SEC report on Gamestop came out, it's mostly what everyone (that's sane) expected but still interesting to read. There's also a corresponding Matt Levine column that came out. Some interesting...
SEC report on Gamestop came out, it's mostly what everyone (that's sane) expected but still interesting to read. There's also a corresponding Matt Levine column that came out.
Some interesting points
Was not a gamma squeeze
Wasn't really a short squeeze - some price increases correlated with short covering, but was mostly retail fervor
However, it also shows that such buying was a small fraction of overall buy
volume, and that GME share prices continued to be high after the direct effects of covering short
positions would have waned... it was the positive sentiment, not the buying-to-cover, that
sustained the weeks-long price appreciation of GameStop stock.
Explanation on DTCC margin requirements and how that related to some brokers restricting customers from buying volatile stocks during that period
Clearing agencies (i.e., NSCC and, to a lesser extent, OCC) played important roles during
the January 2021 GME market events. The risk management mechanisms of these clearing
agencies effectively led others in the transaction chain—such as retail broker-dealers—to pause
and manage the risk exposure that arose as the rate of transactions accelerated. Both NSCC and
OCC experienced record volumes cleared on January 27, 2021. After the market events of late
January 2021, both NSCC’s and OCC’s margin requirements returned to prior and more
historically consistent levels.
Short interest was high in January (up to 120%), by February it was back down to 20%
Has anyone read any of the posts from /r/superstonk that have made their way to /r/all recently? It’s 100% qanon-like in there, very bizarre to me that it’s getting traction although from the low...
it's mostly what everyone (that's sane) expected
Has anyone read any of the posts from /r/superstonk that have made their way to /r/all recently? It’s 100% qanon-like in there, very bizarre to me that it’s getting traction although from the low comments/upvotes ratio I wouldn’t be surprised if it’s artificial.
Honestly if you can put together an energetic 5 paragraph DD post to one if those subreddits you’ve got a good chance at a successful pump and dump scheme. I got caught up in the GME hype when my...
Honestly if you can put together an energetic 5 paragraph DD post to one if those subreddits you’ve got a good chance at a successful pump and dump scheme. I got caught up in the GME hype when my friend convinced me to buy in. The rush of seeing my portfolio increase by tens of thousands of dollars per hour was enough to make me think they were onto something. I wanted to believe. But sifting through their posts it became obvious they were nothing but numerologists.
In the end I didn’t make (or lose) much money on GME because I didn’t quit while I was ahead. But it was definitely a fun experience.
I ascribe that label to any day trader whom is buying and selling stock on the same day. Rapid exchange of equities is not investing, it is gambling. Plain and simple.
But sifting through their posts it became obvious they were nothing but numerologists.
I ascribe that label to any day trader whom is buying and selling stock on the same day.
Rapid exchange of equities is not investing, it is gambling. Plain and simple.
I'm still confused by this. How can short interest exceed 100% without the excess interest being naked short positions? Am I wrong in my understanding that short interest above 100% represents a...
GME short interest hit 50% of shares outstanding first in 2012 and then again in 2015, 2016, and 2018, before rising even further in 2019. From then until early 2021, GME short interest hovered around 100%, hitting its high of 109.26% on December 31, 2020.
I'm still confused by this. How can short interest exceed 100% without the excess interest being naked short positions? Am I wrong in my understanding that short interest above 100% represents a situation where some of the stock was sold short by parties that didn't actually hold the stock? That situation, as I understand it, is naked shorting, and as I understand that, naked shorting is illegal in the US. Why does this report seemingly just gloss over this?
I thought this paragraph was going to answer my questions, but it just doesn't:
Some commentators have asked how short interest can get as high as it did in GameStop. Short interest can exceed 100%—as it did with GME—when the same shares are lent multiple times by successive purchasers. If someone purchases a stock from a short seller and subsequently lends the stock out again, it will appear as if the stock was sold short twice for the purpose of the short interest calculation.75 Short interest ratios tend to be quite low; for large non-financial stocks, they are often less than 2.5% whereas for small non-financial stocks they still tend to be less than 13%. Few stocks, if any, have short interest greater than 50% on a given date.76 Until recently, short interest of more than 90% was observed only a few times—in 2007 and 2008. When examining short interest as a percent of shares outstanding, GME is the only stock that staff observed as having short interest of more than shares outstanding in January 2021.
I seriously don't understand this. Isn't this clear evidence of illegal activity? My understanding that there was extreme interest in GME on r/wsb because there was speculation that a short squeeze would force short position holders to cover in a situation where >100% short interest would mean it would be impossible for all short holders to cover. I heard speculation that reports of >100% short interest in GME must be flawed. But, if the SEC says the reports were correct, I just don't understand how they matter of factly mention this in the report without explaining what they are doing to investigate this, or prevent it from happening in the future.
Person A holds 1 share of stock X. Person B shorts the stock, by having A lend them the share, then selling it to person C. Person C now has 1 share of stock X, which is the same share that A...
Person A holds 1 share of stock X.
Person B shorts the stock, by having A lend them the share, then selling it to person C.
Person C now has 1 share of stock X, which is the same share that A held.
Person D shorts the stock, by having person C lend them the same share that A held, then selling it to person E.
Despite only 1 share of stock X being involved, it appears, for calculation purposes, that 2 shares have been shorted.
Isn't this a fundamental flaw in the "calculation"? It seems rather obvious to me that in this situation you describe that Person D is naked shorting (even if unintentionally/unbeknownst to them)....
Despite only 1 share of stock X being involved, it appears, for calculation purposes, that 2 shares have been shorted.
Isn't this a fundamental flaw in the "calculation"? It seems rather obvious to me that in this situation you describe that Person D is naked shorting (even if unintentionally/unbeknownst to them). Is the problem with all of this that many stock shares are not registered, so determining who actually has ownership of any particular individual share is virtually impossible to track (not to mention fractional shares)?
Naked shorting is selling shorts on assets that you don't actually own - literally don't own, having a share that was also lent to you are part of another short counts as owning the asset. As in,...
Naked shorting is selling shorts on assets that you don't actually own - literally don't own, having a share that was also lent to you are part of another short counts as owning the asset.
As in, you just sell a contract that, if executed, you cannot uphold because you don't own necessary components of the contract.
A stock that gets shorted twice is not naked shorting.
This is what I don't understand, then. Are there some domain-specific definitions of "lent" or "owning" in this context that are different from the normal senses? Being lent something and owning...
having a share that was also lent to you are part of another short counts as owning the asset.
This is what I don't understand, then. Are there some domain-specific definitions of "lent" or "owning" in this context that are different from the normal senses?
Being lent something and owning it are not normally the same thing. In layman's terms, if you loan me an apple, I don't own that apple and nobody would "count it as if I owned the apple".
It's the same in real life, no? If you borrow an apple, there is nothing stopping you from lending it again, or selling it to someone else. Here, the laws of physics ensures the consistency of the...
It's the same in real life, no? If you borrow an apple, there is nothing stopping you from lending it again, or selling it to someone else. Here, the laws of physics ensures the consistency of the apples in the world.
Let's say the price of an apple is $1. You believe that in a week, you'll be able to buy an apple for $0.50. You go to the grocery store and borrow an apple, promising to give one back in a week.
Now you go on ebay and sell the apple for $1. The apple is now off in the void of ebay - your apple has gone who knows where. Your plan is to wait a week and buy back an apple from ebay for $0.50 to give back to the grocery store. Not necessarily the same apple, just an apple.
Now let's say I'm the guy who buys the apple from you on ebay. I have an apple - a physical apple, that clearly cannot be cloned. My friend bob also thinks that apples will cost $0.50 in a week. He asks if he can borrow my apple and give an apple back in a week. I agree.
Now he goes and sells an apple for $1 on ebay.
That's short selling twice.
What would naked shorting be? It would be if you, thinking that apples will go to $0.50 in a week, immediately go on ebay and sell an apple. You don't have any apples. Someone buys your apple for $1 on ebay. But you don't have an apple - you're going say, "hey, sorry having some shipping issues" - "yo, can you give some time my roof just fell in" etc for a week. Hopefully you'll be able to buy an apple for $0.50 in a week and then give it to your ebay buyer.
But you don't actually have anything to give to the buyer when you sold him the apple - you're betting on being able to acquire an apple before you need to deliver it to him.
You can see that it's a very different situation from above. Whether or not it's naked is whether or not you have anything at all when you promise to sell something to someone. A lended apple is perfectly fine for the buyer - it's your ass in the fire when the grocery store wants an apple back in a week.
Thank you for your patience in explaining this, but I still don't understand. I understand this so far. I have shorted an apple, believing the price of apples will go down in the the next week. I...
Thank you for your patience in explaining this, but I still don't understand.
Let's say the price of an apple is $1. You believe that in a week, you'll be able to buy an apple for $0.50. You go to the grocery store and borrow an apple, promising to give one back in a week.
I understand this so far. I have shorted an apple, believing the price of apples will go down in the the next week.
Now you go on ebay and sell the apple for $1. The apple is now off in the void of ebay - your apple has gone who knows where. Your plan is to wait a week and buy back an apple from ebay for $0.50 to give back to the grocery store. Not necessarily the same apple, just an apple.
I still follow.
Now let's say I'm the guy who buys the apple from you on ebay. I have an apple - a physical apple, that clearly cannot be cloned. My friend bob also thinks that apples will cost $0.50 in a week. He asks if he can borrow my apple and give an apple back in a week. I agree.
Now he goes and sells an apple for $1 on ebay.
That's short selling twice.
This is where I get lost. Since we're considering apples fungible here, it doesn't really matter which apple is which. But the total number of apples in the world is still of consequence. As I understand it, >100% short interest in apples would mean that there are more listings for apples on eBay than there are apples in the world. Logically, some of the people listing apples aren't in possession of an apple to sell.
Let's keep things simple and imagine a world in which there are only 2 apples (we'll consider them fungible) and five people Alice, Bob, Cindy, Evan, and Dolly.
Can you explain who owns these 2 apples in this world when there is >100% short interest in apples?
The key is that the people who lent the apples still are considered to be owning apples. It's the same as in fractional reserve banking, wherein effectively more money exists after people deposit...
The key is that the people who lent the apples still are considered to be owning apples. It's the same as in fractional reserve banking, wherein effectively more money exists after people deposit their money and it is lent out than exists before it.
I think the confusion here is the exact definition of a "naked short". Naked shorting is specifically not having the asset you're selling when you're making the sale. It is fine to sell an apple when you have a contract that states that you'll have to give someone else back an apple at a later date.
In that vein, it is fine for there to be more short positions than assets - clearly, since that was the case here. What is specifically not fine is making a contract to sell an asset without having anything to give to that other person when you made the sale.
This is not clear to me (maybe I'm just too dense). I still can't imagine the situation where >100% short interest is possible without some short sellers not being naked. In my toy world with 2...
In that vein, it is fine for there to be more short positions than assets - clearly, since that was the case here. What is specifically not fine is making a contract to sell an asset without having anything to give to that other person when you made the sale.
This is not clear to me (maybe I'm just too dense). I still can't imagine the situation where >100% short interest is possible without some short sellers not being naked. In my toy world with 2 apples and 5 people, I still can't grok what the situation looks like where there is >100% short interest in apples, but nobody is naked.
Hm, I'm not sure where you're confused. Remember the definition of a naked short: selling an asset without having anything to sell. Alice has an apple Alice lends to Bob (fine) Bob sells to Cindy...
Hm, I'm not sure where you're confused. Remember the definition of a naked short: selling an asset without having anything to sell.
Alice has an apple
Alice lends to Bob (fine)
Bob sells to Cindy (fine, because Bob has an apple in his hands that he can hand to Cindy)
Cindy lends to Evan (fine)
Evan can sell to Joe (fine, because Evan has an apple in his hand, lent from Cindy, that he can hand to Joe)
Being able to physically hand an apple over represents the obligation to have a stock to sell before selling it (usually by borrowing it; wouldn't really be a short otherwise).
None of those were naked shorts. What would be a naked short?
Bob does not have an apple
Bob sells an apple to Cindy (!! What is he selling? THIS is the naked short!)
At the last minute Bob buys an apple and gives it to Cindy, pocketing the difference (if the price of apples went down, that is)
Is this description of the state of apple-world complete enough that we can compute the short interest in apples from this information? As I explained, what I can't grok is what the state of the...
Alice has an apple
Alice lends to Bob (fine)
Bob sells to Cindy (fine, because Bob has an apple in his hands that he can hand to Cindy)
Cindy lends to Evan (fine)
Evan can sell to Joe (fine, because Evan has an apple in his hand, lent from Cindy, that he can hand to Joe)
Is this description of the state of apple-world complete enough that we can compute the short interest in apples from this information? As I explained, what I can't grok is what the state of the world looks like where short interest in apples is >100%, but nobody is naked shorting. You've explained a situation where I think I can accept that nobody is naked shorting, but I also don't see how this situation represents >100% short interest. (Maybe my misunderstanding has nothing to do with understanding naked shorting and has everything to do with how short interest is computed?)
How many apples outstanding are there? Just 1. How many apples were sold short? 2: one short sale by Bob, one by Evan. So short interest is Shares Sold Short / Shares Outsanding (total number of...
How many apples outstanding are there? Just 1. How many apples were sold short? 2: one short sale by Bob, one by Evan.
So short interest is Shares Sold Short / Shares Outsanding (total number of shares issued)
= 2 / 1 = 2, or 200%.
Maybe my misunderstanding has nothing to do with understanding naked shorting and has everything to do with how short interest is computed?
I think that's it. It's similar to the way that banks "create" money.
If I have $50, and I deposit it at a bank, then the bank lends $30 out to Bob, and Bob buys a Macbook Pro from Alice for $30, how much money exists in this world?
Well, I have $50, and Alice has $30, so $80. Even though we started with $50, because we still count me as having my $50 even when I give it to the bank's custody as a deposit.
So, I guess this is the fundamental flaw in my understanding. I assumed that short interest is computed at some instant. I took your description of the world as a number of time steps that leads...
So, I guess this is the fundamental flaw in my understanding. I assumed that short interest is computed at some instant. I took your description of the world as a number of time steps that leads to a final time step where the state is such that Evan has been lent an apple that ultimately Alice owns. At this time step, though, you're saying we go back through the previous steps to count the apples sold short as 2? Even though there is only 1 apple in question? Over what window of steps do we need to look to count short sales to compute short interest then? I thought that shares would be counted at one time step, but clearly that is wrong if the short interest is 200% for the state of the world that you described.
Well, I have $50, and Alice has $30, so $80. Even though we started with $50, because we still count me as having my $50 even when I give it to the bank's custody as a deposit.
Well, this is a domain-specific sense of "count" to me. In the lay understanding of "count", I would count you as only having $20, until Bob paid you back the $30 you lent him.
They're actually counted on a monthly time period (except NASDAQ, which does it once every other week) but we can pretend it's daily. You count up the total number of transactions that were a...
Exemplary
They're actually counted on a monthly time period (except NASDAQ, which does it once every other week) but we can pretend it's daily.
You count up the total number of transactions that were a short sell in a day, then divide that by the total number of shares that exist. They are batched over the entire day (well, monthly IRL).
I think part of the confusion is that usually a percentage is unitless; both the numerator and the denominator have the same unit.
Here, they're just completely different things. One is counting the # of a type of transaction, the other is counting the # of shares that exist.
🤦♂️. It would have saved you so much trouble and me so much confusion if finance people understood what percentages are! It is a crime against common sense for short interest to be reported as a...
I think part of the confusion is that usually a percentage is unitless; both the numerator and the denominator have the same unit.
Here, they're just completely different things. One is counting the # of a type of transaction, the other is counting the # of shares that exist.
🤦♂️. It would have saved you so much trouble and me so much confusion if finance people understood what percentages are! It is a crime against common sense for short interest to be reported as a percentage if this what that metric actually means.
Yeah, I realized that this was something that could catch people up. It doesn't help that there ALSO exists the short interest ratio, which is unitless (although, also could hypothetically be...
Yeah, I realized that this was something that could catch people up. It doesn't help that there ALSO exists the short interest ratio, which is unitless (although, also could hypothetically be >100%; the short interest ratio is shorts / average daily trade volume, so technically a stock with low trade volume, when then heavily gets shorted could be >100%)
When expressed as a percentage, short interest is the number of shorted shares divided by the number of shares outstanding. For example, a stock with 1.5 million shares sold short and 10 million shares outstanding has a short interest of 15% (1.5 million/10 million = 15%).
Most stock exchanges track the short interest in each stock and issue reports at month's end, although Nasdaq is among those reporting twice monthly. These reports are great for traders because they allow people to gauge the overall market sentiment surrounding a particular stock by showing what short-sellers are doing.
...
The short-interest ratio is the number of shares sold short (short interest) divided by average daily volume. This is often called the "days-to-cover ratio" because it determines, based on the stock's average trading volume, how many days it will take short sellers to cover their positions if positive news about the company lifts the price.
Let's assume a stock has a short interest of 40 million shares, while the average daily volume of shares traded is 20 million. Doing a quick and easy calculation (40,000,000 / 20,000,000), we find that it would take two days for all of the short sellers to cover their positions. The higher the ratio, the longer it will take to buy back the borrowed shares – an important factor upon which traders or investors decide whether to take a short position. Typically, if the days to cover stretch past eight or more days, covering a short position could prove difficult.
A loan isn't a "listing on ebay." It's a contract that awards you one apple. The ratio is loans / apple, not listings / apple. There might be four loans and two apples existing, but no apples for...
A loan isn't a "listing on ebay." It's a contract that awards you one apple. The ratio is loans / apple, not listings / apple. There might be four loans and two apples existing, but no apples for sale at all.
You might compare someone who sublets an apartment. There is only one apartment, but there are two leases and three parties involved.
It may seem a bit odd that someone can borrow stock and then sell it. However, this isn't all that different from borrowing money and then spending it. Most people with a mortgage on a house don't have the money to pay off the mortgage right away. (They have a house, but it's not the same.)
Let's say a single apple was loaned out twice, so the ratio is 2. The apple will have to be returned twice to repay both loans. Since there is only one apple, only one return can happen at a time, and at most one borrower can actually have an apple. After the apple is returned the first time, the other borrower will need to somehow get it to return it the second time.
Right, I was mistaken in my analogy there because I had the formula for short interest wrong (and the analogy got away from us as I was also presuming that all eBay listings were listed by short...
A loan isn't a "listing on ebay."
Right, I was mistaken in my analogy there because I had the formula for short interest wrong (and the analogy got away from us as I was also presuming that all eBay listings were listed by short sellers, but I didn't specify that). I hope it's obvious how my logic was valid but unsound based on that false premise of defining short interest incorrectly.
SEC report on Gamestop came out, it's mostly what everyone (that's sane) expected but still interesting to read. There's also a corresponding Matt Levine column that came out.
Some interesting points
Has anyone read any of the posts from /r/superstonk that have made their way to /r/all recently? It’s 100% qanon-like in there, very bizarre to me that it’s getting traction although from the low comments/upvotes ratio I wouldn’t be surprised if it’s artificial.
Honestly if you can put together an energetic 5 paragraph DD post to one if those subreddits you’ve got a good chance at a successful pump and dump scheme. I got caught up in the GME hype when my friend convinced me to buy in. The rush of seeing my portfolio increase by tens of thousands of dollars per hour was enough to make me think they were onto something. I wanted to believe. But sifting through their posts it became obvious they were nothing but numerologists.
In the end I didn’t make (or lose) much money on GME because I didn’t quit while I was ahead. But it was definitely a fun experience.
I ascribe that label to any day trader whom is buying and selling stock on the same day.
Rapid exchange of equities is not investing, it is gambling. Plain and simple.
I'm still confused by this. How can short interest exceed 100% without the excess interest being naked short positions? Am I wrong in my understanding that short interest above 100% represents a situation where some of the stock was sold short by parties that didn't actually hold the stock? That situation, as I understand it, is naked shorting, and as I understand that, naked shorting is illegal in the US. Why does this report seemingly just gloss over this?
I thought this paragraph was going to answer my questions, but it just doesn't:
I seriously don't understand this. Isn't this clear evidence of illegal activity? My understanding that there was extreme interest in GME on r/wsb because there was speculation that a short squeeze would force short position holders to cover in a situation where >100% short interest would mean it would be impossible for all short holders to cover. I heard speculation that reports of >100% short interest in GME must be flawed. But, if the SEC says the reports were correct, I just don't understand how they matter of factly mention this in the report without explaining what they are doing to investigate this, or prevent it from happening in the future.
Despite only 1 share of stock X being involved, it appears, for calculation purposes, that 2 shares have been shorted.
Isn't this a fundamental flaw in the "calculation"? It seems rather obvious to me that in this situation you describe that Person D is naked shorting (even if unintentionally/unbeknownst to them). Is the problem with all of this that many stock shares are not registered, so determining who actually has ownership of any particular individual share is virtually impossible to track (not to mention fractional shares)?
Naked shorting is selling shorts on assets that you don't actually own - literally don't own, having a share that was also lent to you are part of another short counts as owning the asset.
As in, you just sell a contract that, if executed, you cannot uphold because you don't own necessary components of the contract.
A stock that gets shorted twice is not naked shorting.
This is what I don't understand, then. Are there some domain-specific definitions of "lent" or "owning" in this context that are different from the normal senses?
Being lent something and owning it are not normally the same thing. In layman's terms, if you loan me an apple, I don't own that apple and nobody would "count it as if I owned the apple".
It's the same in real life, no? If you borrow an apple, there is nothing stopping you from lending it again, or selling it to someone else. Here, the laws of physics ensures the consistency of the apples in the world.
Let's say the price of an apple is $1. You believe that in a week, you'll be able to buy an apple for $0.50. You go to the grocery store and borrow an apple, promising to give one back in a week.
Now you go on ebay and sell the apple for $1. The apple is now off in the void of ebay - your apple has gone who knows where. Your plan is to wait a week and buy back an apple from ebay for $0.50 to give back to the grocery store. Not necessarily the same apple, just an apple.
Now let's say I'm the guy who buys the apple from you on ebay. I have an apple - a physical apple, that clearly cannot be cloned. My friend bob also thinks that apples will cost $0.50 in a week. He asks if he can borrow my apple and give an apple back in a week. I agree.
Now he goes and sells an apple for $1 on ebay.
That's short selling twice.
What would naked shorting be? It would be if you, thinking that apples will go to $0.50 in a week, immediately go on ebay and sell an apple. You don't have any apples. Someone buys your apple for $1 on ebay. But you don't have an apple - you're going say, "hey, sorry having some shipping issues" - "yo, can you give some time my roof just fell in" etc for a week. Hopefully you'll be able to buy an apple for $0.50 in a week and then give it to your ebay buyer.
But you don't actually have anything to give to the buyer when you sold him the apple - you're betting on being able to acquire an apple before you need to deliver it to him.
You can see that it's a very different situation from above. Whether or not it's naked is whether or not you have anything at all when you promise to sell something to someone. A lended apple is perfectly fine for the buyer - it's your ass in the fire when the grocery store wants an apple back in a week.
Thank you for your patience in explaining this, but I still don't understand.
I understand this so far. I have shorted an apple, believing the price of apples will go down in the the next week.
I still follow.
This is where I get lost. Since we're considering apples fungible here, it doesn't really matter which apple is which. But the total number of apples in the world is still of consequence. As I understand it, >100% short interest in apples would mean that there are more listings for apples on eBay than there are apples in the world. Logically, some of the people listing apples aren't in possession of an apple to sell.
Let's keep things simple and imagine a world in which there are only 2 apples (we'll consider them fungible) and five people Alice, Bob, Cindy, Evan, and Dolly.
Can you explain who owns these 2 apples in this world when there is >100% short interest in apples?
The key is that the people who lent the apples still are considered to be owning apples. It's the same as in fractional reserve banking, wherein effectively more money exists after people deposit their money and it is lent out than exists before it.
I think the confusion here is the exact definition of a "naked short". Naked shorting is specifically not having the asset you're selling when you're making the sale. It is fine to sell an apple when you have a contract that states that you'll have to give someone else back an apple at a later date.
In that vein, it is fine for there to be more short positions than assets - clearly, since that was the case here. What is specifically not fine is making a contract to sell an asset without having anything to give to that other person when you made the sale.
This is not clear to me (maybe I'm just too dense). I still can't imagine the situation where >100% short interest is possible without some short sellers not being naked. In my toy world with 2 apples and 5 people, I still can't grok what the situation looks like where there is >100% short interest in apples, but nobody is naked.
Hm, I'm not sure where you're confused. Remember the definition of a naked short: selling an asset without having anything to sell.
Alice has an apple
Alice lends to Bob (fine)
Bob sells to Cindy (fine, because Bob has an apple in his hands that he can hand to Cindy)
Cindy lends to Evan (fine)
Evan can sell to Joe (fine, because Evan has an apple in his hand, lent from Cindy, that he can hand to Joe)
Being able to physically hand an apple over represents the obligation to have a stock to sell before selling it (usually by borrowing it; wouldn't really be a short otherwise).
None of those were naked shorts. What would be a naked short?
Bob does not have an apple
Bob sells an apple to Cindy (!! What is he selling? THIS is the naked short!)
At the last minute Bob buys an apple and gives it to Cindy, pocketing the difference (if the price of apples went down, that is)
Is this description of the state of apple-world complete enough that we can compute the short interest in apples from this information? As I explained, what I can't grok is what the state of the world looks like where short interest in apples is >100%, but nobody is naked shorting. You've explained a situation where I think I can accept that nobody is naked shorting, but I also don't see how this situation represents >100% short interest. (Maybe my misunderstanding has nothing to do with understanding naked shorting and has everything to do with how short interest is computed?)
How many apples outstanding are there? Just 1. How many apples were sold short? 2: one short sale by Bob, one by Evan.
So short interest is Shares Sold Short / Shares Outsanding (total number of shares issued)
= 2 / 1 = 2, or 200%.
I think that's it. It's similar to the way that banks "create" money.
If I have $50, and I deposit it at a bank, then the bank lends $30 out to Bob, and Bob buys a Macbook Pro from Alice for $30, how much money exists in this world?
Well, I have $50, and Alice has $30, so $80. Even though we started with $50, because we still count me as having my $50 even when I give it to the bank's custody as a deposit.
So, I guess this is the fundamental flaw in my understanding. I assumed that short interest is computed at some instant. I took your description of the world as a number of time steps that leads to a final time step where the state is such that Evan has been lent an apple that ultimately Alice owns. At this time step, though, you're saying we go back through the previous steps to count the apples sold short as 2? Even though there is only 1 apple in question? Over what window of steps do we need to look to count short sales to compute short interest then? I thought that shares would be counted at one time step, but clearly that is wrong if the short interest is 200% for the state of the world that you described.
Well, this is a domain-specific sense of "count" to me. In the lay understanding of "count", I would count you as only having $20, until Bob paid you back the $30 you lent him.
They're actually counted on a monthly time period (except NASDAQ, which does it once every other week) but we can pretend it's daily.
You count up the total number of transactions that were a short sell in a day, then divide that by the total number of shares that exist. They are batched over the entire day (well, monthly IRL).
I think part of the confusion is that usually a percentage is unitless; both the numerator and the denominator have the same unit.
Here, they're just completely different things. One is counting the # of a type of transaction, the other is counting the # of shares that exist.
🤦♂️. It would have saved you so much trouble and me so much confusion if finance people understood what percentages are! It is a crime against common sense for short interest to be reported as a percentage if this what that metric actually means.
Yeah, I realized that this was something that could catch people up. It doesn't help that there ALSO exists the short interest ratio, which is unitless (although, also could hypothetically be >100%; the short interest ratio is shorts / average daily trade volume, so technically a stock with low trade volume, when then heavily gets shorted could be >100%)
Some further reading if you're interested:
https://www.investopedia.com/articles/01/082201.asp
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As a bonus, the wikipedia article on how banks "create" money by holding deposits and lending them out: https://en.wikipedia.org/wiki/Money_creation#Role_of_commercial_banks
A loan isn't a "listing on ebay." It's a contract that awards you one apple. The ratio is loans / apple, not listings / apple. There might be four loans and two apples existing, but no apples for sale at all.
You might compare someone who sublets an apartment. There is only one apartment, but there are two leases and three parties involved.
It may seem a bit odd that someone can borrow stock and then sell it. However, this isn't all that different from borrowing money and then spending it. Most people with a mortgage on a house don't have the money to pay off the mortgage right away. (They have a house, but it's not the same.)
Let's say a single apple was loaned out twice, so the ratio is 2. The apple will have to be returned twice to repay both loans. Since there is only one apple, only one return can happen at a time, and at most one borrower can actually have an apple. After the apple is returned the first time, the other borrower will need to somehow get it to return it the second time.
Right, I was mistaken in my analogy there because I had the formula for short interest wrong (and the analogy got away from us as I was also presuming that all eBay listings were listed by short sellers, but I didn't specify that). I hope it's obvious how my logic was valid but unsound based on that false premise of defining short interest incorrectly.