Naked Shorting is Illegal: So How the Hell was GameStop 140% Short?

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by Mish Shedlock, The Street:

GameStop was 140% short. That is illegal. So how did it happen?
Naked Shorting Explained 

Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market. Despite being made illegal after the 2008–09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems.

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The above is from Investopedia What is Naked Shorting?

What’s Going On?

  1. It is illegal to be naked short in excess of float except for market makers who have to take the other side of a trade.
  2. It was not the market makers who were naked short. It could be in theory, but not in this case, at least not yet.
  3. Hedge funds wanted to short and they have to borrow stocks to do so.
  4. The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.
  5. It should be the responsibility of the brokerages and market makes to not let hedge funds get 140% short. But they did, and I believe on purpose.
  6. Since the public cannot be 140% long, except via options, who was effectively long the other 40% of the shares?
  7. The brokerages and the market makers. To get even more shares for themselves, they restricted trading.
  8. So while these Redditt traders did well, the market makers also gained immensely on the meteoric rise. The more the merrier. They screwed the hedge funds big time and purposely so.
  9. A side artifact of points #1 and #2 is when the shorts are all squeezed out the market makers are the only ones who are short.
  10. When that happens, the bids plunge and the market makers cover lower.

Rule #1 The Casino Always Wins

The market makers benefit on the meteoric rise. They will be the big winners in the collapse that’s about to happen.

Rehypothecation Role in Naked Shorting

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