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Comment by dangerbird2 | Hacker News Reader

To clarify, People incorrectly assumed that because the short interest to float percentage was over 100%, the hedge funds had to be naked shorting. This is not true at all: because of how short selling works, there can be more than one short sale tied to a single share.

Seller A borrows a share, sells it to buyer B. Buyer B then leases the share to Seller C, who then short sells it. This is not a naked short, but a plain ol' short sale.

A naked short would be where Seller A doesn't own a share, but sells one to Buyer B anyway, with a contract stipulating the time the seller must buy and deliver the share. With the exception of market makers, this is illegal but ridiculously easy to detect, since Seller A's sales exceed the number of shares purchased. There is zero evidence any of the hedge funds were short selling.

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> With the exception of market makers, this is illegal

Do you mean, this is legal for market makers?

Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?

> Do you mean, this is legal for market makers?

Yes, market makers are allowed to sell short without having a locate.

It should be noted that the market makers will attempt to zero out their total exposure by the end of the trading session.

That should be DMM or PMM or the equivalent designation by the exchange. These are special appointments, you can't just call yourself a market maker and sell short.

Oh yes, definitely. There are a lot of regulations for market makers.

> Do you mean, this is legal for market makers

Yes. They need to be able to make naked shorts, as this is what allows traders to buy a share without having a willing seller at any given moment and vice versa.

> Is there any other way that the number of shares being shorted, could be greater than the number of shares in existence?

As I mentioned, It's perfectly cromulent to have multiple non-naked shorts on the same shares, so the short interest as a percentage of float can certainly exceed 100% without any illegal behavior. I imagine the reason for this misconception is that people think of a short as an "anti-share" that can't exceed the number of shares being traded, when it's really a more abstract investment tactic or contract.

This is exactly it. It's basically fractional reserve banking all over again, except that instead of dollars, we use shares.

It may be in the national interest to impose "reserve requirements" on brokerages in order to prevent too much perversion of market prices.

Aside from being all but unenforcable, Restricting short selling like that will almost certainly cause stocks to become overvalued. Short selling is an important balance on overvalued stocks, and there are cases like the Enron scandal where short sellers were the first to detect a company is engaging in fraudulent behavior[1]. Restricting short selling would allow companies cooking the books to keep their stock values at artificial levels despite investor skepticism

[1] https://en.wikipedia.org/wiki/Enron_scandal#Timeline_of_down...

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