How are GameStop short sellers going to close their positions when there is an insufficient float?

Question

I am aware that brokers are now introducing interventions to stop this situation from happening but theoretically, this could happen.

If borrowed shares can be re-shorted which in this case is by many institutions, how are they going to cover the positions if let's say GME goes to $1,000? They would be facing a weird situation that the number of float in the market isn't enough to cover their short positions.

Simple illustration:

GME > A > B > C > D > Cycle goes on

IPO to A > Long > Short > Synthetic long > Re-short > Cycle goes on

Let's assume only 100 shares on IPO

How are B & D going to recover their positions when the float is only 100 but 200 shares are required? Is the system broken by WSB?

If A & C sell at the same time (since there are no rules prohibiting them) to B & D for them to close the positions, this signifies the float doesn't matter, the tradable shares that are created is what matters.

Answer 1

Let's say 140% of the float was shorted. Obviously the short sellers cannot buy 140% of the float. But they can buy 10%, reducing the amount of available shares by 10%, deliver the shares to people they owe the shares, and that way they amount of available shares goes up again. And they repeat that 14 times.

Answer 2

Short selling without locating shares to borrow is illegal, except for market makers, for this specific reason (along with the unnecessary selling pressure when opening a short position). This is called naked shorting.

The answer is they can't, at once, but they can over time. Maybe they can get GME to create and sell more shares to increase the float, fortunately this is actually the best move for that company as it is the best way they recapitalize.

Answer 3

As I have written before, I have never understood how the short interest could exceed 100% because I always thought that a share could only be loaned out once. The only reason that I could come up with is that they can be loaned multiple times and that seems illogical.So assuming that the latter is true, let me expand on your set up:

+100 A owns the shares and lends them to B

-100 B shorts them, selling them to C

+100 C owns them and lends them to D

-100 D shorts them, selling them to E

+100 E owns the shares (actual physical shares in street name here)

and so on?

If borrowed shares can be re-shorted which in this case is by many institutions, how are they going to cover the positions if let's say GME goes to $1,000? They would be facing a weird situation that the number of float in the market isn't enough to cover their short positions.

In reality, it's highly unlikely that all 140% of the shorters would attempt to cover at once. In addition, if no restrictions were in place, new buyers and shorters would be coming in all the time, making it a fluid situation, kind of a massive shell game with GME shares under each shell.

How are B & D going to recover their positions when the float is only 100 but 200 shares are required? Is the system broken by WSB?

The float will never be just 100 shares (or some low multiple of 100/200). In addition, since there are so many players in the game and a very large number of them are smaller account size Robinhood traders (rather than for example one entity like Porsche short squeezing Volkswagen), there will always be sellers at a higher price.

And lastly, as shorters close their positions during the short squeeze, price soars. When price gets high enough, share owners sell and new shorters come in, driving price down (see GME's price rise to $480 yesterday morning then drop to $120 and subsequent rise to $380 by noon. The cycle is fluid and will repeat but likely diminishing in scale because of trading restrictions being imposed.

Answer 4

The system allows naked shorting. There is no mechanism in the markets that prevent "leaks" because naked shorting is allowed.

There are brokers and market makers who "internalize" the market which essentially are local markets they create and handle themselves. Who knows what they are actually doing in those markets and how could one possibly limit naked shorting without some way to track all the shares? Even an immutable blockchain would not prevent this unless the users themselves could track their own shares and verify that they have legit shares and also so do everyone else.

So in the chaos of the markets there are nefarious actors(pretty much the entire market now) who counterfeit shares using various mechanisms such as FTD's, market maker exemptions, naked shorting, dark pools, etc.

As they increase the supply there are more shares out there than should exist. Generally this is hidden because no one is tracking it can there is no way to verify how many truly exist. Some experts including top executives in the financial system have suggested that over 50% of the market is fake.

But over time the shares change hands and events happen that can expose more shares than exist. The obvious example is when, say, a single person buys all the stock. If he buys all the stock and the stock is still trading then obviously there are more out there. E.g., The case of the guy who bought all the shares of a company and the stock was still having 50M+ volume per day.

How do shorters close out such positions? They just do. A shorter wouldn't necessarily know they are borrowing counterfeit shares. How does a naked shorter close out a position? Either they don't and just hope it becomes someone else's problem or no one figures it out or if they are forced to close it out then they buy back the shares they naked shorted.

If the SI is, say 100% of the outstanding then 1 fake share exists for every 1 real share. The naked shorters who ultimately did this(brokers not keeping track, market makers shorting to "provide liquidity", etc), to close their naked shorts, would only have to buy the outstanding(not 2x). How? They would have to offer a high enough price to get enough people to sell and not buy.

E.g., suppose the stock is trading at $1. If they offer $1M per share do you think they can entice enough people to buy back the shares to close out the naked shorts? Very likely. Of course they won't do it this way as it will bankrupt the world if the outstanding is high enough.

It's not complicated in the sense that if the price is high enough people will sell their "fake shares"(and every share they buy is a fake share w.r.t. to them). In some sense a naked shorter is just shorter who thinks they can get away without ever having to close their position... and usually they are right or get to close when the stock price has been tanked to near zero. But if a naked shorter is forced to be just a shorter then all the same rules apply.

The issue is this: Cheaters are not going to do what is right even if they are "forced to". They are going to find a way to maximize profits no matter what. E.g., a naked shorter who has to cover isn't just going to offer the highest price he can. He's going to spread FUD, hide shares, continue to naked short, etc. The system is designed to protect the cheaters because it is run by cheaters(ultimately the same cheaters).

So it isn't that they can't close it out. In theory they can. The issue is the cost to them in closing it out and who's going to force them and how hard it will be.

With GME, as you can see over 3 years later that they haven't closed out and have likely hidden most of the SI using various schemes such as hiding them in ETF's and using derivatives as ways to pretend they have covered.

The fact is this. If enough people buy GME: 450M buy 1 share and DRS, 225M buy 2 shares and DRS, 112.5M buy 4 shares and DRS, etc then IF GME has a large hidden naked short position it will expose the market and all the people who run it for the frauds they are to the world. In fact, the 450M number is far less because a lot of people already own GME. Also, as people do that and hold(or sell some at spikes and rebuy to own more for free) it only forces the naked shorters to naked short more to keep the price down because any big shorter position can implode causing a chain reaction or a gamma ramp.

The goal of the naked shorters/manipulators/financial terrorists is simply to drag this out and get as many people to give up as possible or to be made to look like fools. If RC somehow bought all the stock(when it was down in the gutter before the sneeze) then it won't matter. He's won't. It's like having a royal flush and having counting the shown cards to know that all the other players do not have one. You know you have the best hand and can't lose and everything they are doing is bluffing. [Of course they could resort sabotage to win such as murder, WW3, etc]

As someone once said: Every lie incurs a debt to the truth. In some sense every short incurs a debt to the longs. It may not be paid back in the same stock or maybe even in the same market or the same people but it is paid back in the long run(conservation of energy).

Here is a very good overview of naked shorting:

https://www.sec.gov/comments/s7-07-23/s70723-20162302-331156.pdf