Someone educate me but why are hedge funds not limiting the loss by covering the short and closing their short position. Wouldn't that stop pumping from WSB crowd?
The only exceptions I could think of is :
- There isn't enough volume to cover shorts due to incessant buying spree from retail side
- Lending freeze initiated by brokers on client request
I think this wording may be a bit misleading. I think the challenge is more subtle, let me walk through a scenario.
100 shares exist, all owned by person A. They lend all the shares to a short-seller, who sells them to B. Then B lends 40 of those shares back to the short seller, who sells them to C.
Now 140% of existing shares are shorted. But 240 shares are "owned" in some sense. A "owns" 100 shares and B "owns" 100 shares and C "owns" 40 shares.
What's not clear to me is which of these shares are available to be bought by the short seller. I assume you can't sell your shares if they're loaned out. So the short seller can first buy 40 shares from C and deliver to B. Then he has to buy 100 from B, including the shares he just delivered, and give them all to A.
What happens in the case where the short reaches it due date and neither B nor C want to sell?
Intuitively I would say that the short seller goes bankrupt, A doesn't get any of the stuff he loaned out back, B ends with 60 stocks while C has 40. Is that what happens in reality?
My understanding is not enough volume. So many shares are sold short that attempting to buy a significant portion back would drive up prices and initiate the short squeeze (vicious cycle of price going up and shorts forced to buy more shares to cover).
They're too stubborn to take a loss and theres not even enough shares for them to all cover. Its also not really the case that none of them have covered. People close out and then new short sellers come in at the same time taking their place, thinking this is their time and surely it will go down, which keeps the short to available shares high.
But couldn't they just settle with the original lenders without buying back the stock from the actual holders? Or is that forbidden? To me this would seem a logical decision for any lender (the business was not dead, so selling was a little bit too risky, but now taking a 100% profit and being done with that instead of having a stupidly inflated stock and 10% profits in the, seems reasonable)
The big pumping has only happened over the last few days. Hedge funds are starting to close their short positions (two of the most noted ones Melvin and Citron announced they had just this morning), and many commentators do expect that this will cause the stock to crash soon as people move on.
Not to tinfoil this too much, but it seems pretty likely from volume that that was a lie by Melvin and Citron, with the explicit goal of tanking the stock (so they can then cover at a lower price).
Agreed. The timing is also rather suspect. I am not sure why they wouldn't have announced it last night if they closed out yesterday. Instead, they waited until this morning after a ~100% jump in price. I find it hard to believe that news organizations haven't been reaching out to them pretty consistently over the last few days since they appear to be the explicit target of the WSB crowd.
Would lying not be a crime here? Maybe not if the position was all from their personal accounts. But wouldn't it be a problem if you were trading other people's money, and you ended up on the losing end, wouldn't you have problems with lawsuits from your clients, saying they were duped, and they would have pulled their money out, if not for this lie? (Or something similar)
Lying is a crime, but as we all know the punishment from the SEC and other regulatory agencies is usually a small "fine" that actually never prevents bad behavior. For many Wall street types, paying fines is literally part of the cost of doing business.
Its better for a business to be in court and pay fines then to be broke and bankrupt.
They announced they closed outside of trading hours, which makes me think they didn't actually close. Why wouldn't they announce at the close yesterday to prevent the run up to 300?
Am I correct in saying that if someone can forecast approximately when that will happen, they can short the stock and make money off of the mass selloff? Essentially putting the short sellers back where they started (in a sense)?
In principle, but it's fundamentally challenging to forecast this kind of thing. For example, Kodak is still up almost 300% (down from like 1,000% in July) on the news of a government loan they haven't received and a pivot to pharmaceuticals manufacturing they haven't started.
If you think you can outsmart both the hedge funds and WSB, go right ahead. I for one will simply regret my lack of faith causing me to miss out on 4000% returns (so far) and move on.
The only exceptions I could think of is :
- There isn't enough volume to cover shorts due to incessant buying spree from retail side
- Lending freeze initiated by brokers on client request