Naked Shorting is Illegal: So How the Hell was GameStop 140% Short?

Mish

GameStop was 140% short. That is illegal. So how did it happen?

Naked Shorting Explained 

Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market. Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems.

The above is from Investopedia What is Naked Shorting?

What's Going On?

  1. It is illegal to be naked short in excess of float except for market makers who have to take the other side of a trade.
  2. It was not the market makers who were naked short. It could be in theory, but not in this case, at least not yet.
  3. Hedge funds wanted to short and they have to borrow stocks to do so.
  4. The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.
  5. It should be the responsibility of the brokerages and market makes to not let hedge funds get 140% short. But they did, and I believe on purpose.
  6. Since the public cannot be 140% long, except via options, who was effectively long the other 40% of the shares?
  7. The brokerages and the market makers. To get even more shares for themselves, they restricted trading.
  8. So while these Redditt traders did well, the market makers also gained immensely on the meteoric rise. The more the merrier. They screwed the hedge funds big time and purposely so.
  9. A side artifact of points #1 and #2 is when the shorts are all squeezed out the market makers are the only ones who are short.
  10. When that happens, the bids plunge and the market makers cover lower. 

Rule #1 The Casino Always Wins

The market makers benefit on the meteoric rise. They will be the big winners in the collapse that's about to happen.

Rehypothecation Role in Naked Shorting

Over and Over

Times Square Billboard 

$GME Go BRRR

The New York Post notes Defiant Redditors buy Times Square Billboard as GameStop Stock Saga Rages.

“$GME GO BRRR,” blared a digital ad on the corner of 54th and Broadway in Manhattan. The ad ran for an hour on Friday and was a creation of digital billboard maker Matei Psatta. 

The line refers to a popular internet meme that uses “Brrr” to signify the sound a money-printing machine makes. GME is the stock’s ticker symbol on the NY Stock Exchange.

Congressional Hearings Loom

Fox Business reports Robinhood hiring 'federal affairs manager' as congressional hearings on GameStop scandal loom.

If Congress wants to Investigate something, I suggest starting with my 10-point scenario and Rule #1. 

Book Already Out

Movie Coming Up

The book on the World's Biggest Casino is already out . I confidently predict the movie is coming up.

Two main characters are ready identified. Vlad Tenev the founder/CEO of Robinhood and DeepF&ckingValue the 30 year old engineer in Boston on the WallStreetBets side. 

The CEO and the CIO (the villains) at the Melvin and Citadel hedge funds will be part of the main cast members. 

Those who produced “The Big Short” will handle this one the same way.

In a related post, please see Buy and HODL Forever, Legendary Short Seller Throws in the Towel.

Mish

Comments (68)
No. 1-25
caradoc-again
caradoc-again

The game was, is, and will always be rigged and those in charge turn a blind eye.

I hope the Reddit brigade go on to expose other such set-ups. Some clever kid write some code/algo to find weaknesses and exploit enmasse.

Anything in the the PM market?

Frilton Miedman
Frilton Miedman

"The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs."

Case closed, there will be no investigations.

"Money is free speech" - Antonin Scalia.

Casual_Observer
Casual_Observer

Just taking a wild guess that hedge funds were unregulated during Trump admin and these funds took huge short positions all the way until January 20th. They probably even gambled Trump would stay in office. It isnt surprising or a coincidence they got blown out of the water in the first week of the Biden administration by the little guy. Joe told you he was for the little guy and he has already delivered.

Eddie_T
Eddie_T

Fools rush in where angels fear to tread.

When there is a ripple in the force like this one.....I want to be on the side. But then, I’ve been on the side 99% of the tie since 2009. So yes it is amusing to see hedgies taking it in the shorts....but the idea that any of this will end well......????

bluestone
bluestone

This is the choice that the hedge funds are facing.

  1. Take appalling losses and hope somehow things work out.
  2. Go to prison for a substantial length of time for naked shorting.

From what I've read the mob wants 2).

goldguy
goldguy

looks like an slv moonshot starting next week.

Notdigitalmoney
Notdigitalmoney

It is possible to have 140% short
Interest. Brokers borrows to cover shorts, then delivers the shares to the buyer, whose broker then lends out the share to short again.

Greggg
Greggg

Wall Street had no problem banning short sales of certain stocks 12 years ago. The system is full of front running algos and all kinds of sophisticated software to maximize profits on trades. Gee, how much trouble would it be to put a system together to deny shorts against excess of existing available float? Well, that must be just way, way harder. Brought to you by those really nice people that lobbied against closing the carry interest loop hole 3 years ago because they know what's best for us. We desperately need another Brad Katsuyama.

magoomba
magoomba

It is delightful to see what absolute fukage is being consumated on the corrupt system. It will continue to be colonized until finally rectalfied.

markb
markb

Editor

Illegal doings on Wall Street? I'm shocked, just shocked.

Tengen
Tengen

Kinda humorous that the CNBC/Fox Business types were aghast at regular short sellers in 2008 when they were betting against the likes of Wachovia and Wells Fargo. Fast forward to today and not only is shorting okay, naked shorting is too!

Daveyp19
Daveyp19

Robinhood have included $slv in amongst their restricted list to 1 share. What possible justification can they have for this? They claim not to be pawns of the PTB????? WTF?

Jojo
Jojo

Here's some really fun reading, especially towards the end when the story gets into options. I took some big losses years ago messing around with options.

It's Not Just Robinhood, Reddit Rebellion Has Clogged Entire Financial System's Plumbing
Saturday, Jan 30, 2021 - 13:40

While mainstream media is juggling with just who to be angry at, and who to virtue-signal for in the WallStreetBets Reddit Rebellion and Robinhood Rout episode, the reality under the surface is that the US financial markets have just been punctured by the thin blades of truth. As CHS recently noted, "it is fatally wounded but nobody dares notice."

...

Jackula
Jackula

Portions of the hearings are gonna be amusing to watch. I don't agree with much of AOC's politics but I do like her style. 140% short interest....pulllease! I think I'm gonna convert some of my gold to silver just for fun!!!!!

Doug78
Doug78

What does that mean for collateral? If shares can be loaned multiple times then they can be counted as collateral multiple times as well which means that collateral calculations are not accurate. If these calculations are not accurate then that means that risk management calculations are flawed and in some firms probably akin to Enron’s accounting practices. In short we will have to overhaul the stock clearing system if we want to have a clear idea of who owns what. What worries me is if one stock can be loaned several times at the same time can the same be said for other financial instruments like T-Bills and the like. That has some interesting implications.

Dodge Demon
Dodge Demon

Mish, how does the Green New Deal and related tech work when silver is $100/ounce?

PeterDr
PeterDr

#1 is false Mish, sorry.. Example:

Person A is long stock XYZ.
--- A: +1
Person B wants to short XYZ, borrows it from A and shorts it to C (Buyer)
--- A: +1, B: -1, C: +1 = Net +1, Gross, 2 shares long and 1 share short.
Person B wants to short more XYZ, borrows it from C and shorts it to D (Buyer)
--- A: +1, B: -2, C: +1, D: +1 = Net +1, Gross 3 shares long and 2 short.

Ultimately, C doesn't know that the share they own is the other side of a short, so they're free to lend it out (presuming it's in a margin acct, blah blah). That's not naked though, as it's legitimately legally borrowed.

This doesn't happen often that short is > float, but it happens.. VXX was a great example a while back.

And in this example, C and D could very well be institutional investors/ETFs.. which is why the institutional ownership for GME is/was > 100 as well..

amigator
amigator

Are shares I hold in a brokerage account used by the brokerage company to lend to others to short sell the stock?

Eddie_T
Eddie_T

Given what I know about SLV and metal ETF’s in general, I think the planned short squeeze on SLV is fraught with danger for anybody betting big......but I have to say that there is reason to believe there is a possibility of a big breakout.

So I am selling my one tiny stock holding (MGI, which has been doing well)....and buying SLV at the open, if they don’t trigger the market circuit breakers immediately.

No calls, just a tiny bite of SLV.....for a lottery ticket. WTF not?

Doug78
Doug78

If you in a short position where over 100% of the stock has been shorted then you deserve to lose a Hell of a lot. End of story. There is no justification and no bailout.

PostCambrian
PostCambrian

I know that this is an old story but read this article (especially at the end) to find out the problems of having shorted shares when there is a change in ownership of the company. More shares than actually exist and you have to try to get the short holders to pay months later. https://www.bloomberg.com/opinion/articles/2017-02-17/dole-food-had-too-many-shares?sref=aipnZtLa


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