Stonks & Bonds. lol fundamentals, sir this is a Taco Bell

By shorting a stock you are increasing the number of sellers in the market while the number of buyers remains the same. Hypothetically let’s say there’s an equilibrium for a stock at $10.00 where one person who holds the stock wants to sell it at 1 cent increments. That is to say Holder A will sell at $10.01, holder B at $10.02, etc.
New buyer A will buy at $9.99, new buyer B at $9.98, etc.

If you introduce 100 short sellers who don’t want to cover until the stock hits $8 or below now all those $9.99, $9.98 bids get taken and the stock is now trading at $9.00.

This could also have a compound effect as some of those holders see the stock decreasing in price and get scared and sell themselves further reducing the current price.

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I think the “all sales have to have a buyer” statement is technically true, but misleading.

When you look at a list of sales, it’s true that for every buyer there was a seller at that particular price. But it’s also true that for other prices, there would be many more buyers than sellers, or more sellers than buyers. Like, when bad news comes out - lots of people want to sell their shares, and because that increased selling demand isn’t offset by increased buying demand, the only way they’re able to do that is if they lower the price. So they do end up selling their shares, but the net selling demand leads to a drop in price.

To put it in a different context, the housing market works the same way. But I don’t think anyone would ever claim that “For every buyer, there’s a seller. Therefore, if there’s a big increase in demand for housing, we won’t actually see an increase in house prices.”

I don’t believe the WSB stories about short sellers, but if I were forced to steelman their argument, this is how I’d frame it:

In a regular market, people who have things to sell meet up with people who want to buy those things, and they negotiate a price that satisfies both parties. That’s fair. And over the course of time, prices will change if there are more sellers than buyers, or vice versa. Like, if a town becomes more desirable, the increase in net demand will cause house prices to increase. That might feel unfair to people trying to buy, but it’s still a generally fair market system. The key is that an individual house can only be owned by one person at a time, and the only person who can sell a house is the owner of that house. (If someone fraudulently offered to sell a house they didn’t own, it would quickly be revealed when the defrauded buyer attempted to claim possession of the house while the real owner occupied it.)

Here’s what short selling does:
Instead of a normal housing market, imagine a market for fractional ownership - time shares. This, on its own, doesn’t change anything; it just means that the rights to any particular physical house are collectively owned by multiple people. But the notion of “only one person can physically own and possess one house at a time” goes away, which makes it a little more difficult to track true ownership and ensure that no one is inappropriately claiming ownership.

Now introduce a shady guy who offers to sell some of those rights even though that guy doesn’t actually own any of them. And this guy is aggressively selling those rights at prices 5%, 10%, 20% lower than the “normal” price. But the buyers have no way of knowing that the seller doesn’t own the shares; they just view this as an increase in net selling demand that allows them to pay less for those shares. That excess selling demand (which is FAKE because the guy doesn’t actually have anything to sell) will drive down prices in exactly the same way that discovery of a toxic waste dump will spur net selling demand and drive down prices.

So this guy WHO NEVER OWNED ANYTHING TO BEGIN WITH can just artificially create as much selling demand as he wants, and drive the price down much lower than what the asset is actually worth. And because the regulator (WHO SHOULD BE DOING THEIR JOB) isn’t monitoring this, the guy suffers no consequences at all, and all the GOOD people who LEGITIMATELY own their shares are suffering because those shares are now valued at low distorted prices.

The solution is that the regulator gets off their ass and identifies the fact that this guy has been NAKED SHORTING shares that he doesn’t own, and forces him to buy back all of those shares that he fraudulently sold. That huge buying pressure, WHICH IS JUST AROUND THE CORNER, will cause the shares to return back to their true value, and is what people refer to as MOASS.

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Exactly that, in fact it always has been. Reminiscences of a Stock Operator was written in fucking 1923:

The theory that most of the sudden declines or particular sharp breaks are the results of some plunger’s operations probably was invented as an easy way of supplying reasons to those speculators who, being nothing but blind gamblers, will believe anything that is told them rather than do a little thinking.

On this inside selling the stock naturally declines. Then the public begins to get the familiar “explanations.” A “leading insider” asserts that everything is
O.K. and the decline is merely the result of selling by bears…“When we asked a prominent director of the company to explain the weakness in the stock, he replied that the only conclusion he could arrive at was that the decline today was caused by a bear drive…The bear party in the market has become aggressive and the weakness in the stock was clearly a raid intended to dislodge weakly held stock.”

The stock in question, notwithstanding all the threats or promises of a tremendous squeeze of the overextended short interest, does not rally. It keeps on going down.

The most common theory I see on reddit is that there’s a scourge of naked shorting (shorting without borrowing shares). Naked shorting hasn’t really been a thing since 2008 when it was outlawed, and nobody who whines about it ever presents evidence. They’ll point to some ticker with a >100% short interest because they don’t understand that the same share can be lent more than once. Often you’ll see the most garbage of companies pander to this crowd, for instance DJT, GNS, TRKA, HLBZ. Notice, however, that you don’t see their insiders lining up to buy shares they claim are artificially discounted.

Another common theory is that hedge funds who are short a ticker employ an army of social media FUD-spreaders and even pay the MSM to spread bearish news. So when they call someone a “shill”, they’re not referring to someone literally shilling the stock to strangers, but rather someone expressing doubt about GME being worth “phone number prices”. Said person is actually being paid by (((them))) to influence others into paper-handing. This mentality has spread to random penny stocks that were never WSB memes, and even to the TSLA cult members.

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It’s been a while since I WSBed - weren’t they also theorizing that the option interest would amplify that MOASS because institutions would have to buy shares to cover all the OTM options that became ITM as short sellers got margin called, or something like that?

Why are you referring to this as a fraudulent sale that should be stopped by a regulator? Is naked short-selling illegal? Or are you just referring to the hypothetical of fractional real estate?

Yes, the gamma squeeze. Let’s see if I can make this short.

  • Suppose the stock is trading at $20, and you’re convinced (because you’ve done your DUE DILIGENCE) that it’s actually worth $40. You could buy the stock and expect a 100% return. OR you could buy a deep out of the money (DOTM) option with a strike price of, say, $35. That option would probably cost less than a dollar right now, and end up being worth $5 if the stock reaches its $40 target price by option expiration.
  • So apes obviously buy the option.
  • Unlike stocks, which have a finite supply, options are created or destroyed by option writers without any need for them to own the underlying share. So someone like Goldman Sachs will observe a demand for the DOTM option, laugh at how ridiculous that is, and happily create (write) the option and sell it to the ape.
  • Now, even though Goldman has sold this preposterous, probably worthless option, they don’t actually want to be on the hook in the unlikely event that the stock price does actually moon. (They have effectively written an insurance policy on the stock price.) So they hedge that risk by buying an appropriate number of shares of stock. That way, if the stock does moon, the gains from the shares they own will offset the loss they’ll experience on the option they wrote. (This is delta hedging, because the delta ratio determines how many shares they need to buy.)
  • Initially, Goldman will need to buy very few shares of stock, because the delta of a DOTM option is very low. Over time, the appropriate number of shares that Goldman needs to own will change as the stock price changes - as the stock price goes up, the option delta goes up and Goldman will need to buy more shares. If the price goes down, the opposite.
  • So basically, these DOTM options provide fuel to both upside and downside price movements. As the price goes up, delta goes up, and Goldman needs to buy more shares to stay hedged. That Goldman buying pressure causes the price to go up further, which means Goldman has to buy more, etc. It’s like a perpetual motion machine.

[There is actually a lot of truth in the mechanics of all this. The SEC investigated it and concluded that a gamma squeeze was unlikely to have caused much stock price movement. However, some academics noted that the SEC’s conclusions weren’t bulletproof.]

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I was partially using the voice and language that I imagine apes to be using. But yes, naked short selling is illegal.
https://www.sec.gov/news/press/2008/2008-204.htm

If it’s illegal to short sell without physically borrowing the stock, why do brokerages’ platforms allow these sales to take place?

Isn’t the brokerage borrowing the stock from other clients that hold it?

They don’t, it’s just a conspiracy theory not backed by anything. Someone who’s already short can briefly become naked-short if lenders recall their shares, but then the broker will automatically close the short with a market order.

ETA: the same thing can happen if a put exercises or a call gets assigned in a ticker with no shares available to borrow. Monday morning, the naked short would get liquidated by the broker. However, from what I’ve experienced and heard, it’s rare for this to happen. Even in a ticker that you ostensibly can’t short, brokers usually find shares from somewhere when an option expires.

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I assume it’s because of the gap between when trades are executed and when they clear. Technically, when you submit a trade to buy or sell a stock, even though you see the transaction immediately in your account, it doesn’t settle until 2 days later. So when you submit a short sale transaction, your broker will survey available shares and make an assessment of whether they can locate a share to borrow within that period. They might initially assess that they can locate shares, but then ultimately not be able to.

Market makers are also allowed to naked short sell in order to satisfy their job of maintaining liquidity. (If there is a rush of buyers and no sellers, a market maker might naked short just to satisfy that buying demand.)

Edit: there’s no real evidence that naked short selling is a pervasive problem, as opposed to a very rare situation with hard-to-borrow stocks.

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Interesting…I just assumed that the platform software searched for these shares at the company at the time of sale and then attached them immediately. Or does the settlement delay make this impossible?

The large brokerages generally keep a decent inventory of every stock as well so they can just lend you the stock you’re shorting.

Right, and it’s not even that the brokerage themselves keep an inventory. It’s that their customers have the shares and allow them to be borrowed.

In my case, I have an account at Schwab. I chose to make that a margin account so that I could short stocks and occasionally go negative and trade options and do other dumb things that I shouldn’t do. Anyway, if you designate your account as a margin account (rather than a cash account), you give the broker permission to lend out your shares. So if a Schwab customer decides to short Berkshire Hathaway, Schwab doesn’t need to look outside for those shares to borrow - they can just lend some of mine without even telling me.

Index funds are also a good source - they don’t give a shit if their shares are borrowed, and they can make a small amount of money by lending those shares.

In addition to the shares being held by clients the brokerages also have an inventory of their own shares. You place an order to buy something and sometimes the brokerage will just sell (cross) it to you out of their own inventory at the bid or last sale price rather than match it in the market with another seller.

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Private equity is a disgrace

https://x.com/trungtphan/status/1792580920106467425?s=46&t=XGja5BtSraUljl_WWUrIUg

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“mismanagement”

We all love our PE don’t we.

A Thai seafood firm contributing to getting red lobster shutdown by laundering its excess shrimp through it is objectively hilarious

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Does this look like a man who had all he can eat?

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Capitalism working as designed

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