.

I'm curious, if this is the case, why doesn't the market realize this and short sell like crazy right now, given it's clear the price isn't sustainable. That would then generate more negative price pressure and generally keep the whole thing from happening in the first place, no?

I’m not convinced that the economics work like this. Suppose there are n real shares, i.e. longs - shorts = n. A short squeeze happens if the number of shorts exceeds the number of long shares that aren’t trying to squeeze the shorts. That’s longs - squeezers < shorts. Rearranging gives n < squeezers. So the short holders are in trouble if the number of squeezing shares exceeds the number that actually exist.

Imagine there’s a near-squeeze situation, and someone shorts more shares. This drives the price down, which makes it less expensive for squeezers to buy shares, which exacerbates the problem.

This is complicated by margin calls and their institutional equivalents. This cuts both ways. Enough downward price pressure could cause some longs to get margin called. But more shorting also means more danger.

If I were the SEC, I would consider restricting the total short interest to a fixed fraction of total outstanding shares to improve market stability. I don’t know whether this would be a good policy overall.

That's happening. I just tried to short GME and my brokerage gave me an error message that it was "hard-to-borrow" and no shares were available at this time, and to check back tomorrow.

That's what I figured might be the limiting factor. At some point, nobody wants to take the other end of the short, so it becomes impossible to short further.

Market can remain irrational longer than your wallet can remain solvent or something like that.

It's worth noting a lot of the investors are holding for ideology, so that is certainly not your typical hold. Many may very well hold all the way back down to their buy in.

What I am interested in is how far this can get twisted. Are there more mechanisms at the hedge funds disposal? Will the financial institutions step in at all?

Sure, but irrational enough not to short a $6 stock priced at $300?

just because it was held at $6, doesn't mean that is the fair market price. These Hedge funds had significant incentive to bankrupt this company. 300+ is most likely a bubble, but $50-$90 is completely reasonable looking at the fundamentals. And besides, traditional wall street fundamentals are not the end all be all of a stocks value. Tesla is living proof of that.

What fundamentals?

Retail is a liability, and they're retail that's ESPECIALLY being eaten alive by online.

The bull case is that GME's own online revenue is trending up and that they're well positioned to grow more.

I personally don't buy it, particularly at $300 a share, but GME is not entirely bricks & mortar.

This was at least part of the catalyst:

https://m.youtube.com/watch?v=alntJzg0Um4

I don’t fully buy it either but it’s not irrational. GameStop still sells a lot of games. Online is gradually taking over but it has been for what 20 years now and people still go to the store and consoles still have disk drives. B&M is not going away any time soon, and in some ways I think the hardest hits have already come and gone, what’s left now is likely to stay.

Some consoles have disk drives. Playstation released their "Digital Edition" Playstation 5 which doesn't have a disk drive, and Microsoft released the Xbox Series S which also doesn't have a disk drive. Phones and tablets never did have disk drives, and the gaming market on them is large.

I think it's pretty clear that the days of physically buying games are quickly coming to an end. Years ago there were chains of computer software stores, and long after that, stores like Best Buy had huge computer software sections. The same thing will happen to games now that every console is connected to high speed internet.

Gamestop has lost money for the past two years, and it only shows signs of getting worse.

> Retail is a liability, and they're retail that's ESPECIALLY being eaten alive by online.

Retail may be a liability. But real estate is not.

GameStop has small stores that should shut down. However, they also a not insignifcant number bigger stores that can become "gaming places" once we get Covid under control.

Being a "Safe place for Mom to drop the kids to play Pokemon" has real value.

Not everything must be online.

Do they own real estate?

Every GS I’ve ever seen is in a strip mall, where they are surely renting.

Yes, they do. But more in areas where real estate is cheap like the Midwest.

Perhaps, pick your favorite number. I think it's pretty clear nobody believes fundamentals support $300 though. Was wondering why market short pressure doesn't prevent it from getting that high.

At this point, no broker is lending gme to retail investors. However, if you are market maker, you should be able to short it still.

You need unknowable amounts of capital to pull this off. $300 could be $600 tomorrow (as example).

>The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price.

A cursory look at /r/WallStreetBets suggests this is statement is mostly wrong. You're suggesting the price is rising due to speculation/hype, but this phenomenon is fundamentally different. The reason for this rally is clearly activistic in nature, an attempt to bankrupt the hedge funds who engage in vulture capitalism.

Some might be greedy, but many aren't trying to make money and greed wasn't the cause of the rally. At the end of all this, there will absolutely be a redistribution of money, but even if the "diamond hands" investors walk home with a loss, they (hopefully) will have strangled a few hedge funds far greedier than the speculators who are taking advantage of this market dynamic.

This is far from a "classic bubble", driven by over exuberance, or a classic squeeze, driven by greed. This is an example of a new phenomenon that will change how hedge funds operate in the future.

Perhaps classic is a bridge too far, but it is certainly a bubble!

> The reason for this rally is clearly activistic in nature, an attempt to bankrupt the hedge funds who engage in vulture capitalism.

That's a fun rally cry that happens to be true, but even if it wasn't true and the conditions existed naturally, these WSB folks just spotted an opportunity to make money and jumped on it like anyone else. Activism is just trash talk like much of this subreddit has always been.

You're incorrect, nobody can go around shorting stocks like crazy. First one need to borrow the stock, which may be difficult for some stocks. This creates a concrete imbalance between long and short holders and a limit for how much can be sold short. But that's not the whole problem, every short stock needs to be covered by some margin. If the stock goes up too much, the short seller needs to buy it back no matter water, for lack of margin. In other words, it is NOT just the buyers who are forcing the price up, but the short sellers who are forced to cover their shorts. That's why it doesn't matter that the price is insane, it will go up as long as the shorts are forced to buy back the stock at those ridiculous prices.

> First one need to borrow the stock, which may be difficult for some stocks.

In the US, stock loan markets are extremely deep and liquid. Finding borrow is rarely a problem. Borrow fees may be relatively high, about 0.1% per day right now for GME. But considering that short sellers are targeting an 80%+ profit within a few weeks, that's not a real deterrent

Virtually 100% of shares held at retail brokers are available to borrow. This is especially true at discount brokers like Robinhood, where borrow fees are a primary revenue stream. Ironically the more WSB people that buy GME, the easier it becomes to borrow.

> If the stock goes up too much, the short seller needs to buy it back no matter what, for lack of margin.

This is incorrect in the vast majority of cases. Virtually every prime broker (i.e. the brokers used by hedge funds), uses portfolio margining. The prime broker calculates an aggregate "value-at-risk" for the entire portfolio, then requires the fund to post that collateral. As long as they have over that threshold, they won't trigger any margin calls. But even if they do, there's no reason they have to buy back GME specifically. They could just as easily liquidate any other position to bring down VaR in another less lucrative position.

Remember a major multistrat fund like Citadel or SAC will have something like $30 billion AUM, then lever that up by 500% or more. One of these players could short 30% of the float in GME, and it'd still only be 2% of their portfolio.

> could short 30% of the float in GME, and it'd still only be 2% of their portfolio

That would be true if it wasn't for leverage. When using portfolio margining, the leverage is huge. So a relatively small change in the stock will result in large losses. Now, you're right that this is not going to break a fund like Citadel, but not all hedge funds are that huge.

If all of Alice's 100 shares are out on loan, is it actually easy for her to sell them?

Assume that her broker doesn't have a bunch of extra shares lying around, due to squeeze or bubble event.

Sincere question, I don't know how this works in practice.

From [0] and [1] I don't think chaining shorts, as described in the parent comment, is possible. Alice cedes control over the shares in return of a fee. Therefore, when Bob borrows 100 shares from Alice and sells them to Chuck, there are still only 100 on the market, not 200.

> When a security is sold, the seller is contractually obliged to deliver it to the buyer. If a seller sells a security short without owning it first, the seller must borrow the security from a third party to fulfill its obligation.

To actually answer your question, is worth noting that Bob has to provide a collateral to Alice at 100% + some margin (from wiki) the value of the borrowed stock. So, in short (ha!), Alice sells Bob a bunch of shares with the idea that they will revert the transaction at a later date.

[0] https://en.wikipedia.org/wiki/Short_(finance)

[1] https://en.wikipedia.org/wiki/Securities_lending

>Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.

That is not quite true. If after Bob has borrowed and sold 100 shares to Chuck, and then David comes along and makes an offer to Alice to buy 100 shares, Alice can only sell her shares once they are recalled. Which means Bob now has to scramble to return those shares, specially if Chuck does not want to sell (or if Chuck has lent out those shares and they need to be recalled in turn).

This is true. But shares are fungible. So, even if Alice sells, the broker will just locate 100 different shares on the loan market and invisibly swap them out for Bob. Very likely whoever Alice sells her shares to, will also put them up for lending.

Is using a short to create a synthetic long shares of stock really legal/allowed/common?

If so, seems like a loophole a truck could be driven through that I'd imagine is abused frequently.

I've seen synthetic positions like this for options, but never heard about them for stocks.

But once borrowed, the shares can’t be borrowed a second time. So if 100 shares are borrowed and sold short, they’re back on the market, yes. But the total number of shares available is 100, not 200.

That's not true. The same share can be borrowed an arbitrary amount of times. Palm reached short interest of nearly 150% during its heyday. By definition that would require float to be borrowed a second time.

https://money.stackexchange.com/questions/126685/can-a-singl...

So this one is wrong?

https://money.stackexchange.com/questions/98418/does-short-s...

No, it is saying something different. You can only loan out your share of stock once, but the person who buys the stock can lend it out again.

So let's imagine there is one share of a stock and person A owns it... they lend it to person B, who sells it to person C, who lends it to person D who sells it to person E....

Now, person E is the only person who currently holds an actual 'share', and is the only person who can lend it out. Person A and C will have an IOU saying they will be given back their share at date x... they can sell the IOU, since it has the same value as a share, but they can't lend out an IOU.

Can the value of that IOU drop to zero if the lendee can't return the share, e.g. if lendee no longer holds the share and none are for sale? Does the IOU specify alternate restitution in that case?

The broker usually guarantees the stock to the lender, and will sell any other assets the short seller has to cover. A broker isn’t going to let the short seller get in too over their head.

While conceivably what you are suggesting could happen, I don’t know if it ever has.

Honest question. How does that explain what happened with VW? I always thought there was a supply problem with shares to be shorted.

https://moxreports.com/vw-infinity-squeeze/

Yes but what I’m saying is that the float doesn’t increase from 100 -> 200. There’s still only 100 shares on the market at any given time.

If Alice shorts 100 cows on Monday, and then Bob shorts 100 cows on Tuesday, and both are due at close of market on Friday, it’s gonna be a bloodbath.

Shorts aren't "due". You can hold them as long as you pay the interest and have the margin requirement.

Not always true. I've had brokers force me to close short positions (esp in '08-'09) because 'no shares available' which forced me to buy at the market in order to close out the position. It had nothing to do with interest or margin.

(Granted, they were some pretty illiquid stocks so I suspect that the broker had managed to get into a naked short situation when they allowed the trade to execute before actually trying to go out and borrow them. Of course, their mistake was made my problem.)

I'm not saying that your example isn't valid, but it's kind of different than what you are responding to.

Your short position may have been called, but (I am assuming) you didn't take out a short position with an explicit expiration date. Ie, it wasn't "due" on Friday, and you likely didn't know days/weeks in advance of when it was going to be called.

No, it wasn't called. The broker would inform me, after executing the trades, (typically after the close on the day of the trade) that they literally could not borrow the shares and would send me a 'sucks to be you' message saying I had to close the position before the end of the settlement period or they would close it for me at the market price on settlement day. IIRC, it was less than 72 hours notice and I was given no option for any amount of money to keep the position open. Since these were thinly traded stocks, there were no options available on them so I couldn't keep it going that way either.

No, the person who lent the share out can demand it back and refuse to lend it out again... normally, the short seller would just turn around and borrow another share from someone else to sell short, "rolling over" their short position, but that assumes there is another share to borrow. There usually is, it not always.... and it might be VERY expensive to borrow if it is a heavily shorted stock.

Alice lends a share to Bob. Carol buys the share from Bob. Carol lends the share to Doug. Ellen buys the share from Doug.

The share has been lent twice.

There is one share, and Ellen owns it for real.

Everyone else has these agreements involving collateral and promises to get/give a share back.

wron, ex-CEO of Chewy is quite a bit long

Naked short selling is illegal

That is not naked short selling. Naked short selling is when you sell a stock short without first borrowing it.

The parent to your comment describes someone buying a stock from someone who sold it short, and turning around and it selling it short themselves. This happens organically and is not "naked."

Beware the incredible amount of false and misleading information about this situation online. Things catch on in the zeitgeist and don't really get fact checked.

Ok thanks I think I got your point but you probably worded it wrong. Some can’t buy a stock and then “short sell” it, right? He just sold it

Right. But you can buy a stock (without knowing it was a borrowed share in a short sale), and then lend it to someone else (who intends to sell, it, thus creating another short sale).

So to unwind this, the one existing share has to get bought (by someone who short-sold it), and returned (to the owner who lent it out), twice.

not for hedge funds.

yes for hedge funds. some market-making entities are legitimately allowed to be short without borrowing, but is it absolutely not just any random hedge fund!

Isn't it the opposite of what parent is saying, that market makers are allowed to do naked short selling for "liquidity purposes" but hedge funds I'm not so sure

>Isn't it the opposite of what parent is saying

Yes. vpribish is saying that chovybizzass is wrong.

What??

I agree. The anger seems like an ancillary phenomenon. People seem to be buying because they think it's a sure thing that the asset price will increase. Maybe anger at shorters helps justify exploiting their error, but it's not the primary motive.

Anger/vengence seems like a primary motivator. Let me put it this way: how much money do you think these folks would pay to see a hedge fund manager crap his pants?

Not much. Everyone is mainly hoping for big profits and if they manage to show they're powerful enough to bring a hedge fund to its knees in the process then that's simply an added benefit. The anger at the big guy is just an artificial banner behind which to rally the troops. The objective is profit and the motivation is greed.

I have no skin in the game so I don't care who comes out on top, but it's delusional to think there's some noble cause behind all this on either side of the game.

Yeah, I think the anger is a device for keeping each other from selling, but has nothing to do with how this situation arose.

HODLers also use emotion and ideology to keep from selling.

It’s decentralized motivation to coordinate!! :)

Someone would do well to inspire a cult following and a viral one at that... then it will attract people who just believe in the To the Moon rocket emojis

This is some of the oldest stuff in the book in terms of human psychology: how to create group beliefs, how to punish defectors, etc. I think it might work surprisingly well, given the rise of populist movements in the past few years.

To add something to this:

The redditor doesn't need to pay 1 dollar per cow (the market price as sold by fund), the redditor pays .01 cents for an option contract to buy the cow for 2 dollars at the end of the month. The options contract requires the bank selling the contract to buy a cow today. In effect, the redditor is able to force the bank to buy 100 cows by spending only 1 cent.

The bank has to buy the cows right away? I thought when the redditor buys the call someone else, let's say Bob, sells the call. If Bob already owns 100 cows (covered calls), then no one will be forced to buy cows ever. If Bob doesn't own 100 cows (naked calls), Bob will have to buy 100 cows at the end of the month if the call is in the money, not right away.

No. It's a lot more complicated than you buy a call option and the brokerage buys 100 shares immediately.

Yea, but we’re describing the basic mechanics of what’s happening, we don’t need to get into the details of delta hedging. The basic mechanic is that large groups of folks buying Out of the money calls results in the sellers of those options buying shares to offset risk in the trade. In effect, in an env where lots of shares are locked up due to shorts, an cash efficient way to cause a squeeze is to buy out out of the money options, causing more shares to be bought to offset risk, sending the price up.

Thanks. Great explanation.

I don't get the over 100 percent part though. Is it required to squeeze the short (i.e., beat hedge-fund at this game)? Wouldn't hedge-fund still need to purchase 100 cows even if they only borrowed once?

Because as I understand, the way it works is that:

- You borrow 100 cows.

- You sell them immediately.

- You wait for the cow price to drop.

- Now you buy 100 cows, netting a profit. (but they need to buy back those 100 cows here, and they only borrowed once).

- Now you return those 100 cows to the lender.

Hedge funds typically buy on margin so when they 'borrow' the 100 shares, they are only required to have a fraction of the amount borrowed in their account (either in cash or other securities) essentially to guarantee the broker doesn't get stuck holding the bag. They have to maintain this margin ratio (i.e. percentage of the position) whichever direction the stock is going.

When there is a rapid increase in the price of a stock they have shorted, they will no longer meet the margin requirements. So they either need to deposit more funds/securities to keep the position going or start buying back shares to get back in line with their margin requirements. However, if the fund is maxed out on their positions buying back shares often just helps raise the price further causing them yet another margin problem... it's a downward spiral. Plus, once other hedge funds smell 'blood in the water', they'll start piling on too (i.e. buying shares raising the price further) knowing that the fund(s) that are in trouble have no choice but to cover their short position regardless of the price. That's part of why you'll see these gigantic price spikes.

You don't have to have over 100% but you do need a significant amount. For a squeeze to occur you have to have 1) some initial upward price movement and 2) enough short interest that as people get uncomfortable with the increased downside (or their broker calls them on their margin), they have to buy real shares to close out their short positions, thus increasing the upward pressure on the price. That drives the price higher, and causes more people to get uncomfortable and more margin calls to be made, driving the price even higher. Other people notice the price and trade volume going up and want in on the action, which drives the price even higher. This cascades until there are no more surviving short positions.

The whole thing about borrowing 200 cows is illustrating the concept of leverage, but it isn't necessary. We could have illustrated the concept of a short squeeze by saying the hedge fund borrowed 50 cows, and a Redditor noticed and bought 51 cows. When the hedge fund needs to close their position there are only 49 cows available and the Redditor can ask an insane amount of money for the last cow. And that isn't even really how a short squeeze works (see top paragraph).

A squeeze can happen with any amount of short interest. But if it's a tiny amount it will be swallowed by the other random noise in the market, and won't cascade into a giant news story. Gamestop had right around 150% short interest in December. The other crazy thing is not just the number of shares shorted, but what prices they might be at. The 50 day moving average is about $30. If you shorted at $30, you had a 500% downside yesterday. If you still weren't forced to close your position then you were at 1000% downside today. The one year low is $2.57. If you shorted any sizeable position at $2.57 you're probably thinking about jumping off a skyscraper.

You don't need to borrow more than 100 cows, the short squeeze of Porsche/VW had a much lower short interest because the shares were all tied up in institutional holdings.

Well over 100% of GME’s float was short.

150%

> Hedge-fund cries foul. Doesn't like being beaten in it's own game.

Have any of the hedge funds actually cried foul?

CNN just had someone talking about the government should ban people talking about the stock market on the internet.

edit: Here's the link in case people want to see it. Ignore the article about Trump (really weird to blame Trump in this case), but watch the video. https://edition.cnn.com/2021/01/27/politics/gamestop-stock-s...

CNN is a news site not a hedge fund, do they have quotes from hedge funds that I missed (entirely possible)?

CNN is an entertainment network. They don’t need quotes from hedge funds. It’s easier and more engaging to get “an expert on hedge funds” to rant on-air about how mad they must be, and then report on it as if it were news.

They also have had a few stories about how this is "Trumpism". They're desperate for eyes. It think it's great and the fact that discord dropped the WSB channel because of bad users (which could easily have been infiltrated users) falls right into the same issues we were having a couple weeks back.

All of this makes it clear that people are frustrated and upset. My only concern is people that can't take the squeeze jumping in on the train and losing in the end.

Since no one replied with anything substantive yet, I looked around a bit to try and answer my own question. Nothing I've found from a hedge fund is even remotely close to crying foul... but here's a collection of quotes

Citron research (not a hedge fund, but one of the parties that had a large short position) put out the following video generally supporting redditors and wsb: https://www.youtube.com/watch?v=yS4yPsmaDDQ

Melvin Captital (Hedge fund that took a big hit), as far as I can tell, has not put out any substantial statement, but none of what I can find that they did put out is crying foul. Examples of what I can find include "The social media posts about Melvin Capital going bankrupt are categorically false", ""Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop)"

The only statement I can find from Citadel (hedge fund that invested in Melvin) is from their CEO, saying "Gabe Plotkin and team have delivered exceptional results over the history of Melvin. We have great confidence in Gabe and his team".

Point72 (another hedge fund investing in Melvin to bail them out - and who already had $1 billion under management with Melvin) had their chairman say "I've known Gabe Plotkin since 2006 and he is an exceptional investor and leader. We are pleased to have the opportunity to invest additional capital and take a non-controlling revenue share in Melvin Capital,". I haven't found anything else.

> The only statement I can find from Citadel (hedge fund that invested in Melvin) is from their CEO, saying "Gabe Plotkin and team have delivered exceptional results over the history of Melvin. We have great confidence in Gabe and his team".

That sounds like the kind of thing a GM says a week before they can a couch. If you actually HAVE great confidence, you don't have to say you do. Actions speak.

> Actions speak.

I mean, the action here was Griffin's company investing two billion dollars into Melvin, so that sort of lends credence to the idea that Griffin does have confidence in Gabe and his team.

>> We are pleased to have the opportunity to invest additional capital and take a non-controlling revenue share in Melvin Capital

Haha, seems to me like other funds are taking advantage of Melvin's position to buy up some of Melvin on the cheap. All those hedge funds must love the squeeze!

yeah - this is just a squeeze. they happen. any sophisticated player in the market will recognize this as a normal (though not common) thing.

the weird and new part is that the people cornering the market are a horde of retail traders who are colluding in the open, but in a way regulators probably don't have tools to address.

what you are describing is not collusion or market manipulation. If it was, CNBC should be investigated for recommending stocks daily.

random people post analysis and others decide if they agree. Even if there were people saying to buy to cause a short squeeze, that is also perfectly fine. Institutions trade on momentum all the time, that is basically the entire HFT sector. If anything, the people on reddit are even less egregious that wall street because they are doing it in a public forum, where institutions do it in secrecy during three martini lunches or "idea dinners"

Wallstreet does it all time at their private meetings in the Hampton’s.

Um no not really. Fund managers don't all get together and decide what they should buy all together. It doesn't work like that.

Who do you think complained to the SEC and is having them investigate?

I mean...

Do we know if anyone actually complain to the SEC? I know they put out a statement they are monitoring it, but it's rather hard to miss, especially when noticing weird market trends is literally your job, unless they've said something otherwise it seems likely they did that on their own initiative. Especially when congress members (i.e. your bosses) have been putting out various statements about it...

If there was a complaint there are also lots of other options than hedge funds... banks, mutual funds, pension funds, etc...

I do not think pension funds and mutual funds short GME I mean hope not.

It seems somewhat unlikely that they were short, but they are the parties who I would generally expect to want increased regulation. Hedge funds on the other hand are probably delighted as a whole that there are lots of retail investors throwing money around in interesting ways - they generally excel in taking money from people doing that.

Have you seen CNBC this week?

CNBC is a news site not a hedge fund... I didn't notice any quotes from hedge funds (but I admit I could have missed one).

What makes no sense to me as a layman is how can you sell something you don’t own legally? If I borrow your cow and sell it that’s illegal without consent, if you give me consent to sell the cow, there is still only one cow and ownership changes hands, there are not now two cows.

Because cows aren't really fungible, but stocks are.

If I borrow $10 from you, you don't expect the literal note that you gave me back. I can give you $10 back in coins, or $10 transferred to your bank account. I can burn the $10 note you gave me, give it to a homeless person, or re-lend it to my friend. There's nothing illegal about that.

On the other hand if I borrow your car, you're expecting the same car back. I can't sell it and then give you another similar car in return. I can't borrow your car and then lend it to my friend.

>>I can burn the $10 note you gave me [...]. There's nothing illegal about that.

Not to detract too much from your analogy but burning money is illegal in some jurisdictions[1], and in the United States is prohibited under 18 U.S.C. §333: "Mutilation of national bank obligations"[2].

[1] https://en.wikipedia.org/wiki/Money_burning

[2] https://www.law.cornell.edu/uscode/text/18/333

Cows aren't fungible, so that analogy isn't great. The key thing to keep in mind is that here you do legally own the share you bought, except that when buying it you also signed a contract that says you will resell a share to the original owner at the original price, plus interest.

This is exactly how loans from banks work. You took money from the bank and bought a house. You now do not have enough money to pay back the bank, but the bank doesn't mind, because they only care about the contract that says they will get their money back plus interest.

Right but the bank no longer has the money in their account they let you borrow, so one dollar does not become two.

The bank has an "asset" in their account that is the debt note from you. This asset has the value of the money you borrowed, plus interest, and it can be sold for that. One dollar just became two. (If it's a mortgage it's called a mortgage-backed security which the Federal Reserve will gladly take off your hands currently. The money they pay is created from nothing.)

That asset has associated risk vs cash that for the most part doesn’t. The risk being you don’t get the cash back. One dollar did not become two. If you sell the asset you get your cash back from whoever bought it, and it comes out of their account, again one dollar did not become two, unless it’s the Fed sure, they can create money.

Shares aren’t created unless the company issues more right?

So I think you do actually have it right. That's why you'll see careful commenters in this thread referring to "synthetic shares", which are like normal shares but come with that risk that you don't get it back. Except, if I understand correctly there are also laws around shorts which say that you are required to have the money to cover the share, which helps diminish the risk.

"Synthetic Shares" just sounds like a fancy way of saying you have a loan on the books. Its like if I loan you money and saying now I have "Synthetic Money" in the form of the loan you owe me. Money people seem to love to make up new terminology to obfuscate the meaning.

The risk is priced. That's the excess interest (above the risk-free rate) embedded in the asset value.

I should also add that it's not the case that the bank "no longer has" the money lent out. The bank doesn't actually move money from some depositor to the borrower. The bank credits the borrower's account with money created from nothing, and it feels comfortable doing so because there is the asset backing it. The Federal Reserve doesn't have to be directly involved at this stage. It allows banks to do this as long as capital requirements are satisfied.

So fractional reserve banking, once they hit reserve fraction they can't legally lend more cash out right?

This also doesn't occur with shares, you either own the share to lend or you don't? There are no new shares created only loans on a fixed amount of shares in circulation unless the company issues more shares, right?

You don't own the share you lend as in it's no longer your property, but you own a new contract claim against the brokerage house whom you lent to. As with any loan, this is newly created financial property. It acts and is priced like the original share, plus additional compensation for the risk (payment for share lending).

It's not the same as company issuing a new share since there is no voting right and there is no SIPC insurance. But in all other ways, financially, it's as if the brokerage created a new share. Real share owners can lend again, so one real share can leverage into any number of outstanding synthetic shares. The only thing holding leverage in line is the margin requirement, and how many people who lent real shares want their loans back.

Right so one share does not become two and "sythenic shares" is as much a thing as "synthetic money" that is money you loaned out.

Right, risk plays into it, but the loan the bank creates is an asset, (a liability for the bloke that has to pay it back in the future) - If I can sell that loan to someone else great, I just have to make it look low risk. But whether or not I sell the contract/loan off, I do have an asset that I didn't have before. It may not be a dollar from the Fed, but it's worth a dollar as long as the risk is low.

> That asset has associated risk vs cash that for the most part doesn't.

Yes, that's why when you accept to lend your stocks, you will receive interests in exchange.

Apparently there is some consent and interest payment involved.

https://www.investopedia.com/ask/answers/how-does-one-make-m...

Again one cow does not become two, you just may owe two cows when there is actually only one in circulation because you sold the same one twice.

I guess the talk of creating new shares threw me off this is just IOU’s

Absolutely correct. The cows remain 100. When I said buy 200 cows back, I meant by the 100 cows TWICE. Buy them, give them back to the second person you borrowed them from, then buy them again, and give them back to the person you borrowed them from originally.

Sorry for making it confusing in my attempt to simplify it.

I have to admit. Its really a bit disappointing to see how many people don't understand the short, given we bailed out and financial institutions, its worth everyone to know.

Isn't this more like "10000 people each buy a fraction of the 100 cows" and you need all 10,000 of them to coordinate extremely well to manage it?

Would even getting 1 cow from someone breaking with the big group let you break the pressure if the person you initially borrowed the cows from isn't part of the group trying to squeeze you? Return them 1 cow first, then buy it back, then return it again as the second cow you borrowed, etc? You're gonna lose on this trade, but so is everyone else, then?

You don't even need them to coordinate extremely well. This isn't some sophisticated group with plans, this is a bunch of randos making jokes on the internet. If you have a large enough starting pool (like say a subreddit with 3 million followers), you've got a pretty big force even if it's just a small fraction of them buying a single stock for the lulz. And once the price starts moving up, even more will join in without you asking. If all of those people are using their play money then they aren't getting hurt at all.

But with that said, u/DeepFuckingValue started his YOLO over a year ago- he was super committed and it finally came around. How many other idiots did something similar and went bankrupt? How many will try it because they saw it happen this time?

Why use analogies? This one is wrong. Talk about short lending mechanics.

Wait until someone figures out how to automate this for small small small investors. Distribute across millions of Redditors

Bot traders for bitcoin/crypto already exist for purchase.

> borrow the 100 cows for one month and sell them for $1 each.

Who on earth is buying those cow for $1, if it is pretty obvious they are worth $0?!?!

By cows i mean GME, before the meme.

People who would like to rent out cows for other people to sell, and then pay back.

All those still need someone to ultimately buy a cow at some point, when everyone knows the value is zero.

Or are the ones holding the cow the last ones that assumed they would be able to still sell a cow?

Even if you think a stock should be worthless, it may make sense to hold it, even if eventually it will become worthless. The sale value may be zero, but as long as people are making shorts, the use value is the fee you can charge for lending them out. (And since it has a use value to make more profit, the sale value isn't exactly zero, but is more related to its use value than anything about the underlying product being securitized.)

Being able to sell it on is one exit from this gamble; but also, simply having accrued more lending fees (over time) than the share cost to acquire. Mostly, it's some combination of the two.

People who buy one of every livestock, then sell shares of that bundle.

(index funds, for example)

What does it mean to "borrow" a cow?

How do you know the redditor is a woman?

> Then they borrow them again, and sell them once more for 90c

IANAL but I believe this is actually illegal and if so the hedge funds are in the red for doing this

No it's not illegal. Reasonable people can disagree about whether it should be illegal, but it would be nontrivial to enforce and it's meaningfully distinct from what's termed "naked short selling."

There's really not any other way to get to shorted at 150% of the float, which was the GME reality. So... yes, likely illegal things happened by the hedge funds. Will the SEC investigate or fine them for it? Probably not, they'll probably get a(nother) bailout instead.

Under a title of investigate there are two red buttons in front of a sweating SEC, one reads /r/wallstreetbets and the other ...

https://en.wikipedia.org/wiki/Bernie_Madoff

Can you provide some factual basis for these claims? We can type out claims without foundation endlessly; the Internet demonstrates that well; what we need is real knowledge and facts.

This explains it

https://i.redd.it/9micoqswusd61.gif

The “short interest” is very factual and if you are not able to corroborate that on your own someone else will have to chime in

The cows are GME shares. The repeated sale of cows corresponds to short interest in GME greater than the number of available shares.

Hope that answers your question. To me, that's the central claim of the OP.

https://www.bloomberg.com/news/articles/2021-01-25/gamestop-...

the only thing resembling a "claim" is greater than 100% short interest on the security. This information is public https://www.marketbeat.com/stocks/NYSE/GME/short-interest/

As of this comment, it's 134%. So, 134 cows are borrowed from a base of 100.

Are there any claims in that post?

Yeah. It read just as a simplified explainer of shorting.

"Claim" seems like the wrong word. It's explaining shorts, but I think it's actually doing it inaccurately. It's saying the hedge fund will have to buy the cows at the end of the month. I don't think that's accurate. I don't think shorts ever expire.

Well, that "Hedge-fund cries foul" (which I've questioned in a direct reply, let's keep that discussion over there).

I'm not making claims, if that's what you mean. The burden of proof is on the person I was replying to.

There is no burden of proof on anyone. The person was simply explaining a concept, known as a short squeeze.

A short squeeze is a well known financial concept. It is not a claim. It is a concept.

was there a double blind study proving the existence of cows in the first place? I don't want to be mislead.

hilarious, given i just came from https://news.ycombinator.com/item?id=25928183

You might have missed it, but the cows are the facts, Jack.

No claims, just explaining how shorts work.

Just google "GME Short Float". I would also suggest not using so strong language and almost accuse someone, without at least googling the info.

What are you defining as "these claims"?