Naked Short

Discussion in 'Retail Brokers' started by BMK, Jan 31, 2021.

  1. BMK


    Some of those following the various threads on GME and RobinHood etc. may not recognize that there are two completely different meanings for the phrase naked short.

    Most of the time, when people use this phrase, they are referring to a position with unlimited risk if the price of the stock rises, e.g., short the stock without any type of hedge such as a long call, or short a call while neither long the stock nor another call. This is the more common use of the phrase naked short.

    The other meaning refers to selling the stock short without first borrowing the shares.

    This actually happens, but it is a very small percentage of total short stock sales, and many experts, including some influential people at regulatory agencies, think that under normal conditions, it does not have a significant impact on the market. The short positions eventually get covered, even if the stock is never borrowed. At least in the USA, the practice is not illegal.

    Most customers cannot knowingly short stock without first borrowing the shares. It is something that happens behind the scenes. It is something that brokers sometimes allow to happen. Institutional accounts, market makers, and prop firms may, in some cases, be allowed to short a stock even if the shares are not readily available to be borrowed.

    And it means that in some cases, it is possible that the number of shares sold short could be greater than the total number of shares that actually exist.

    In another thread, someone just pointed out that this sort of thing all the time with futures. There are more silver futures contracts open than there is silver on the entire planet. In theory, this could cause serious problems if enough people holding futures insisted on physical delivery.

    In practice, that's not very likely to happen.

  2. Amatrue


    whos on the other side of the trade if you are borrowing shares that don't exist?
  3. its pretty annoying right now how people keep pumping the evils of 'naked shorting' without even knowing what it is

    for the time being ive started referring to unprotected shorts as uncapped shorts
  4. What if the next logical conclusion is to
    squeeze the silver market and demand delivery? GME could be round one and JP silver exchange is telling customers all deliveries will be delayed 1-2 weeks. Sure it’s bigger market but saying it’s not likely to happen in light of recent events is a little silly.

  5. BMK


    Most holders of silver futures contracts do not want physical delivery, and most do not have the resources to take physical delivery. Not only do you need real cash (not margin, not leverage, actual cash) to buy the entire quantity of bullion each contract, you also need to pay significant fees for the storage.

    Most holders of futures contracts are simply not going to do that. Even if they have the money, it simply does not make sense, on any level, to actually do that.

  6. BMK


    It doesn't matter. I don't even really understand your question.

    When I sell stock short, the guy who buys the stock might be a pension fund manager in Omaha, or a retail customer in Sydney, Australia. He doesn't know who sold him the stock, and he doesn't know whether I sold short. He doesn't care, and he doesn't need to know. All he knows is he bought the stock. He may sell it the next day, or he may hold it for ten years. When I buy to cover my short, I'm not buying it back from that guy. That's not how the system works. I am buying it from some other seller.

    The clearinghouses and the brokers guarantee the integrity of the system. They match up buyers and sellers, and they guarantee delivery of the stock. When you buy stock, you don't know who the seller is, and you don't know whether they sold short or sold stock that they actually owned. It doesn't matter.

  7. smallfil


    You cannot borrow what does not exist. It is impossible. A lot of disinformation and lies being peddled out there is the problem. There are 2 ways to short a stock, borrowing shares where your risk is unlimited to the upside. Then, there is put options you can buy and where the risk is limited to the cost of the premium you paid. I guess the liars have lumped the borrowed shares with put options that is why they came out with the 200% short BS of theirs. Options also, trade independently, of stocks. Most smart traders, hedge funds included would just buy put options with the added leverage that will give you huge returns when a stock moves by a large amount. It is as simple as that and options are created out of thin air. If there is a demand for it, the market maker will create a strike price for it. There is also, no limit to how many contracts you can buy as long as the market maker is willing to sell you that option.
  8. BMK


    Have a look at how the SEC defines naked short sales:

    Is this definition "disinformation and lies"?

    While we're on the topic, can you tell me who won the presidential election in the USA last year?