[Armisael16]

>It's not supposed to be possible to go over 100% any more since 2008, by the way.

This is fundamentally untrue.

Abusive naked shorting with the goal of driving down prices is illegal. >100% short interest doesn’t require naked shorting at all.

If person A borrows a stock from person B then sells it to person C, they can borrow the stock back from person C and sell it again. No naked short involved.

[ZephyrBlu]

To clarify, this is not considered a naked short because in this situation there is a share that is known to exist.

Re-borrowing the same share does not make it a naked short.

[Accujack]

It has to not only exist, but be obtainable.

In any case, the important limit here is that financial firms are not supposed to allow hedge funds or other entities to assume short positions for more stock than exists, because if it becomes necessary to execute the trades to resolve the shorts, that extra 40% will fail to deliver, because those shares don't exist.

The SEC actually keeps a list of trading companies with high rates of failure to deliver as a means of detecting naked shorting.

[kcg]

> that extra 40% will fail to deliver, because those shares don't exist.

That's only true if you force all shorts to be covered at once without a chain of trades. That's not how it happens.

Person A covers their short by buying a share from Person B and returning to Person C. Person D then buys that share from Person C and returns to Person E to cover their short. That's 2 short shares covered with a single underlying share and no failure to deliver.

Yes, the SEC does track failure to deliver, but >100% short interest does not mean there is naked shorting nor does it imply there will be failure to deliver.

[ZephyrBlu]

> It has to not only exist, but be obtainable

"Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist"

- https://www.investopedia.com/terms/n/nakedshorting.asp

> that extra 40% will fail to deliver, because those shares don't exist

This is not true because all shorts don't have to be covered simultaneously.

> The SEC actually keeps a list of trading companies with high rates of failure to deliver as a means of detecting naked shorting

Funnily enough, $GME had very high failure to deliver rates in December [0] but this is not necessarily due to the short interest.

[0] https://www.reddit.com/r/wallstreetbets/comments/l97ykd/the_...

[jessaustin]

In this situation, there's no theoretical upper limit, is there? How is this any better than it was before the naked short selling "ban" was instituted?

[belltaco]

Because its the difference between selling that you borrowed and whats in your possession vs. something thats not.

[jessaustin]

That might make a moral difference, but I'm more concerned about the effect of the financial system on firms in the economy. It doesn't seem obvious that "naked" short-selling has a worse effect than "recursive" short-selling.

[Armisael16]

Naked shorts let you create stock out of nothing, which you can sell to drive prices down (and ultimately make money off of, since you can rebuy more cheaply).

If you can’t do that then you at least have to get the cooperation of someone who does own the stock in sufficient quantities - and their interests are probably against yours since they, y’know, own the stock.

Banning recursive shorting would be a nightmarish enterprise, since each individual share would need to be tracked to see if it was already shorted. Banning naked shorts supposedly does enough to discourage the behavior. We may be seeing that to not be the case.

[alex_young]

> If person A borrows a stock from person B then sells it to person C, they can borrow the stock back from person C and sell it again. No naked short involved.

Naive question: Why would that ever happen? Wouldn't this scenario just cost person C commissions with no opportunity for gain?

[kcg]

In this scenario, Person C still owns the stock and will gain/lose with the stock's rise/fall. Person A borrowing from C at the end is just borrowing, not buying. At some point Person A needs to return stock to Person C.

[alex_young]

So in this example person A could keep selling the same share over and over again? How would the multiple “owners” realize their gains if they all decided to sell on the same day?

[kcg]

Person A can only sell the number of shares they've borrowed. If Person A borrows a share from Person C, they can sell that one share only. To sell more without borrowing additional shares would be naked shorting, which is prohibited.

You might be asking instead about the following scenario, though, where a single share is borrowed and sold short multiple times:

Person A borrows from Person C and sells to Person B

Person D borrows from Person B and sells it to Person E

Well, the covering of the shorts doesn't have to happen in an atomic transaction; there are thousands to millions of trades of a single ticker every day. Just as a single share can create a chain of multiple shorts (borrows and sales), a single share can cover multiple shorts too through a chain of trades.

[dpiers]

Call it a scantily-clad short then. A share that is already lent out to a short seller should not be eligible to be lent out again for the same reason I can't get two mortgages to buy the same house - the underlying collateral would be owed to multiple parties.

[314]

This is not true. Party A has a contract that party B owes them a share - not the share that they originally loaned. The whole idea is for party B to buy a share later to balance the trade.

A better analogy to understand why short interest can rise above 100% is fractional reserve lending and the effect that it has on money supply.

[rokobobo]

A share is a share is a share. You can’t tell which one was loaned out and which one wasn’t. And it’s not used as collateral, money is posted as collateral instead.

[ZephyrBlu]

This is ok because all instances of borrowing the share don't need to be settled simultaneously.

[mam2]

This essentially the same result.. you are making two shorts with one share so one is "naked"....