Now, of course, some of those shares are locked up by funds tracking, say the Russell 2000 index, which cannot liquidate their holdings (and may even be required to buy more as GME climbs) in order to maintain it's percentage in the fund. Other shares are held by other funds or institutions, and so on. So the reality is it is difficult for the shorts to cover quickly.
This isn't a problem during "normal times" because the volatility of the stock is relatively low and thus the short margin interest that you have to pay to keep borrowing the stock is a small percentage. But as the price runs up, that interest and collateral requirements grow dramatically since the broker needs to be sure you can pay up if you have to buy the shares at the current market price.
Can someone please explain how the original 100 shares turned into 220? Does this mean that after borrowing a share and shorting it, the original owner and the one who shorted can both sell it?
Imagine three participants: Alice, Bob, and Charlie. Alice owns a share of Foo Corp, the only such share that exists. Bob decides to short Foo Corp, and borrows a share from Alice's broker (Alice's broker gets paid for this).
At that moment, there are two shares that exist. If Alice logs into her brokerage account, she sees a share of Foo Corp, but it's really an IOU for a share of Foo Corp. If Bob logs into his account, he also sees a share of Foo Corp (that he borrowed from Alice). At that point, there are two "shares" of Foo Corp that exist.
To make money on the short, Bob has to sell the share and buy it later, so he puts it in the market and sells it to Charlie. At this point, there are two shares: a share owned by Charlie and an IOU to Alice from Bob.
Bob could be very confident about shorting Foo Corp, so he could also borrow a share from Charlie's broker, at which point there would be three shares in existence: an IOU to Alice, an IOU to Charlie, and the sole share that exists. Each of these participants, if they log into their brokerage account, do see a share.
These phantom shares can't exist forever though: Bob is paying both Alice's and Charlie's brokers. Keep in mind that either Alice and Charlie can decide to sell their share, which Bob could then buy, at which point he could cover the remaining IOU, and everything would settle.
But then, what if both Alice and Charlie just bought the share and weren't planning to sell it? Bob would be in a position where he owes two shares but there are zero to buy on the market. Normally, that doesn't happen because shares are traded often enough, but in certain scenarios (short squeeze, collusion between participants) there might be issues. At that point, Bob can decide to keep on borrowing the shares until one sells, or maybe he runs out of cash to borrow shares and closes his account.
That's when things get a bit dicey. At this point, there are two "shares", one actual share and one IOU for a share. What happens is that Bob's broker is in a fail to deliver position. They're supposed to deliver a share of Foo Corp to close the IOU but there's no such share to deliver.
This is the thing I have been thinking about the last day. In theory if all the shares are bought, these buyers would technically be price setters and list an arbitrary high price. Could they?
If the shareholders decide to corner the market, the company could issue more shares or the SEC might step in and say "no you can't do that" to either the broker, the shareholders, or both.
I don't think the SEC looks very highly on people cornering the market, be it hedge funds colluding or individual investors colluding. The SEC is supposed to look for all investors, not just the ones that decided to corner the market in one security.
Of course there's many ETF's that aren't market-cap weighted, but the majority of funds/value is.
They don't even need to buy up 100%. They only need to buy up 20%. Then they're back in the situation of being under 100% shorted, and problem no longer applies.
With such a large short interest it means that a motivated or coordinated buyer can force them to cover it at highly inflated prices, and that's their fault. But doesn't seem to be impossible just because the interest is >100%, merely very expensive (perhaps bankruptcy expensive).
Am I missing something?
A few things. I'm not an expert, but:
> They don't even need to buy up 100%. They only need to buy up 20%. Then they're back in the situation of being under 100% shorted, and problem no longer applies.
They're still in a very tough position. Buying 20% will raise the cost of the stock further, since they're buying it at market price which would drive up the price. And raising the price makes maintaining the rest of their shorts more expensive. That's ultimately the goal - make and maintain a higher share price, which would force shorts to buy instead of continue to pay to maintain their position, which in and of itself would make the stock price grow.
This is also why /r/wsb is interested in other large but not greater than 100% short interest stocks. They might not get squeezed as much as GME but the pressure would still result in a similar situation with lesser gains.
This becomes much less possible as the short interest shrinks or the lower impact you have on the share price.
When a company issues shares, there is a finite amount. It determines the the percentage of the company someone owns. So if there is 100 shares, you own 20, it would mean you own 20%. When a company goes public, they typically give, say 10%, to the market. So those 10 shares exist only. You either stock split or issues more shares. But issuing more shares would mean you own less percentage (and who would do that to themselves without a payoff).
You can buy more than 100% if you buy a financial instrument that has its underlying value tied to the company stock price (i.e. vanilla equity derivative), but its price is determined by the stock and not the other way around.
> Then they're back in the situation of being under 100% shorted
Let's say now there are 5 hedge funds that hold GameStock. Each has 20% (because hedge funds bet big, not small). The first one to cover will lose the least. You never want to be the last one because you lose the most and liquidity would be scarce because no one is willing to sell you their shares since its going up, meaning you would be double screwed. With each player that leaves, it causes a cascading effect.
> With such a large short interest it means that a motivated or coordinated buyer can force them to cover it at highly inflated prices, and that's their fault.
Yup.
edit:
The only people that can issue more shares without dilution is the Federal Reserve. They have a count of how much money is in flow, and can print money when need. But that only works if people believe in it. It hasn't been backed by gold in a long time. Otherwise, you will be in the same situation as some European countries prior to WW2 - hyperinflation (i.e dilution).
Theres calls and covered calls. Some brokers will only let you sell the later due to the margin needed. With a covered call you have to own the stock and hold it in your portfolio. With a non covered call, if your option gets exercised you then buy the stock at market value and sell to the executor at the agreed upon price.
basically when people are saying they shorted over 100% of the stock they are saying that its a non covered PUT contract and there isn't enough stock to cover the volume of all the PUT options contracts.
BUT what we don't know is when this PUT options contracts expire, which could basically make all of this worth fairly worthless. If the shorts option contracts don't expire til next year then this really doesn't matter to them.
Generally the P&L dept will make them stagger the options contracts over dates spanning the next year or so though.
I would recommend reading up on call and put options for more information.
You're still in a kind of race to see whether it will stay that high for long, or if people will eventually want to take their profits. But it definitely puts pressure on you to reduce your exposure to that, even at the inflated price.
Disclaimer: I am not one.
There's some very well written analysis between emojis. I guess some professionals are involved, that enjoy the attention and influence they get there.
Lots of inside jokes and repeated text blocks (that smell like broadcast propaganda). VERY positive energy overall.
They usually profit from switching side quickly or making informed bets you can’t easily make - like shorting stocks.
Except, they dug too deep this time. We’re seeing another LTCM meltdown in process, albeit smaller and so far more contained.
No matter how much people buy, they can't buy >100% of the shares on the market unless GameStop issues new shares. The people buying are betting that when these hedge funds need to cover, they will be covering ~120% of the number of shares (the amount of shorted stock) on the market. That covers everyone that has shares right now.
So right now, its a tug of war (hence the volatility). Its a zero sum game where one side will definitely lose. You can argue that the company isn't worth anything and that buyers will get hurt, but only when <100% of the stock is shorted.
edit (below):
The loser will be the one holding 100% of the stock. At that point the stock would plummet because all the buyers have left. Meaning if the hedge fund loses, they are not just covering at a higher price (and thus continuing to drive it up even more), they will effectively be buying worthless stock.
I consider this a battle of trading strategies. The fundamental value of the company is beside the point. Hedge funds have done this to each other before, that's why there's an existing term for it - short squeeze. Its definitely covered in a textbook for first year business school students.