From https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...:

There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

Entity A holds 100 shares and lends 80 to B, who shorts it by selling it to C, who lends 60 to D, who shorts it by selling it to E.

Now there are 240 long positions (100 A, 80 C, 60 E), and 140 short positions (80 B, 60 D), for a net 100 long, as before.

Short interest is 140/100 = 140% of the shares outstanding.

Oh, and by the way: Now A has 20 shares left (out of a 100 long position), C has 20 shares left (out of a 80 long position), and E has 60 shares (out of 60 long position).

Now assume that entity E is redditors/RobinHood/financial justice warriors that pledge to hold, and not let anyone borrow their shares, to squeeze the bad bad shorts B and D. So, FJW/HODLers control 60% of the shares now, and will never ever lend or sell!

A: 100 long (=20 shares, 80 lent), B: 80 short (=0 shares, 80 borrowed), A+B together net 20 long (the rest is held by C, D, E)

Well, so no A can sell, say 10 shares to B:

A: 90 long (=10 shares, 80 lent), B: 70 short (=10 shares, 80 borrowed), A+B together net 20 long (the rest is held by C, D, E)

And now, B returns those same 10 shares to A:

A: 90 long (=20 shares, 70 lent), B: 70 short (=0 shares, 70 borrowed), A+B together net 20 long (the rest is held by C, D, E)

Well, so no A can sell, again, say 10 shares to B:

A: 80 long (=10 shares, 70 lent), B: 60 short (=10 shares, 70 borrowed), A+B together net 20 long (the rest is held by C, D, E)

And now, B returns those same 10 shares to A:

A: 80 long (=20 shares, 60 lent), B: 60 short (=0 shares, 60 borrowed), A+B together net 20 long (the rest is held by C, D, E)

As you see, with only 10 shares circulating, and 60 shares in the hands of HODLers, B can happily reduce their short exposure. Let those shares circulate in this manner a bit more, and you end up with:

A: 20 long (=20 shares, 0 lent), B: 0 short (=0 shares, 0 borrowed), A+B together net 20 long (the rest is held by C, D, E)

Now, B is out of their short and flat, A has the same 20 shares it had at the beginning, and only a 20 long position now, and C, D, E keep holding their 80 shares net together.

Now, C,D can also drive down their position, we end up with A holding 20 shares, C holding 20 shares, and E holding 60 shares.

TL;DR: as long as 1 share is circulating, the shorts can reduce their position to zero, even if the majority of shares is held by never-lenders, never-sellers.

And now the market can collapse, and E is left holding the bag.

This is fascinating. Is Melvin Capital the "B" in this situation, and that's how they "closed their short positions" earlier today? It just shuffled hands between the other funds?

When you short a share, you borrow a share from someone who owns it and sell that share to someone else.

If the person who bought the shorted share lends it to someone else to short, one share has been shorted twice.

They are naked shorting. This is why wsb is so eager to destroy them.

When you buy a share and return it to the lender, you can buy it again from the lender. 200%, not naked.