[WA]

Why? If I'm short GME, I'd just wait. Sure, I have to pay borrowing fees, but it doesn't matter if I hold for a week or a few months, if I'm sure it collapses 90% within a year.

Of course, I'm oversimplifying stuff like risk management, margin calls etc. but generally speaking, what forces a hedge fund to liquidate its short position?

[DSingularity]

Where do they get their shares from? They borrow it from people who don’t own it. Those people may want to sell — especially in the event that the share price grows. And when that happens in sufficient volume time to put up because the exchange is not going to fail to deliver.

[WA]

A lot of assumptions you're making here. Maybe many didn't do naked short selling. Maybe the lender didn't want to sell for whatever reason. You just assume that MOST shorts were forced to cover and I don't see why this should be the case.

[DSingularity]

If they are borrowing a share then how is it naked short selling?

To understand the scenario where a short is forced to cover imagine you are the exchange. You don’t own shares. You just match orders and move money around and so on. One of the things you do, for margin players, is lend short-sellers shares that others bought on margin from the exchange. You bought it on margin to sell it and the other guy bought it margin to hold it. If the price spikes and the other guy wants to sell it what will you do?

[WA]

Yes, this is one scenario where the short is forced to cover. What about this scenario:

Institutional investor A believes in GME and owns a lot of stock. They want to hold GME long-term. They don't care about price fluctuations, but they want to make a steady profit by lending out their shares. Institutional investor B believes GME is worth nothing, borrows the stock from A and sells it to whomever. The price goes up from $20 to $300. A doesn't care, the steady income from the lending fees is more valuable to them from a risk perspective and voting rights or whatever. B thinks this is a bubble and decides to sit it out. Where is the forced covering?

Edit: Can't answer to you anymore, because of tree size limit. So here:

> A has to continuedly prove that they have enough money to be able to eventually buy back the stocks to assure B that he will eventually get their stocks back. If they cannot show that, then they are forced to either raise more capital or return the stocks.

Good point. Not sure about the 'continuously' or if there can be individual short selling contracts between two parties that have different margin requirements. Maybe a call from B to A like "we will give you back your shares in a month when the bubble is over" works in the real world. Not for retail investors, but between big parties. I don't know much about this.

[dagw]

Where is the forced covering?

A has to continuedly prove that they have enough money to be able to eventually buy back the stocks to assure B that he will eventually get their stocks back. The more the price goes up the more money the have to show that they have. If they cannot show that, then they are forced to either raise more capital or return the stocks.

[a254613e]

I'm not an expert, so someone please correct me if I'm wrong, but nothing forces them.

The theory was that if they have to spend $X per week, and that number is higher than what they would gain if they waited Y months, then they'll be "forced" to do it.