Clarify: How was greater than 100% of GameStop shares trimmed?

© Reuters. FILE PHOTO: FILE PHOTO: Trading information for GameStop is displayed in the Robinhood App

By John McCrank

NEW YORK (Reuters) – One focus of a US House of Representatives panel on Thursday is likely to be the role of short selling in the GameStop (NYSE 🙂 market mayhem.

Executives at trading platform Robinhood and hedge funds Melvin Capital and Citadel Securities are grilled after the retail-fueled trading frenzy that sparked wild swings in GameStop and other sharply shortened stocks.

Short sales, the details of which are included in the memorandum https://docs.house.gov/meetings/BA/BA00/20210218/111207/HHRG-117-BA00-20210218-SD002.pdf about the hearing, can be a positive move as it is Can be used in hedging positions to more accurately assess stock prices and detect frauds such as Enron and Theranos.

Vlad Tenev, chief executive officer of broker Robinhood, recently pointed out that some of the stocks involved in the "meme stock" rally were cut by more than 100%, meaning more stocks were cut than were available for trading were.

"I just think that's pathological," he said late last Friday on the all-in podcast https://www.youtube.com/watch?v=HopEdff0RCU. "You have this situation that could destabilize the financial markets."

HOW DOES SHORT SALE WORK?

Typically, shorting a stock is a bet that the stock price will fall.

Short sellers borrow stocks from brokers and then sell them on the market, with the agreement that they will buy back the stocks and return them to the lender at an agreed time. The stocks can come from the brokers' own inventory or from customers who have allowed the brokers to borrow their stocks.

When it is time to return the shares when the share price has fallen, the short seller can buy back the shares at a lower price than they originally paid for them, making a profit.

If the price has risen, the short seller must buy back the shares at the higher price, resulting in a loss.

In the meantime, the short seller pays the lender interest on the value of the stock, thereby generating additional income for the lender.

Is It Risky To Borrow Stocks?

Not really. The borrower deposits collateral, usually https://www.interactivebrokers.com/de/software/glossary/content/glossary/shortsale/collateral.htm 102% of the settlement price of the previous day. The borrower can also reclaim the shares at any time.

How can more than 100% of the shares in a company be cut?

Once the short seller has borrowed the stocks from the lender and then put them back on the market, the new owner of the stocks can borrow them like the previous owner and has no idea that they are on the other side of a short sale.

The processing time is two days after the transaction. During this time, the same shares can be borrowed again and again. On paper, this enables more than 100% of a stock's float to be trimmed.

According to data from financial analyst S3, GameStop's highest short interest on Jan. 4 was 141.8% of its free float.

S3 recently argued in a research report that the traditional method of calculating the float percentage is flawed because it uses outdated data. US investors are required to mark their stocks as short, and regulators report these numbers twice a month with a 10-day delay, S3 said.

Since the GameStop saga, there has been a call to improve transparency on short sales through more frequent reporting.

What is a short press?

When the price of a sharply shortened stock goes up, short sellers are forced to buy back the stock at higher prices to close out their positions, driving the stock price even higher.

According to financial analyst Ortex, short selling stakes in GameStop hedge funds totaled $ 12.5 billion in January.

ARE THERE RESTRICTIONS ON SALE?

Yes. In 2004, the US Securities and Exchange Commission banned naked short sales. This is the practice of short selling before borrowing, except in some cases, such as when a market maker is providing liquidity.

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