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When A Situation Is 'shorted' And It's Speculator Makes A Bundle: Who Loses?

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When a currency or other big situation is 'shorted' and it's speculator makes a bundle: Who loses?

Assuming that the deal isn't creating any new money then where does the money come from? Who is the losing party?

If somebody IS losing big time why do opponents of shorting fail to draw clear attention to this as their first complaint rather than simply harumphing when they are told that, in fact, 'shorting is good for you' ' don't be so weak'?

Weak or not, who is on the losing side of these deals?

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You are correct in that it is a zero sum game. The person who loses is the other party that went long.

Suppose you own some shares, 99% of the company in fact. The shorters sell a huge number of shares in your company, more than exist out there. Taking the other side, the longs sell them shares they do not own. The shorters were in the majority so the price of the shares fall and the longs pay them the cash difference. No shares are delivered because they cannot be delivered. Thus it can be seen that the mechanism creates an infinite number of virtual shares. As the price of the shares is now much lower, you as the majority holder, have suffered a loss in value thanks to their activities. The prices do not reflect the value at which you are willing to part with your shares (since you own 99% that is important) or what others are willing to pay for them.

It is much like me shorting your house by repeatedly selling it until the price is down to £1. I then come along and say "Your house is worth £1, sell it to me". The creation of an infinite quantity of something distorts the fundamental purpose of markets. That is price discovery.

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You are correct in that it is a zero sum game. The person who loses is the other party that went long.

Suppose you own some shares, 99% of the company in fact. The shorters sell a huge number of shares in your company, more than exist out there. Taking the other side, the longs sell them shares they do not own. The shorters were in the majority so the price of the shares fall and the longs pay them the cash difference. No shares are delivered because they cannot be delivered. Thus it can be seen that the mechanism creates an infinite number of virtual shares. As the price of the shares is now much lower, you as the majority holder, have suffered a loss in value thanks to their activities. The prices do not reflect the value at which you are willing to part with your shares (since you own 99% that is important) or what others are willing to pay for them.

It is much like me shorting your house by repeatedly selling it until the price is down to £1. I then come along and say "Your house is worth £1, sell it to me". The creation of an infinite quantity of something distorts the fundamental purpose of markets. That is price discovery.

you are not differentiating between Naked shorting and shorting,

Your example is only valid for Naked shorting, without the Naked ability the shorter cannot sell more shares than exist because they need to be borrowed first before they can be shorted

Edited by Tamara De Lempicka

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When a currency or other big situation is 'shorted' and it's speculator makes a bundle: Who loses?

Assuming that the deal isn't creating any new money then where does the money come from? Who is the losing party?

If somebody IS losing big time why do opponents of shorting fail to draw clear attention to this as their first complaint rather than simply harumphing when they are told that, in fact, 'shorting is good for you' ' don't be so weak'?

Weak or not, who is on the losing side of these deals?

To short a a share put simply:

you ask to borrow 100 shares off your mate who has plenty. He lends you those shares but takes a fee from you for the inconvinience.

There shares are worth £1 each.

You sell them immediatly for £100.

The price drops to 50p so you buy back the 100 shares for £50.

You give your mate back his 100 shares.

Your profit is £50 minus the fee for borrowing.

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To short a a share put simply:

you ask to borrow 100 shares off your mate who has plenty. He lends you those shares but takes a fee from you for the inconvinience.

There shares are worth £1 each.

You sell them immediatly for £100.

The price drops to 50p so you buy back the 100 shares for £50.

You give your mate back his 100 shares.

Your profit is £50 minus the fee for borrowing.

so how does a naked short exist?

the banker lends shares to a shorter he doesnt have...bank writes an IOU that says hand back my non existent shares on such and such a date.

who is picking up the tab?

this must be pure counterfeiting. and gambling....you bet on a horse with a booky, have no interest in the horse at all. equally, the bet is not a contract and cannot be enforced at law.

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so how does a naked short exist?

the banker lends shares to a shorter he doesnt have...bank writes an IOU that says hand back my non existent shares on such and such a date.

who is picking up the tab?

this must be pure counterfeiting. and gambling....you bet on a horse with a booky, have no interest in the horse at all. equally, the bet is not a contract and cannot be enforced at law.

Unless you're hedging then it is effectively gambling. Not sure what you mean by "picking up the tab", as you pointed out there's two parties so it would be whoever made the other half of the trade. You cannot short something unless there's someone else to make the other half of the trade; if they lose money on it then they only have themselves to blame (putting aside market manipulation).

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Unless you're hedging then it is effectively gambling. Not sure what you mean by "picking up the tab", as you pointed out there's two parties so it would be whoever made the other half of the trade. You cannot short something unless there's someone else to make the other half of the trade; if they lose money on it then they only have themselves to blame (putting aside market manipulation).

surely the merchant bank doing this would have to find two buyers at the same time....the "shares" are no more than gambling strips.

in short:

I, a banker, lend you some shares I dont have for a fee.

in a short sale, you would sell them....how can you sell these? there are none to sell.

then when it comes time to hande back the shares...what can you hand back...i gave you nothing.

Edited by Bloo Loo

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When a currency or other big situation is 'shorted' and it's speculator makes a bundle: Who loses?

I recommend you read up on the Porsche / VW short squeeze in 2008. That'll give you a flavour of what can happen when the free float disappears.

link

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surely the merchant bank doing this would have to find two buyers at the same time....the "shares" are no more than gambling strips.

in short:

I, a banker, lend you some shares I dont have for a fee.

in a short sale, you would sell them....how can you sell these? there are none to sell.

then when it comes time to hande back the shares...what can you hand back...i gave you nothing.

I believe that although you don't own the shares and havnt borrowed you sell said imaginary shares but at the point of delivery of the shares you 'fail to deliver' (because you don't have them. Then buy them after a few days and make the delivery then.

Don't fully understand it myself but I think that's the basics of it.

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You are correct in that it is a zero sum game. The person who loses is the other party that went long.

Suppose you own some shares, 99% of the company in fact. The shorters sell a huge number of shares in your company, more than exist out there. Taking the other side, the longs sell them shares they do not own. The shorters were in the majority so the price of the shares fall and the longs pay them the cash difference.

Yet the shorters would appear to be horribly vulnerable if their counterparties insist on delivery of shares that simply can't be acquired at any price (which they are surely entitled to do?).

Eg the VW/Porsche story.

(already covered by JY, I see)

Edited by huw

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I believe that although you don't own the shares and havnt borrowed you sell said imaginary shares but at the point of delivery of the shares you 'fail to deliver' (because you don't have them. Then buy them after a few days and make the delivery then.

Don't fully understand it myself but I think that's the basics of it.

I see, you borrow shares someone else hasnt got and pay them a fee. then you sell them to someone else who beleives you have some who also doesnt get any.

Its starting to make perfect banking sense.

heres 500 BP shares...thatll be £50 please...I want them back Thursday 27th May safe and sound please.

something very Injinesque about all this.

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I recommend you read up on the Porsche / VW short squeeze in 2008. That'll give you a flavour of what can happen when the free float disappears.

link

That was a case of shorts losing a packet! (what's german for Schadenfreude?) :lol:

Genuine investors (as opposed to speculators, who are fair game) may be affected. But the potential for real damage is if they weaken the shorted entity to the point where its business suffers.

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I see, you borrow shares someone else hasnt got and pay them a fee. then you sell them to someone else who beleives you have some who also doesnt get any.

Its starting to make perfect banking sense.

heres 500 BP shares...thatll be £50 please...I want them back Thursday 27th May safe and sound please.

something very Injinesque about all this.

No, you dont need to borrow shares if you are 'Naked shorting' by definition.

In naked shorting, the opportunity to sell things you don't have exists because of the time afforded for settlement eg 20 days for a 'T20' trade(see link). So, you sell 100 shares you don't have, then have 20 days to complete the deal, and assuming you buy again within 20 days, you produce the evidence and keep the difference.

In normal shorting, you have the ability to wait longer before buying back because you did actually have the shares to sell (although this is dependent on the party they were borrowed from not wanting them back anytime soon).

It is no surprise(and a bit of a scandal imo) that the biggest lenders of shares are pension funds. Does the lending commission make it back into the pension pot? A good question. But lending the shares definitely damages the assets of the pension savers i.e. those that the pension fund it supposed to be helping!

http://www.easier.com/26986-trade-online-now-and-pay-later-with-t20-extended-settlement.html

Edited by cheeznbreed

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No, you dont need to borrow shares if you are 'Naked shorting' by definition.

In naked shorting, the opportunity to sell things you don't have exists because of the time afforded for settlement eg 20 days for a 'T20' trade(see link). So, you sell 100 shares you don't have, then have 20 days to complete the deal, and assuming you buy again within 20 days, you produce the evidence and keep the difference.

In normal shorting, you have the ability to wait longer before buying back because you did actually have the shares to sell (although this is dependent on the party they were borrowed from not wanting them back anytime soon).

It is no surprise(and a bit of a scandal imo) that the biggest lenders of shares are pension funds. Does the lending commission make it back into the pension pot? A good question. But lending the shares definitely damages the assets of the pension savers i.e. those that the pension fund it supposed to be helping!

http://www.easier.co...settlement.html

Sorry, for us confused mortals and sticking with the '20 day' deal for simplicity,

So a short position is where you borrow the shares at a fee, sell them, buy them back at any point in the next twenty days and pocket the difference.

A naked short is when you don't borrow the shares up front but you promise to give me 100 shares in 20 days time. At some point in the next 20 days you have to buy those shares to deliver them to me.

Two questions, in a naked short why would I not just buy the shares outright immediately instead of doing a deal with you to deliver them in 20 days?

Where has all this 'virtual shares' talk come from? Surely in even a naked short the total number of shares in a company doesn't change and you have to buy them at some point?

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Sorry, for us confused mortals and sticking with the '20 day' deal for simplicity,

So a short position is where you borrow the shares at a fee, sell them, buy them back at any point in the next twenty days and pocket the difference.

A naked short is when you don't borrow the shares up front but you promise to give me 100 shares in 20 days time. At some point in the next 20 days you have to buy those shares to deliver them to me.

Two questions, in a naked short why would I not just buy the shares outright immediately instead of doing a deal with you to deliver them in 20 days?

Where has all this 'virtual shares' talk come from? Surely in even a naked short the total number of shares in a company doesn't change and you have to buy them at some point?

what happens if there are no shares to give at the time of settlement?

slapped wrist?, or handcuffs?

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Sorry, for us confused mortals and sticking with the '20 day' deal for simplicity,

So a short position is where you borrow the shares at a fee, sell them, buy them back at any point in the next twenty days and pocket the difference.

A naked short is when you don't borrow the shares up front but you promise to give me 100 shares in 20 days time. At some point in the next 20 days you have to buy those shares to deliver them to me.

Two questions, in a naked short why would I not just buy the shares outright immediately instead of doing a deal with you to deliver them in 20 days?

Where has all this 'virtual shares' talk come from? Surely in even a naked short the total number of shares in a company doesn't change and you have to buy them at some point?

Spot on.

Firstly. The longer between sale and purchase allows greater chance of price variation.I guess it's about flexibility to choose the close date to maximise profit.

Secondly (and I'm no expert) the whole trick relies on buying them back before the others do! Clearly in this situation, many are going to lose a lot of money because of the finite number of shares. I guess these sort of traders assume that they will always be able to close these bets without a problem, but occasionally it does not work out like that eg Porsche/VW

A clunky analogy for the confused:

I guess I could open an ebay store selling a particular item, on a 'Buy it Now' at £30 more than it is sold on Amazon. If I sell one, I then have a few days to get one from Amazon to fullfil the sale, and keep the difference, before my buyer gets wind of the fact I do not have the item to sell. Clearly if Amazon hike the price in the interim, I lose.

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To short a a share put simply:

you ask to borrow 100 shares off your mate who has plenty. He lends you those shares but takes a fee from you for the inconvinience.

There shares are worth £1 each.

You sell them immediatly for £100.

The price drops to 50p so you buy back the 100 shares for £50.

You give your mate back his 100 shares.

Your profit is £50 minus the fee for borrowing.

So is this like borrowing from a pension fund that owns a whole raft of shares like banking shares for example. The share price drops the borrower makes a fortune, the pension fund manager take his or her own cut and the pension fund investors take the loss.

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So is this like borrowing from a pension fund that owns a whole raft of shares like banking shares for example. The share price drops the borrower makes a fortune, the pension fund manager take his or her own cut and the pension fund investors take the loss.

clearly the shares have to return to preshorting levels once they are rebought so the fund investors are unlikely to lose out unless someone other than the shorter is also selling, and you are making the assumption that when someone goes short the share has to drop, it doesnt it will rise if someone thinks its cheap, given shorting has been around for 100s of years im amazed the stockmarkets are above 1 as all they need to do is sell a few shares to make money, how the hell has this bull market happened over the last 70 years

Edited by Tamara De Lempicka

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...Where has all this 'virtual shares' talk come from? Surely in even a naked short the total number of shares in a company doesn't change and you have to buy them at some point?

I guess, if 10,000 traders all do the same trick, with the same company, then there are more shares being offered for sale / expected for delivery, than actually exist?

Is that the VW story?

There seems no way to rein in the excesses of ingenious traders, but it seems more and more a drag on the economy. At some point will there grow enough of an incentive for companies not to bother with issuing normal shares, will alternative models develop? What might they be like?

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Yet the shorters would appear to be horribly vulnerable if their counterparties insist on delivery of shares that simply can't be acquired at any price (which they are surely entitled to do?).

Eg the VW/Porsche story.

(already covered by JY, I see)

The Porsche debacle was VERY funny. All the banksters were naked shorting every car company they could.

There aren't may Porsche shares around. Most are owned by about 3 families who effectively owned the company. The ganksters tried to short them, selling shares they didn't have for less than current list price. The Porsche families said "thankyou very much" and bought all the naked sales.

The Porsche families ended up owning about 120% of the companies shares. They forced the banksters to cough up ridiculous amounts of money to get out of the naked shorts. Technically the Porsche families could have totally destroyed the banks forever if they wanted to as the banks had sold shares they didn't have and couldn't produce... out right share fraud, lots of prison time, bans from share exchanges ect...

IIRC the Porsche families used the money they made from the banksters to buy the rest of VW, but I could be wrong on that.

Essentially banksters short companies to force the share price down. This makes people think the companies are in trouble and the share price drops further so the banksters can buy back th shares they sold and pocket the difference.

The trouble comes when someone with deep pockets KNOWS or even just believes the company isn't in trouble.

If someone with deep pockets keeps buying the shorts, the banksters are screwed, even if the company and shares are worthless... they just need to buy shares and short equivalent to 101% of the companies shares and their minted for life.

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The Porsche debacle was VERY funny. All the banksters were naked shorting every car company they could.

There aren't may Porsche shares around. Most are owned by about 3 families who effectively owned the company. The ganksters tried to short them, selling shares they didn't have for less than current list price. The Porsche families said "thankyou very much" and bought all the naked sales.

The Porsche families ended up owning about 120% of the companies shares. They forced the banksters to cough up ridiculous amounts of money to get out of the naked shorts. Technically the Porsche families could have totally destroyed the banks forever if they wanted to as the banks had sold shares they didn't have and couldn't produce... out right share fraud, lots of prison time, bans from share exchanges ect...

IIRC the Porsche families used the money they made from the banksters to buy the rest of VW, but I could be wrong on that.

Essentially banksters short companies to force the share price down. This makes people think the companies are in trouble and the share price drops further so the banksters can buy back th shares they sold and pocket the difference.

The trouble comes when someone with deep pockets KNOWS or even just believes the company isn't in trouble.

If someone with deep pockets keeps buying the shorts, the banksters are screwed, even if the company and shares are worthless... they just need to buy shares and short equivalent to 101% of the companies shares and their minted for life.

in which case then, the short selling of share sounds like a crime.

share prices should be determined by sales of actual shares.

whats so wrong with that?

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As has been said before, it's all about settlement (i.e. the time you have to actual turn over the money).

Rather than banning naked short selling the obvious way to stop speculation is to make settlement immediate (or near immediate). This would automatically reduce most of the speculative trading in the markets.

If you really wanted to go one stage further you could restrict trading in derivatives too.

(This would, of course most likely result in me losing my job - so maybe not such a good thing personally B) )

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As has been said before, it's all about settlement (i.e. the time you have to actual turn over the money).

Rather than banning naked short selling the obvious way to stop speculation is to make settlement immediate (or near immediate). This would automatically reduce most of the speculative trading in the markets.

If you really wanted to go one stage further you could restrict trading in derivatives too.

(This would, of course most likely result in me losing my job - so maybe not such a good thing personally B) )

i don't think it's abou tsettlement.

I think it's about morality.

You can't sell what isn't yours.

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