[CuriousNinja]

>It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares

Can someone please explain how the original 100 shares turned into 220? Does this mean that after borrowing a share and shorting it, the original owner and the one who shorted can both sell it?

[jfim]

It's not unlike fractional reserve banking.

Imagine three participants: Alice, Bob, and Charlie. Alice owns a share of Foo Corp, the only such share that exists. Bob decides to short Foo Corp, and borrows a share from Alice's broker (Alice's broker gets paid for this).

At that moment, there are two shares that exist. If Alice logs into her brokerage account, she sees a share of Foo Corp, but it's really an IOU for a share of Foo Corp. If Bob logs into his account, he also sees a share of Foo Corp (that he borrowed from Alice). At that point, there are two "shares" of Foo Corp that exist.

To make money on the short, Bob has to sell the share and buy it later, so he puts it in the market and sells it to Charlie. At this point, there are two shares: a share owned by Charlie and an IOU to Alice from Bob.

Bob could be very confident about shorting Foo Corp, so he could also borrow a share from Charlie's broker, at which point there would be three shares in existence: an IOU to Alice, an IOU to Charlie, and the sole share that exists. Each of these participants, if they log into their brokerage account, do see a share.

These phantom shares can't exist forever though: Bob is paying both Alice's and Charlie's brokers. Keep in mind that either Alice and Charlie can decide to sell their share, which Bob could then buy, at which point he could cover the remaining IOU, and everything would settle.

But then, what if both Alice and Charlie just bought the share and weren't planning to sell it? Bob would be in a position where he owes two shares but there are zero to buy on the market. Normally, that doesn't happen because shares are traded often enough, but in certain scenarios (short squeeze, collusion between participants) there might be issues. At that point, Bob can decide to keep on borrowing the shares until one sells, or maybe he runs out of cash to borrow shares and closes his account.

That's when things get a bit dicey. At this point, there are two "shares", one actual share and one IOU for a share. What happens is that Bob's broker is in a fail to deliver position. They're supposed to deliver a share of Foo Corp to close the IOU but there's no such share to deliver.

[nowherebeen]

> Keep in mind that either Alice and Charlie can decide to sell their share

This is the thing I have been thinking about the last day. In theory if all the shares are bought, these buyers would technically be price setters and list an arbitrary high price. Could they?

[jfim]

If the buyers decide to hold their shares, then yes they could corner the market. I believe the broker could just elect to not pay the price and fail to deliver on the IOU. The SEC keeps a list of FTDs and publishes it twice a month [0].

If the shareholders decide to corner the market, the company could issue more shares or the SEC might step in and say "no you can't do that" to either the broker, the shareholders, or both.

I don't think the SEC looks very highly on people cornering the market, be it hedge funds colluding or individual investors colluding. The SEC is supposed to look for all investors, not just the ones that decided to corner the market in one security.

[0] https://www.sec.gov/data/foiadocsfailsdatahtm