Reddit Trolls Wall St. Hedge Funds, Buying Up GameStop Stock

[Brian4Liberty]

Sure it would. It would allow the market to address naked short selling in exactly the way that it's being addressed in the example that this whole thread is about. Those who engage in it (both the short sellers themselves and their brokerages) will be taking on a risk that they may lose large amounts of money, while also allowing and even enticing buyers to make that amount of money at their expense. There's a natural financial disincentive against brokerages issuing credit in the form of shares to short sell that they don't have in amounts that they can't afford to lose if the share prices rise too high. If anything, government regulation will be more likely to lessen that disincentive which the market itself would capably provide in ways that are similar to how it, as a lender of last resort, lessens the disincentive that the market would otherwise give banks engaging in reckless degrees of fractional reserve banking.

Naked short selling itself shouldn't be outright banned, just like fractional reserve banking shouldn't be outright banned. The determination of when either one of those practices constitutes fraud and when it doesn't should be determined by the language of contracts that the interested parties enter with each other allowing those things.

Shorting is different than naked short selling. I’ll go ahead and print up some stock certificates on my computer. How many would you like to buy? How about 100,000 shares of Tesla?

 

[Krugminator2]

Enforce existing laws against naked short selling. Stop the revolving door between Wall St. and regulators.



The second option is great, but it still wouldn't address naked short selling.

I make multiple trades on the short side in hard to borrow stocks every day. 250 trading days a year. Have done it for a decade. Have seen exactly one example of naked shorting. Gamestop. And I guess you could kind of say Overstock but not really.

Naked shorting being a problem is a myth perpetuated by the dumbest people on the internet. I am not calling you dumb. I am calling people who trade actively and perpetuate this myth dumb so that someone like you thinks it actually exists. The people who whine about naked shorting are losers who are wasting their life. I have never seen even one successful trader complain about naked shorting. There is no naked shorting problem. I am a nobody with no connections and I can't remember the last time I couldn't get a locate on even the the hardest borrow stock. There are always shares available somewhere for a price. Presumably Goldman Sachs and Citadel have much greater access to locates than me. And I am not even sure market makers like Citadel have to find locates because they are market makers if the close out the position within a day.

 

[Brian4Liberty]

I make multiple trades on the short side in hard to borrow stocks every day. 250 trading days a year. Have done it for a decade. Have seen exactly one example of naked shorting. Gamestop. And I guess you could kind of say Overstock but not really.

Naked shorting being a problem is a myth perpetuated by the dumbest people on the internet. I am not calling you dumb. I am calling people who trade actively and perpetuate this myth dumb so that someone like you thinks it actually exists. The people who whine about naked shorting are losers who are wasting their life. I have never seen even one successful trader complain about naked shorting. There is no naked shorting problem. I am a nobody with no connections and I can't remember the last time I couldn't get a locate on even the the hardest borrow stock. There are always shares available somewhere for a price. Presumably Goldman Sachs and Citadel have much greater access to locates than me. And I am not even sure market makers like Citadel have to find locates because they are market makers if the close out the position within a day.

I will certainly take your word that you don't engage in naked shorting, and have not witnessed naked short selling. But that is not evidence one way or another that it has occurred.

This is not a new hypothesis. Naked shorting has long been suspected in manipulation (and suppression) of paper precious metal prices.

It’s not like naked shorting and other financial crimes don't exist at all. There have been many cases of illegal naked shorting (and other violations) which result in fines and penalties. It’s written off as a cost of doing business.

 

[Snowball]

TRULY naked shorting isn't what it used to be. But I believe it happens for no more than 5 sessions at a time. It used to be that humans- real people- who worked for real hands-on, human-driven Market Makers naked shorted as a habit, both on the major exchanges and the pinksheets. (OTC Bulletin Board which no longer exists). Now that everything, even the OTC Market is run by computer, and the SEC rules (no idea if they are enforced, but the software is programmed to abide with the law) no longer allow naked shorting by right of seat, only to be "made good" within 30 days (or quarterly in some instances) , the only way truly naked shorting occurs is in the framework of settlements and as a mixture with retail shorting availability.

It's just not possible to identify NSS anymore, and it was always a detective's game anyway. With quants and automated high-speed networks determining pricing now, there is a lack of human-coordinated activities, especially across brokerages, and there is no obvious collusion between underwriters, transfer agents, brokerages, market makers and hedge funds, although this could pop up again soon given the opportunity of a bubble in markets and the lessening of Covid protocols. It will only happen if the owners want it to.

There is no resemblance between today's market and the market before decimalization, Federal Reserve oversight and software automation over high-speed networks.

The so-called market is a top-down operation run by the New York Fed, Bank of London and its daughter organizations who operate it as a tool for plutocratic asset accumulation and societal transformation, sponsored by the host governments. The effort to encourage participation among the youth and dependent seniors and institutions is all part of their systemic societal transformation conspiracy. It really is a conspiracy. Literally. It is updated operationally every year but the working plans are formatted in 10-year increments. Our government is a captured beaurocracy of appointed middle-managers, like an H.R. department. They have no real power whatsoever.

 

[Invisible Man]

Shorting is different than naked short selling. I’ll go ahead and print up some stock certificates on my computer. How many would you like to buy? How about 100,000 shares of Tesla?

I would buy none.

But that's not what naked short selling is. You've been reading too much prospect.org.

 

[Invisible Man]

Here's a recent article on naked short selling by Robert Murphy that I think strikes the right balance.
https://mises.org/wire/when-short-selling-fraudulent

These are the last few paragraphs:

With “naked” short selling, the transactions are marked up “on paper” without first locating and obtaining actual shares of the stock. To adapt our scenario, if a speculator wants to short a hundred shares of XYZ when it’s selling for $50, perhaps his brokerage will allow him to do so even though it hasn’t gotten possession of a hundred shares. When the speculator closes out his position, the brokerage calculates what his profit/loss would have been if he really had obtained the shares and credits/debits his account accordingly.The potential problem here occurs if something goes wrong and the speculator can’t close out his original position because XYZ has gone up in price too much. For example, suppose that after shorting the hundred shares at $50 (and thus temporarily earning $5,000), the speculator is horrified to see that XYZ shoots up to $1,000 per share! In order to close out his position, the speculator would need to spend $1,000 x 100 = $100,000 to obtain the hundred shares on the open market and return them to the brokerage. If the speculator doesn’t have that kind of money, he can’t do it.

The victims in this type of scenario are the people who thought they were buying those hundred shares of XYZ back when it was selling for $50. (After all, that’s where the original $5,000 came from.) For small enough dollar amounts, the brokerage itself would cover the speculator’s loss. But in principle, if a brokerage allowed many of its clients to engage in naked short selling, then a surprising spike in stock prices could cause such aggregate losses that even the brokerage itself couldn't afford to cover them. In that case, investors who thought they were buying shares of stock from the brokerage would discover that even though it had taken their money and told them the transaction went through, they in fact did not own actual shares.

Readers will note the similarity between naked short selling and fractional reserve banking. It’s true in both cases that contracts could carefully spell out the details, and give the brokerage/bank the legal right to refuse redemption, but there is a line in Austrian economics (going from Mises through Rothbard to many of today’s Rothbardians) which argues that legal niceties don’t really matter, it’s commercial practice that does. If bank depositors treat demand deposits as immediately redeemable (and hence equivalent to money proper), then fractional reserve banking causes the boom-bust cycle. Likewise, one might argue as an Austrian that naked short selling is a dubious practice that could foster instability in the financial markets. (Note that my own position on this latter issue has evolved since I previously wrote on naked shorting for mises.org.)

Conclusion

In a free market, short selling is a healthy practice that allows farsighted speculators to push down overpriced stocks. There is nothing inherently dubious or fraudulent should the gross short position exceed the total number of shares. However, the practice of naked short selling could be problematic, if it became large relative to overall trading.

Murphy doesn't get into any prescriptions for what should be done to prevent naked short selling from crossing that line between when it is and when it isn't "problematic" (note that he refrains from repeating the word "dubious or fraudulent" from his previous sentence). But note his analogy between naked short selling and fractional reserve banking. I suspect that his prescription for both would be not to ban them, but rather to let the market sort them out. And I further suspect that he would argue that government regulations will have a tendency to promote the exercise of these practices on a problematic scale, rather than to temper them. In the case of fractional reserve banking, if the government would passively allow bank runs to happen, then the potential for them would put pressure on banks to hold a high enough amount of money in reserve to keep themselves in business. They would still engage in fractional reserve banking, and it wouldn't be fraudulent to do so, but the market would temper it. Likewise with brokerages lending out shares they aren't able to borrow immediately (i.e. lending them out on credit, which they rely on buyers to trust them to be good for), they would need to mitigate their own risk and work to maintain a reputations with their business partners as firms that can be counted on to be able to buy back all the shares they allow people to naked short sell through them.

 

[devil21]

I would buy none.

But that's not what naked short selling is. You've been reading too much prospect.org.

You and Brian are both correct, actually. Brian is correct that 100,000 Tesla shares are just printed up by the shorter and sold. What you're not addressing is that those 100k shares are then supposed to be located, borrowed and delivered to the buyer within 2 to 6 days (# of days depends on who is short selling) to complete the short sale. The difference between shorting and naked shorting is that the naked shorter has no intention or ability to locate and deliver the borrowed stock they are selling short! Keep in mind that retail can't even engage in naked shorting, btw. A retail shorter must borrow the stock from the broker as part of the short sale process. It's only hedgies, banks and market makers who can get away with naked shorting. Naked shorting is when the seller has no intention or success of locating, borrowing and delivering the shares within the 2 to 6 day delivery window after the short sale, resulting in a Failure To Deliver (FTD) status on those shares. The catch is that the buyer still has those shares listed as a holding in their account even after the seller FTD'd. They don't disappear from the buyer's account ledger if the short seller FTD's. (Obviously, if they did, no one would have any CONfidence in the market and stop giving the pirates their currency.) The buyer is then just holding phantom shares in their account that don't actually exist as issued shares by the corporation. The shares were never located, borrowed and delivered. They're now merely book entries in the buyer's account evidencing a claim on a share that doesn't exist. It's the same principle as how we got to 100 paper claims on COMEX for only one ounce of silver in the warehouse. 100 shares of GME showing up in account listings, due to phantom shares created via naked shorting, for every one share actually issued by the corporation and held in trust by the DTCC, in other words. It's not rocket science. Shorting is legal and technically the creation of a claim on a share only meant to exist as a book entry for 2 to 6 days until the real share is delivered. Those shares not being delivered to the buyer within the 2-6 days is naked shorting and creates claims on shares that do not exist as issued shares.

 

[devil21]

Things gonna get interesting starting the beginning of next week.... if I were holding a lot of equity positions I'd probably start selling hand over fist right now. But I don't so I can't. Holding a bit of GME and a few puts with kung fu grip, but that's it.

 

[Invisible Man]

You and Brian are both correct, actually. Brian is correct that 100,000 Tesla shares are just printed up by the shorter and sold. What you're not addressing is that those 100k shares are then supposed to be located and delivered to the buyer within 2 to 6 days (depending on who is short selling) to complete the short sale. The difference between shorting and naked shorting is that the naked shorter has no intention or ability to locate and deliver the stock they are selling short!

That's true, as far as I understand it. But that's still not the same thing as just any random individual printing up counterfeit shares and selling them. Nor is it necessarily fraudulent. I see no essential ethical difference between simple short selling and naked short selling. The naked short seller can buy back those same shares that they sold on credit while failing to locate shares to borrow, provided they can afford to, just as much as they can buy back shares that they did locate and borrow before selling, provided they can afford to, after 2 days, 6 days, or 1,000 days. The potential problem in both cases is that the short seller and their broker stand a risk that the price will rise so much that they won't be able to buy back the shares. If that doesn't happen, then I see no issue either with short selling in general or with naked short selling in particular. It's important that short selling be done in small enough amounts, and that it be covered by entities with enough money to buy the shares back under any reasonably possible scenario of increase in their prices. But this ability to cover the cost is the factor that matters, not the question of whether the shares were located before being short sold. And the market is capable of letting individual participants weigh their own tolerance for risk and deciding whom they can trust to be able to cover their potential losses better than the government.

 

[devil21]

That's true, as far as I understand it. But that's still not the same thing as just any random individual printing up counterfeit shares and selling them. Nor is it necessarily fraudulent. I see no essential ethical difference between simple short selling and naked short selling. The naked short seller can buy back those same shares that they sold on credit while failing to locate shares to borrow, provided they can afford to, just as much as they can buy back shares that they did locate and borrow before selling, provided they can afford to, after 2 days, 6 days, or 1,000 days. The potential problem in both cases is that the short seller and their broker stand a risk that the price will rise so much that they won't be able to buy back the shares. If that doesn't happen, then I see no issue either with short selling in general or with naked short selling in particular. It's important that short selling be done in small enough amounts, and that it be covered by entities with enough money to buy the shares back under any reasonably possible scenario of increase in their prices. But this ability to cover the cost is the factor that matters, not the question of whether the shares were located before being short sold. And the market is capable of letting individual participants weigh their own tolerance for risk and deciding whom they can trust to be able to cover their potential losses better than the government.

Just FYI, I made some edits to my post for clarity and detail (mainly the borrowing step of short selling) so what you replied to may not be what my post ended up saying.

To your point:
The issue is that the buyer is not holding actual issued shares for that 1000 days. What if that buyer decides to sell the shares before the shorter delivers? Then you'd have one holder selling something that doesn't exist to another buyer. Ad nausem. Or if someone else wishes to short that same stock, does the broker then lend their fake shares to "deliver" them to another short seller, compounding the fake share problem? You may philosophically think that's ok, I dunno, but I don't. Since markets always crash eventually (generally based on the observance of biblical harvest cycles and is the method used to periodically flush years of fraud like naked shorts out of the system but that's for another thread), shorting always takes place to various extents. Failing to deliver short sold shares perpetually creates more and more phantom shares until the whole market becomes the house of smoke and mirrors I mentioned previously. Holders trading non-existent shares back and forth until something breaks the system....like GME. Or that periodic crash I mentioned. But the cause of that crash is never attributed to Wall St fraud. It's always scapegoated onto something and/or someone else...like GME and/or retail.

eta: Imagine my neighbor is selling his Corvette. I think his price is wrong and is opportunity to make money. But instead of buying at his price, I create an ad for his Corvette at the price I think is good. Someone sends me the cash for my price. But then I go to buy neighbor's car and he already sold it to someone else. But instead of returning the money I keep it and send the buyer a picture of the car! (That sums up blockchain and NFT idiocy but I digress) What if you were the buyer? You'd want your fuckin' Corvette right? Not me telling you how awesome your new Corvette is while also telling you I'll deliver your new Corvette in 2, 6 or 1000 days.)


Fwiw, my SO is a CFO/CPA and I asked her what she thought about such accounting methods. You can guess what her reaction was....I didn't have the heart to complete the ouroborus circle for her and tell her that her 401k is based on it.

 

[Krugminator2]

GME and AMC getting a little heavy. Small short in both. If GME breaks the 50 day could be start of 70 dollar plus drop.

 

[devil21]

GME and AMC getting a little heavy. Small short in both. If GME breaks the 50 day could be start of 70 dollar plus drop.

Coinciding with Burry's alleged comments? It's interesting because Burry disappeared off Twitter not long after he said the SEC paid him a visit for his tweets about hyperinflation incoming. Now he's publicly predicting a crash at some point? He even says he doesn't know when. Meh, sounds like he's trying to engineer one by scaring GME holders. The only way it would crash is mass selling by retail being routed to the exchanges, instead of dark pools, and even more shorting games by Wall St. Smells a bit. Or an engineered crash courtesy of WEF Cyber Polygon cyberattack July 9 partners NYSE and DTCC. Any way, I know some really idolize Burry and no doubt his comments are worth considering but I don't understand why anyone thinks Wall St types are on their side. Burry, like the rest, is just interested in taking money, that's it. If Burry is showing up now while being Twitter silent but talking to a Wall St rag, he probably is shorting, hoping to create a mass sale by his followers. At the same time, the hedgies are up to their necks in ridiculous short positions heaped upon ridiculous short positions and need a crash in price to prolong the game before any margin calls start coming in and rule changes start to affect them.

Interesting times. Many things lining up numerically pointing to 7-14-21. 7 77 777

 

[Invisible Man]

J
To your point:
The issue is that the buyer is not holding actual issued shares for that 1000 days. What if that buyer decides to sell the shares before the shorter delivers? Then you'd have one holder selling something that doesn't exist to another buyer. Ad nausem.

I see all of that as manageable. What that buyer holds is essentially a contract that is backed up by the faith and credit of whatever brokerage mediated the deal. This isn't something that doesn't exist. They can sell those shares just like any other shares. And the shares the short seller (naked or not) later buys back don't have to be bought from the same person who bought the shares they short sold. They're all interchangeable.

As long as the short sellers (naked or not) make good on their debts within the terms of their contracts, I don't see anything fraudulent about it.

 

[Krugminator2]

Coinciding with Burry's alleged comments? It's interesting because Burry disappeared off Twitter not long after he said the SEC paid him a visit for his tweets about hyperinflation incoming. Now he's publicly predicting a crash at some point? He even says he doesn't know when. Meh, sounds like he's trying to engineer one by scaring GME holders. The only way it would crash is mass selling by retail being routed to the exchanges, instead of dark pools, and even more shorting games by Wall St. Smells a bit. Or an engineered crash courtesy of WEF Cyber Polygon cyberattack July 9 partners NYSE and DTCC. Any way, I know some really idolize Burry and no doubt his comments are worth considering but I don't understand why anyone thinks Wall St types are on their side. Burry, like the rest, is just interested in taking money, that's it. If Burry is showing up now while being Twitter silent but talking to a Wall St rag, he probably is shorting, hoping to create a mass sale by his followers. At the same time, the hedgies are up to their necks in ridiculous short positions heaped upon ridiculous short positions and need a crash in price to prolong the game before any margin calls start coming in and rule changes start to affect them.

Interesting times. Many things lining up numerically pointing to 7-14-21. 7 77 777

I think GME will probably drop back to the 50-60 bucks over time. Every bounce is getting sold. It is breaking a range to the downside so I got short. If it doesn't go down I will cover. Really nothing more to it. I really have no idea what these random numbers and Michael Burry and engineered crash or any of that means and I don't want to know.

 

[Madison320]

Sure it can, and it often does. When it does, then the government law is redundant. When it doesn't, it's unjust.

But in either case, if there's a case to be made against the practices you mentioned on the basis of justice, then you should be able to do that, without needing to defer to laws that corrupt politicians made up as though they decided the matter.

I would argue that the best case is when government law matches natural law. You're not an anarchist, are you?

 

[Madison320]

Are those the only two options? I would like the second one, but it's not in the cards.

I think by far the biggest problem in this country is the size of government. I'd wouldn't rank naked short selling, if it's even a crime, in the top 1000. Does it makes sense for someone on a liberty oriented site to focus on making government bigger?

 

[Invisible Man]

I would argue that the best case is when government law matches natural law. You're not an anarchist, are you?

Yes, I am.

I agree that the best case is government law matching natural law. But when that happens, the result will be statelessness, since the institution of the state necessarily violates natural law. And even taking the existence of the state as a given, as I said in the post you quoted, in those instances when the state's laws do reflect natural law, the state's laws are then redundant. For state based laws, redundancy is the best case scenario, and it goes downhill from there.

 

[Madison320]

Yes, I am.

I agree that the best case is government law matching natural law. But when that happens, the result will be statelessness, since the institution of the state necessarily violates natural law. And even taking the existence of the state as a given, as I said in the post you quoted, in those instances when the state's laws do reflect natural law, the state's laws are then redundant. For state based laws, redundancy is the best case scenario, and it goes downhill from there.

Damn. You were pretty much batting 1000 until that

I have the anarchist debate distilled down to one simple scenario:

You and bunch of other anarchists decide to start an anarchy on an island. How are you going to defend the island? (this was tried back in the 1970s by the way)

 

[Invisible Man]

Damn. You were pretty much batting 1000 until that

I have the anarchist debate distilled down to one simple scenario:

You and bunch of other anarchists decide to start an anarchy on an island. How are you going to defend the island? (this was tried back in the 1970s by the way)

I'm not sure what "start anarchy" means.

Anarchy is not something someone starts, it's what is, right here already. There does not exist any special subset of society that has the moral right to rule over others without their consent. There are people who do use force to rule over others (e.g. muggers in dark alleys, criminal gangs, states), but by doing that they violate the Creator's moral law. Their claim of a moral license to rule others is false. They are not archons, they are just people, no different than the people they victimize, and are subject to the same objective and universal moral law as everyone else. Such archons as they fancy themselves to be simply do not exist within the human race apart from Jesus Christ whose kingdom is not of this world. Being an anarchist means adhering to a moral law that permits me to point at the actions of those falsely called archons and call them wrong. Whether I am able to stop those actions, or even ought to try to stop them, is an entirely different matter.

If I lived on a stateless island and it was invaded by a conquering nation bent on establishing a regime there to subjugate us under its rule, then the same anarchy that tells me I am not permitted to subjugate my countrymen by force and rule them is what tells me that foreign invader is not permitted to either. If I weren't an anarchist, I couldn't even say those invaders were doing anything wrong, as I would concede that their might makes them right.

But there are a few points to consider about the scenario:

1. I don't believe that this island being stateless makes it a better target for invasion than an island with a centralized ruling regime would be. The scenario with the centralized ruling regime would have the infrastructure of statehood in place so that all an invading force would need to do is conquer that regime. But in the stateless island the invaders would have to conquer each sovereign individual. Now, I'm not sure what anarchist island in the 1970's you're referring to. But let me go out on a limb and take a guess that the invading force they were unable to repel was an existing nation-state that claimed sovereignty over that island and didn't accept the claim of its inhabitants to be outside of its rule. And if this is the case, then as a thought experiment, consider the hypothetical alternative of that very same island, with the only difference being that the new order there was not anarchist, but rather a state in which some subset of the people conquered and subjugated the rest under their rule, establishing a central ruling regime, and consider what that other already existing nation-state that claimed sovereignty over that island would have done in response. They would have still reclaimed it, and they would have still succeeded. The presence of a state there would have done nothing to prevent that, and in fact it would have made it easier, not harder.

2. Whatever measure of defense a state could muster, if the subjects of that ruling regime in large part support those measures, would still be possible without the presence of a state. And in fact, the demand for those measures would ensure that the market would provide them. I decline the gambit of trying to predict exactly what these free people would do. The beauty of the market, and one of its great advantages over central planners, is that it provides goods and services in unexpected and unplannable ways that no committee of even the best central planners would be able to come up with. The same rule would apply to defense as much as it does to pencils. We can imagine all sorts of voluntary contracts and defense companies and such, and I'm sure that anarcho-capitalists have written a fair bit teasing out some of the possibilities. But at the end of the day, what the market would provide would be better than anything we could predict. The market may not provide a solution that would be effective in defending this particular island. But however ineffective the free market would prove to be, a state-based alternative would be even less effective.

3. Statelessness, or something very close to it, was the norm for most human beings throughout most of humanity's existence. It isn't some modern fad that some extremists in the 70's decided to experiment with. The status quo that we now take for granted of a globe that's divided up among nation-states without an occupied acre to be found that's unclaimed by them, is a very recent development. The process by which the earliest states developed took millennia, and their attempts to conquer stateless people proved to be overall very ineffective. There was a tenacity to humanity's statelessness that led to greater costs than benefits to those who tried to replace it with states. And even after those earliest states developed, their rule only extended over what amounted to a minority of the human population for additional millennia. When successful empires (and even here success typically meant a lifespan of mere decades) did manage to expand, they did so more successfully by conquering existing states than they did by nitpicking at stateless peoples in their hinterlands whose numbers added up to a majority of the human race until not many centuries ago. This truth is sometimes hidden by the fact that ancient written history tends to present things as seen from the vantage points of those within the emerging states, and not those silent masses outside them.

Personally, I'm a follower of Jesus Christ, and the path that he leads me on is the one that leads to the cross. His victory over his enemies didn't come by his killing of them, but by their killing of him. They demanded his allegiance, and they expended every tool in their tool chest, the most powerful one being the taking of his life, and never attained that allegiance from him. He rose from the dead victorious over them and offers that same victory to all who follow him as their king, and not the powers and principalities of this dark world.

 

[Brian4Liberty]

That's true, as far as I understand it. But that's still not the same thing as just any random individual printing up counterfeit shares and selling them.

It was an analogy.