https://en.wikipedia.org/wiki/Cede_and_Company
All you own are assignments of that stock
What DTC trades are assignments of stock held by Cede corp, what you own are assignments of assignments held by brokers - it's how you take physical stock certificates and start trading them electronically (back in the 60s)
The other thing to consider here: if some entity needs to provide the put option, how does one hedge (risk manage) a put option ? They need to consider what would happen if the price drops, and as the price drops their hedge needs to increase in price. There's undoubtedly more to this, but that relationship sounds awfully like a short.
Any experts want to wade in here?
A short sale is something very particular: it's selling something you're borrowing. The counterparty has actually bought a stock. Not an option, he can hold that stock for sixty years. This is fucking weird.
(If you write a put and a call for the same strike, you are basically in the same position as a short seller. If you buy a put and a call for the same strike, you are economically in the same position as an owner of the stock.)
Hence, you can't separate options from stocks.
To replicate the stock, you'd buy the call and sell the put. The risk exactly balances out in the sense that a total portfolio of 1 stock short, 1 call long and 1 put short would have zero risk and behave like a risk-free bond.
(If the risk premia of the long call and the short put would not exactly balance, you could make money with very simple arbitrage trades.)
When we talk about naked shorts, they would still have to be covered before delivery (usually two days after the trade).
And when buying a normal stock, not from a short seller, you also can only vote once you take delivery. So everything is the same.
Selling cash secured puts is risk equivalent to covered calls, but doesn't require stock. If anything it's a neutral/bullish strategy since max profit is above the strike.
You give stock borrow consent when you sign up for a brokerage account. It’s also trivial to turn off, though there isn’t an informed reason for non-activist investors to do this. Some brokers share stock loan income with the account holder, though most keep it from retail accounts.
You have agreed to it at some point. If your broker doesn't give you a choice you may go to another broker.
This is an explanation of how it does actually work.
The brokers I have experience with either propose you to participate in a share-lending program with profit sharing (opt-in) or propose two different kinds of accounts and you can disallow lending but then the conditions are slightly worse (some fees are waived if you let them loan your shares).
The shares are not "stolen without your knowledge". If you're using margin it may be part of the conditions attached to that. Would you say that a broker liquidating part of your positions to satisfy margin requirements is also the broker deciding to steal your shares without your knowledge?
However, this argument does not apply to regulations that lower barriers to entry, because low barriers to market entry are exactly what enables competition.
(Most regulations, alas, raise barriers to entry. Even if that's not their intended purpose.)
It's one thing to argue for making sure shorts are well-regulated, but this something entirely different that has the risk of fundamentally breaking our society.
I think he is arguing against the idea of applying fractional reserves to brokers.
> Same if you bought a stock, and your broker suddenly decides to steal it without your knowledge, and loan it out in order to sell it in the hopes of earning money if its value drops (i.e. short the stock). Clearly you'd want to know if your property is being loanded out, because it means that you're incurring risk, no matter if you're compensated for it through interest or not.
I can't find any other interpretation for this logic and terminology other than a rally against fungibility.
No, fungibility is whether an asset (ie. individual assets within a particular class of asset) is interchangeable with one another.
It means when you deposit banknotes into your bank, whether the bank has to give you the same banknotes with the same serial number, or whether they can give you equivalent instruments to satisfy their obligation to you. What they owe you aren't the banknotes, but instead the money.
Also note when you deposit money into a bank, it's not treated the same way as if you put banknotes in a safe deposit box. The way you made your argument on stock brokers is as if it is, and fundamentally misrepresents this relationship. They don't owe you 'your' shares, they owe you a number of shares. Your shares become their asset, in exchange for their liability to you. You don't get to control what they do with their assets.
That's also the reason you don't get to control what the bank does with 'your' money you hold with them, because legally, it's their money with an obligation to pay you when requested. Hence the central bank steps in to regulate and guarantee fractional reserve banking in order to prevent bank runs.
Of course. This is synonymous with my own explanation. However your take is that it means that after you've made it interchangeable, then the bank or exchange somehow automatically gets more rights over it. That just isn't the case. Unless there's an express prior agreement, it's also morally wrong.
Eg it's common in some tech companies to give the founders super-voting stock that reverts to normal stock on sale.
When you buy a share from the open market, they are not going to guarantee a particular share with a particular serial number you specify, they will only provide a number of that particular class of share of the company.
Most companies decide to make their shares fungible, because they want them to be readily tradable.
But there's no one forcing anyone here. Companies and investors could agree to shares with particular serial numbers.
It's just so much more convenient to have fungible shares, that this is where all the capital goes.
'a physical share' No. There's no such thing. Even a physical share certificate is not a physical share. It's a physical piece of paper which documents a nebulous thing - the set of rights you have, and terms between you, the company, its management and other shareholders.
'slippage and volatility'. No. You bought the share at the price you were filled on. No slippage. One share gets lent out, one share gets returned. You are not affected by volatility in any way, because the share your get back is exactly the same as the one you lent, and the price change would have affected you anyway.
'A substantial loss' When a share your broker lent out fails to deliver (which you would never know about), the broker doesn't write to you and say 'oops, your share didn't make it back, your loss'. First of all they didn't write your name on the same before they lent it. They have a bunch of shares which they lend out. Secondly, someone will have to produce either the share or the exact amount of money required to buy an identical share at some point. Thirdly, even if they didn't, the broker would make good any loss, whether inadvertent or due to some mysterious malfeasance. That's literally the reason your broker holds capital and is regulated.
A share is not like an apple. You buy a share with the clear intention of selling it to someone else one day. It's a speculative activity par excellence. People who buy apples in order to trade them are generally quite comfortable with the fact that 'their apples' are in reality just a binding contract on someone else to produce those apples when asked. In the same way, the bank does not have 'your money' in a pot somewhere. They just promise to produce it under certain conditions, and there are regulations making sure they keep this promise. I get that some people think this in itself is suspect, but if so, you are opposed to most aspects of modern finance, why pick on short sales?
If you buy a share, your order to buy one will most definitely be met. They can't lend out something that hasn't been bought. You might be confusing short selling with another bugbear, order internalisation and PFOF.
> If instead my money is “borrowed” without my concent for some nefarious activity
What activity? Who is borrowing your money?
> whose money is being stolen Your money was used to buy the share.
Want to sell the share? It's there. Want to vote the share? It's there provided that you actually paid for it with cash. Oh, you bought the share on margin? Well, the same as a car which you borrowed money to buy, the share does not fully belong to you in those circs. So depending on the rules, you might not be able to vote it.
> That these shares do not exist, isn't some slip-up. The share definitely exists. Allowing retail investors to bet on shares going up and down without any actual shares trading hands is illegal, since the 1930s.
'without your knowledge'. Everyone knows about this. That's literally why we're taking about it.
>loan it out in order to sell it in the hopes of earning money if its value drops The broker doesn't earn money if its value drops. They lend out a share, they get back an identical share.
>Clearly you'd want to know if your property is being loanded out, because it means that you're incurring risk
No more risk than the general risk that your broker (or bank) will fail, that the regulator got it wrong and they don't have enough money to pay everyone back, and that the govt won't step in if this happens.
And you do know.
And you are allowed to ask them not to do it. If you paid cash for the share.
Oh, you bought the share on margin? So the broker stole someone else's money from their pot at the bank where they thought it would be taken care of, lent it to you for nefarious activity, and you spent their money on a share you couldn't afford yourself, with the express intent of making the price go up? Shouldn't that be illegal? No, margin investing is conceptually very similar to short selling and is also an accepted part of modern finance. The broker lends you money, you buy a share, you hope it goes up, when you sell the share you pay back the money. The broker lends a short seller a share, they sell it, hold onto the money, hope it goes down, when they buy back the share they give it back to the broker.
There are tons of problems with finance and financialization in modern society. This isn't one of them.
When you put money in a bank, acquiring interest, you no longer control that money, the bank is free to invest it, though obligated to return it. This is part of your agreement with the bank.
When a broker buys stock on you behalf, there are often similar arrangements in the T&Cs. Your stocks therefor, cannot be borrowed, or sold, without your consent; but you need to read the terms to see what you are consenting to.
Same if you buy an apple, I'm sure you'd only do it in the belief that you will actually get something edible. If I got nothing, I'd want my money back! But then when you buy an apple, you can see and touch it before you commit. Not so with stocks. And so you buy it while trusting the broker that your order will actually be met.
If instead my money is “borrowed” without my concent for some nefarious activity—in order to create more “liquidity”—that has a name: It's fraud. It's fraud of the customer whose money is being stolen. It's fraud of the customer who's being fooled into thinking that he's buying a real stock. That these shares do not exist, isn't some slip-up. It's an intentional effort, done with the motive of earning money by exploiting the trust of their customers. Such action should thus clearly be illegal.
Same if you bought a stock, and your broker suddenly decides to steal it without your knowledge, and loan it out in order to sell it in the hopes of earning money if its value drops (i.e. short the stock). Clearly you'd want to know if your property is being loanded out, because it means that you're incurring risk, no matter if you're compensated for it through interest or not.