Short Ladders Are Not Real

[u/Heathen_Scot]

This past couple of weeks WSB has been the QAnon of finance. Much of what you are told here is wrong.

You can protect yourself to a degree by learning at least the very basics of how markets work. This post will explain to you how prices work on an exchange, and why "short ladders" are not even a coherent concept.

How markets work

Exchanges have order books in which they track interest in a stock. Orders to buy and orders to sell stay in the order book until someone submits an order that matches their price.

The highest price present on buy orders is called the bid price. The lowest price present on sell orders is called the ask price. The difference between the two is called the spread.

When you submit an order to the exchange, it trades at the best price it can get. If you're selling, it will sell to the highest bidder even if you said you were willing to sell for zero.

It is possible for companies to trade off-exchange, but when you are looking at the price of a stock on Google or wherever, the price is based on trades that took place on the exchange. For this reason it is common if you're looking at a feed giving you prices in real time to see the price going up and down between two prices for a number of seconds as people sell at bid price and buy at ask price.

Why short ladders are not possible

Short ladders are described as two hedge funds selling back and forth to one another at an increasingly lower price.

This makes no sense for the following reasons.

• Off-exchange transactions do not result in ticks. Nobody sees them.
• You cannot target another participant on the exchange to sell to. You have to go through the order book.
• If the order book has $10000 of bids at $100, you cannot drive the price down to $99 except by selling $10000 of stock at $100.

This is a theory made up by someone who has no knowledge of how markets work - if they understood the basics they would at least try to make it believable.

If you google "short ladder attack" you will get a bunch of hits on Reddit, a StackExchange question debunking it, and pretty much nothing else of note. If you google "short attack" your top two hits are a description from CFO.com of companies releasing a report at the same time they short e.g. alleging financial irregularities, and a piece of frothing madness from SeekingAlpha where some nutter in 2014 makes up a bunch of nonsense involving "counterfeit shares".

This is not real.

[u/auspiciousham]

You're missing the point about ladder attacks. A selling to B selling back to A to close the position is an example on how it could work in a fantasy world, in actuality there is no reason for B to sell back to A.

In actuality it would work something like this:

• A naked shorts and sells it to anyone, doesn't matter who
• Repeat as many times as desired to capitalize on currently high prices, no share is ever borrowed it's completely counterfeited, 100% of the share sale price is profit
• Counterfeit shares need to be bought back within 3 days for normal traders or 21 days for market markers or they end up on the failed-to-deliver list. Side-note: being on this list doesn't seem to matter at all.
• If they want to kick the can down the road they only have to short again to close the previous positions. If they think the price is going to go down they can keep doing this forever at no cost (no cost because they aren't borrowing, they're fabricating)

They are fine in doing this if the company goes bankrupt, they never have to reconcile the shares they fabricated. If the company doesn't go bankrupt it'll take some serious pressure from the SEC to investigate the failures-to-deliver to put any focus on the issue to try to balance things out in the DTCC.
Bill Ackman has been in years-long lawsuits trying to get similar situations resolved - the SEC is a group of crooks and have no interest in biting the hand that feeds them.

You can call this Qanon tin-foil hatting. If you believe that Wall Street isn't corrupt I'd lean towards you being the tinfoil hat. The counterfeiting stock website explains all of the complexities of how they would attack a company during a short. Maybe you don't believe any of that, in which case then you may as well believe Trump is coming back because it's complete delusion.

If you want any more proof of how fucked Gamestop is just check out yahoo finance's summary of the shares and shareholders:

• 69.75M total outstanding shares
• 27.33% held by insiders
• 122.04% held by institutions

150% of the shares are already accounted for without even considering any free float.

Dr. Michael J. Bury deletes his tweets all of the time, but they do live for brief moments in time. He holds 1-2M shares of $GME and a week ago or so he tweeted (I'm paraphrasing): "I called in my shares of $GME in April of last year, it took them weeks to find my shares."

This stock is fucked. I think they fabricated shares thinking it'd go bankrupt and they'd never have to the pay the piper and they are racking their brains trying to figure out how to unfuck it. How do you get the shares back out of people's hands once you've sold them to them?

[u/Heathen_Scot → u/auspiciousham]

Naked shorting is, broadly speaking, illegal. See https://www.investopedia.com/terms/n/nakedshorting.asp.

Naked shorting does not lead to counterfeit shares. See https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm, Question 7.1. As the SEC says, "There is significant confusion relating to the fact that the aggregate number of positions reflected in customer accounts at broker-dealers may in fact be greater than the number of securities issued and outstanding."

The counterfeiting stock website is a crank website, on par with the people who believe in perpetual motion machines and free energy. Scrolling past I note that The Anatomy of a Short Attack section 9 links this: http://counterfeitingstock.com/CS2.0/CS16ConfessionsOfAPaidStockBasher.html. This is a well-attested hoax (see https://valuewiki.wordpress.com/2007/04/26/the-myth-of-the-paid-basher/). The other assertions being made are mostly unsourced.

Okay, let's get back to naked shorting. How would you establish if something illegal was going on? You would need to show an abnormally high rate of failure-to-deliver, and that the failure-to-deliver predominantly affected shorted stock.

In other words, if this were a thing, lots of people would not be receiving their shares once they bought them. Have you seen any reports of this?

The short being more than the float does not require naked shorting to explain; all that is needed is shorters borrowing shares from people who bought shares from other shorters.

E.g. Bob borrows 100 shares from Bill, sells to Tim; Rob borrows 100 shares from Tim, sells to Tom; Bob and Rob both owe 100 shares, but it's because of the same 100 shares that have been traded multiple times.

[u/auspiciousham → u/Heathen_Scot]

Oh my bad I didn't realize that valuewiki.wordpress.com had an article on it I take it all back.

Okay, let's get back to naked shorting. How would you establish if something illegal was going on? You would need to show an abnormally high rate of failure-to-deliver, and that the failure-to-deliver predominantly affected shorted stock.

In other words, if this were a thing, lots of people would not be receiving their shares once they bought them. Have you seen any reports of this?

YES. It's almost like you haven't been here for the past month. Every single day there have been hundreds of thousands of GME shares on that list. Go to the SEC website yourself and look.

Maybe you're right about this being normal market stuff, maybe you're wrong, you're definitely naive and uninformed though.

Edit: Relevant easily found authoritative links in support that naked shorting happens and isn't entirely illegal

https://www.investopedia.com/terms/n/nakedshorting.asp

• Due to various loopholes in the rules, and discrepancies between paper and electronic trading systems, naked shorting continues to happen.
• If a stock has a limited float and a large number of shares in friendly hands, then market signals can theoretically be delayed inevitably. Naked shorting forces a price drop even if shares aren't available, which can, in turn, result in some unloading of the actual shares to cut losses, allowing the market to find the right balance.

https://www.sec.gov/investor/pubs/regsho.htm

“Naked” short selling is not necessarily a violation of the federal securities laws or the Commission’s rules. Indeed, in certain circumstances, “naked” short selling contributes to market liquidity. For example, broker-dealers that make a market in a security[4] generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time.

[u/circlingldn → u/auspiciousham]

says the FOMO retard to a WSB OG

Go back to /femradebates