Anna lends Bob a book, Bob lends Charlie the book, now the book is 200% lent out. It's arguably risky and stupid to be Bob, because now he's in trouble if Anna wants the book back and Charlie doesn't want to return it, but there's nothing illegal about this.
> In shorting, it sounds like you can sell the same share to 2 different people.
You have to obtain (buy or borrow) the share twice in order to sell it twice.
If I short a stock, I borrow the share and the sell it on the market. If I loan the share to someone else and they sell it then it is still only sold once.
In my opinion it's more likely that people were either selling naked calls (which would convert into an IOU for stock) or that people were selling shares that didn't actually exist on the open market.
I don't know enough about settlement to verify the latter claim, but there are some reports of shares taking an excessively long time to settle. Those kind of irregularities should probably be more closely investigated.
The share can then, afterwards, be loaned out and sold again. This causes it to be “double sold” and you’ll see something like the 140%.
Alice loans share to Bob, Bob sells to Carol, Carol loans to David, David sells to Eve.
Bob and David are both short sellers. There is only one stock. It has been sold twice.
I've seen the same argument more than once this weekend but this flood [1] (also linked from the TFA) says otherwise:
In order to meet legal requirements, the broker has to find un-lent shares (so the same shares aren’t lent twice). The PB will “tag” those shares, indicate to the client the prevailing cost to borrow, and provide the client a “locate ID” that guarantees that client those shares.
[1] https://twitter.com/compound248/status/1355276755980980225
I’m not 100% sure this is correct though, someone please let me know if I’m wrong.
Is there a reason why it isn't, other than the obvious one that Wall St corrupted the US govt a long time ago through bribery (lobbying)? Eg. Biden's treasury secretary has already been bribed (colloquially called "speaking fees") to the tune of $7.2M.
There is no reason to make this illegal and put effort towards banning it. Eg, I'm not losing any money and it is entertaining. If I think the price after the shorts get involved is too low I can buy the asset in question. Why should I, in my capacity as a taxpayer, be getting involved and spending money through my government?
Back in the 1920s I could make a company, issue a bunch of stock, and then go around telling people how amazing and profitable my company is, selling stock door to door.
Unusual, but a thing that can happen, and not at all illegal.
The answer is no, it is not illegal.
What law would shorting 140% of a company’s stock break?
But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal
Naked shorting would not increase the number of share available to be bought. But not the total number of shares in existence.
This is the same way banks use deposits to make loans. The dollar is the same dollar, but can be spent multiple times. Hence the money multiplier effect. The number of dollars in circulation is a constant. The number of times a dollar can be spent can be more than one.
At some point the loan still has to be paid off, which requires me, eg, to acquire a dollar somehow, then pay it back to the bank -- with interest.
Perhaps it should be explicitly treated as if I have one share, and two "claims on shares" which are likely to materialize, but are not guaranteed to do so - to make that distinction clear, to ensure that the lending for a short actually involves the lender temporarily giving up that share instead of just marking it as "used".
How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.
The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history:
> At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade.
> In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.
1 - https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...
I mean...this was due to fat cats gambling. Illegal gambling in fact. What else do you call shorting 140% of a company's stock?
Also, this might just be me, but it feels disingenuous for you to not mention a disclaimer while posting this that you're a quant trader at a market maker.
EDIT: As others have pointed out I seem to be misinformed about the legality of it, but my original point does stand. This IS happening due to fat cats gambling, and retail investors catching wind of it and blowing it up on social media (to be clear I'm aware that the majority of GME holders are still institutional)