If you look at the SEC data on FTDs, there have been a huge number of them for GME in the past year https://www.sec.gov/data/foiadocsfailsdatahtm

So that kind of points towards a possibility of naked shorts, if I understand correctly (although by itself it doesn't prove it's happening).

Dec 2020, second half:

  SETTLEMENT DATE|CUSIP|SYMBOL|QUANTITY(FAILS)|DESCRIPTION|PRICE

  20201215|36467W109|GME|170655|GAMESTOP CORP (HLDG CO) CL A|12.72

Not very rich data. I wonder how much of that comes from market-makers versus hedge funds.

Wait, by my own calculation it seems GME had way more shares failed to deliver than that. I count over *14 million* in December using the [two data files provided by the SEC](https://www.sec.gov/data/foiadocsfailsdatahtm):

    $ cat cnsfails202012[ab].txt | csvgrep -d '|' -c SYMBOL -r '^GME$' | csvcut -c 'QUANTITY (FAILS)' | sed 1d | paste -sd+ | bc -l
    14276093

How many of those are the same shares failing to be delivered multiple times? Lots I don't understand...

The numbers you're looking at are aggregate data, so that includes past days I think, not just the given day. I think you have to subtract each number from the previous one.

> The figure is not a daily amount of fails, but a combined figure that includes both new fails on the reporting day as well as existing fails

Ah yes, they are aggregate indeed. The sentence just before the one you quoted also says:

> Fails to deliver on a given day are a cumulative number of all fails outstanding until that day, plus new fails that occur that day, less fails that settle that day.

So the last day we have data for is December 31, 2020:

  SETTLEMENT DATE,CUSIP,SYMBOL,QUANTITY (FAILS),DESCRIPTION,PRICE
  20201231,36467W109,GME,228358,GAMESTOP CORP (HLDG CO) CL A,19.26

As I understand it that means there were only 228358 shares failed to deliver at that point in time. This needs more analysis to understand how irregular it is compared to the other 12,000 symbols that had shares fail to deliver in December...

And just for completeness on your comment, a naked short is the same as a regular short, but in the opposite order. First sold short, then borrowed after the fact.

I can’t quite wrap my head around how this is possible.

Are stock brokers allowed to just generate shares in their computer systems and then find a way later to actually obtain them? And when they do so, that might actually be from another broker who magicked them into existence?

Because actual delivery does not happen until settlement time three days later. The seller has until then to acquire the shares.

Naked shorting is illegal. To short the shares the seller only has to perform a “locate” first. That involves contacting someone that has the shares and is willing to lend them. Skipping the locate step is illegal. They just don’t have to actually borrow them until delivery.

Additionally, if the locate fails to materialize then it’s the sellers responsibility to borrow them from someone else before delivery. If not, that leads to a fail to deliver which locks up further transactions for the seller until it’s resolved.

>Naked Shorting is illegal.

Unless you're a market maker and thus exempt from the regulation, because your market making function requires buying and selling lots and lots of unsettled shares in order to provide liquidity.

I'm curious if you have any more information on this, not in a snarky way, just curious.

Sorry it took so long to get back to you with an answer! Also no snark detected. Here is a nice overview by the SEC but it's really light on the details.

https://www.sec.gov/investor/pubs/regsho.htm#_ftn4

You can also look through FINRA's regulations here:

https://www.finra.org/rules-guidance/rulebooks

The wikipedia article on Regulation SHO is also fairly relevant:

https://en.wikipedia.org/wiki/Naked_short_selling#Regulation...

It's pretty long and tedious and not really targeted to your question though. I'll try to remember to post a better resource here when I find one.

That last part is what really confuses me... what if the seller never resolves the failure to deliver? The buyer is walking around believing they own a share that the seller never actually gave them... I understand that the types of institutions that can engage in this behavior will true up their balance eventually, but why allow it in the first place? I can understand playing fast and loose with derivatives, since they are created out of nothing anyway, but securities should be treated in a manner consistent with their name.

Same as if you pay for ten tons of lumber and it doesn't show up. Stock trading grew out of traditional property trading and inherits a lot of its norms from there.

Does it have to be that way? Everything is electronic and stocks can move at the speed of the network whereas lumber cannot.

There could be some archaic processes that are not electronic but are there inherent good reasons why they cannot be converted?

Not necessarily. But we're talking about a heavily regulated system, run by a lot of very conservative entities, that currently works pretty well on the whole; there's going to be a whole lot of "if it ain't broke don't fix it".

I guess this is where the sentiment of "let's break it so they fix it" comes from.

That's what the clearinghouse is for. They are the counterparty for both sides. So the seller's counterparty is the clearinghouse, not the buyer, and the buyer's counterparty is also the clearinghouse. The clearinghouse requires broker margin accounts so that they can close out a trade when there's a failure. And the amount of collateral depends on risk.

(This is also why GME trading was halted by some brokers--assymetrical trades and increased volatility meant there was greater risk for trades in those stocks for those brokers, so the clearinghouse demanded more collateral from the broker. Broker doesn't have that collateral right away, they can't make the trade.)

The buyer gets made whole by the broker they bought from, retail you'll never know it happened. The buyers broker makes the sellers broker make them whole, they pay whatever the buyers broker has to pay to buy the shares elsewhere plus more. Brokers

Thanks, that’s a bit clearer now.

It sounds devious when you put it like that, but yes. Most things in finance are compositions of credits and debits that take time to settle. The aim is to have sufficient liquidity and price accuracy that the time between executing and settling is safe, but there's always risk that things go awry before the settlement.

Trades aren't settled immediately. Finance runs on various forms of promises, basically.

I’ve never heard a simpler statement of the fundamental Achilles’ heel of modern finance: “various forms of promises”

The system has become so intertwined that when someone breaks a promise, it’s too disruptive to actually hold them to account so we just paper over it to keep the wheels of commerce rolling.

Which is a form of hostage negotiation. Promise breakers are incentivized to profit as much as possible from broken promises as long as they can hold the system as a whole hostage.

Not sure this analogy answers your question, but it might help:

https://news.ycombinator.com/item?id=25944738

Yes, it’s like writing a check that won’t clear because you know it’ll be a few days until the money comes out of your account and even if it doesn’t, you can say “oops my bad” and fix it later.

Not necessarily. As long as the borrower commits to borrow the stock at a determined point in the future which the broker legitimately deems should have borrow liquidity (availability of shares to borrow), the short sale is not naked.

And interestingly enough, if this transaction occurs in good faith and for unforeseen reasons there is no borrow liquidity at the agreed upon time, a fail to deliver will occur despite the short sale not being naked.

That's fair - said another way you just have to have a plan in place to borrow the share but don't actually have to have it borrowed yet. And all this discussion is fairly moot given the number of shares that routinely fail to deliver and the general lack of meaningful enforcement actions.

That... seems gimmicky. Like using repurchase agreements to pretend that your balance sheet looks cleaner than it actually is.

It's not really about presentation of balance sheets, it's about liquidity. The explicit purpose of market makers is to provide liquidity, so they have a special exemption to buy and sell shares without being certain they exist. They have to have a good faith belief they will exist though. Usually they're right. Occasionally they're wrong.

Does this mean that there is still only 100% of stocks available and the ratio of iou's to total stocks 113/100?

I guess that makes sense that a person can borrow a stock, sell it, borrow it again from the second buyer, sell it again. The number of stocks floating around stay the same, however, the number of iou's increases. Likewise, a person can buy the one share, return it, then buy it again, and return it again to settle the second of the iou's.

Interesting that nobody is really explaining the mechanics of how this works. Makes me wonder if a lot of retail investors are about to get hurt.

>Interesting that nobody is really explain the mechanics of how this works.

This is another case of the more popular a thing is, the less reliable the talk about it seems to be. News outlets could very much be explaining well what is going on, but they aren't. Bits and pieces of the "real" story are coming out, and lots and lots and lots of nonsense.

I read this, but it's not clear to me there's anything to it. It has a strong aroma of crank, and not a lot of quantitative detail. Has anyone written a useful response to this?

EDIT: Specifically, I think the idea that failures to deliver create counterfeit shares is wrong. I'd love to hear from someone with intimate operational knowledge of this process. FYI, SEC SHO FAQ:

https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm

I just wanted to point out that naked shorting is very easily hidden. It’s hard to prove and the system is built for allowing shadiness. At this point how can we still give them the benefit of the doubt?

Here's an analogy:

* data breaches are very easily hidden: literally anyone can walk out with a usb drive loaded with information, or download the data off an unsecured/unlogged server without a trace

* it's hard to prove: I mean, companies aren't exactly offering their logs up for public inspection

* the system is built for allowing shadiness: not sure how to quantify this one but there's definitely a problem of attribution when it comes to who did it, especially when there's multiple data brokers involved.

You read hearsay saying that company X has suffered a data breach. The company denies this. Do you give them the benefit of the doubt, or do you assume they're guilty?

> I just wanted to point out that naked shorting is very easily hidden. It’s hard to prove and the system is built for allowing shadiness.

Is it though? Regulation SHO seems to make it quite hard for brokers to hide it these days. What makes you say it's easily hidden?

Pardon the question - thing is, i don't know if you have expertise in this, or if you're just another random internet guy expressing his biases.

this is some qanon equivalent gobbledeegook

I’ve seen that explained on WSB. I don’t think there’s much confusion about it. Nonetheless, SI being that high will inevitably drive the price up to unwind, and take quite some time to unwind. The evidence of naked shorts (which Market Makers are permitted to do to enable liquidity) seems primarily based on FTDs.

What happens if a market maker fails to deliver the promised stocks due to inability to purchase stocks? Penalties to the government?

> What happens if a market maker fails to deliver the promised stocks due to inability to purchase stocks?

Unless volume is zero, there is no “inability to purchase stocks.” Just inability at a desired price. If a market maker fails to deliver, they get hit with fines and fees from clearing infrastructure, exchanges and, eventually, the SEC.

In addition to the shorts, when people buy call options - doesn't that mean someone else is on the hook to provide shares at a later date, and they might not hold them at the time of selling the option?

You can sell naked calls. The maximum loss is infinite and so it is hard to get a brokerage to allow you to do this, but it is done. Indeed if the price goes up you are on the hook to buy the shares and deliver them.

Calls are commonly either covered by shares you own or in a spread where you buy and sell the same ticker at different prices or dates.

Yeah but it's not like anyone would exercise out of the money options *nervous laughter*. Though theorethically, with enough options it could cause the same effect as a short squeeze, where the exercise drives up the price to make them in the money.

A lot of calls will be "covered" by whomever wrote the option initially, meaning for each contract they wrote, they hold 100 shares of the underlying security as collateral. I don't know the percentage and my Google skills are failing me, but perhaps someone more familiar with the industry can comment on the ratio of covered v. naked calls.

I've written cash-secured puts and covered calls a decent amount as an individual investor, the worst thing that happens is you end up buying something for more than it's worth or selling something for less than it's worth. However, it rarely goes wrong the first time and you've made premium from other options many times over on the same security. If you look up the Wheel or Triple Income options strategy that goes into the specifics of it. It works pretty well for high-volume, stable stocks that you want to own anyway.

When you buy a call from an option trader, you're long the stock, trader is short, so they will buy shares to hedge themselves.

They often do, but they don't have to. You can write an uncovered call, if you're brave or stupid -- after all, worst case you'll just market buy the shares to deliver on the day the option is tendered.

No, worst case is nobody is selling shares on that day. Thats the exact scenario wsb is hoping to create.

Liquidity providers can always just write share IOUs and find the shares to fill them later. The market running out of stock is not a thing that can actually happen.

I dont understand how the new owner of the stock can ”re-short” it. Could you maybe explain? :)

I borrow your car (and you even give me the title!), promise to return it to you (but not necessarily the same car, just the same make and model), and then I sell what is truly now my car to someone else. That new owner could then find someone else to lend the car to, transfer the title on a promise that they'll eventually transfer the title back, and then let the new borrower sell it, transfer the title, etc. There's only ever one title and one car, but there are a lot of promises to return the car back later. When you explain it with goods it becomes obvious that a fraud was perpetrated if the buyers don't realize that the car might be owed to someone else. Yay for financialization and long impenetrable terms of service agreements with your broker where you automatically allow your broker to "lend" and re-title your shares so that they can earn interest on the lending.

This is a simplification though, there's actually like a parking garage involved (broker) who says to trade on his exchange that the broker will keep your title safe for you - it's better than a paper certificate to hold in your safe at home because it can't get lost! But this allows the parking attendant to sell your car hoping you wont notice, and hoping that he'll be able to buy another similar car back before you actually ask for yours back. And of course insurance companies, auto dealerships, etc, but you get the idea.

Robinhood's genius is hiding this complexity from their users behind a slick "gambling is fun" style app. TD Schwab ETrade and other "adult" brokerages also don't make it obvious, but at least they make you "read" some documents that explain the details before you get an account.

In sports, we call these "side-bets," wherein the total value captured in the bets can be many times the purse prize of the event (fight/match, what have you).

That there's a great deal of betting happening on the outcome of the stock market shouldn't surprise anyone (and yet it does!). It is, after all, the biggest game on the planet.

Except in sports, the side bets don’t inherently sway the outcome of the match (unless the players are betting too). Financial side bets do influence real asset prices.

And what happens when the side bets begin to wag the dog - when it becomes more profitable to manipulate the underlying and pay the fines there in order to save a bigger position in the side betting market?

Your car example makes for a fun scenario where you lend someone a one-of-a-kind car, and that person sells it to someone else, and you manage to buy it back from that someone else (maybe for a quite high markup). Then when the time comes for the first person to buy the car back to return it to you, you either outright refuse to sell or ask for even higher markup. What will happen then?

Why do we even allow people to sell borrowed things?

> Why do we even allow people to sell borrowed things?

Unlike cars, one share in a company is as good as another, and the whole reason you borrow a share is so that you can sell it. It's kind of like how if you borrow money, you're allowed to spend it instead of just keeping it in a pile under your bed.

Owners don't short, owners lend.

A owns a widget and lends it widget to B; B sells the widget to C; C lends a widget to B; C buys another widget from B.

A has 1 IOU from B and no widgets.

B has no widgets and owes one to A and 1 to C.

C has one IOU and one widget.

There you have 2 IOUs and only one widget. To settle debts, B will have to buy a widget from C, return it to him, and then buy it again and return it to A. The widget isn't "tainted" by being at one point borrowed, anybody buying it can lend it out. Doing so can create more IOUs than there are widgets.

Imagine getting in a circle with all of your friends, you have a dollar and the person on your right borrows it from you, then the person on their right borrows from them until you get around the circle and you borrow the dollar from the person on your left. There was only ever one dollar but now there are as many IOUs as people in the circle. That's of course a silly thing to happen, but if you rearrange it to make it messier the result is the same, more IOUs than there are things to be borrowed.

The linked Wikipedia page has a graphic that explains it better than I can in text: https://en.wikipedia.org/wiki/Short_(finance)

Basically, a short sale is a 3-party transaction. The first person lends their shares to the short seller. The short seller then sells the shares to another buyer. The original owner is still owed 1 share, which the short seller must later buy.

In other words, you can't have a short sale unless someone buys the shares from the short seller. That new purchaser, who has the stock, is long.

The key is that there are 2 people with long interest and 1 person with short interest. The short seller must pay borrow fees to the lender for the privilege of selling the shares short, otherwise there's no reason to do it.

This analogy might help:

https://news.ycombinator.com/item?id=25944738