Short squeeze: a serious question...

Discussion in 'Trading' started by Option Trader, Jun 15, 2008.

  1. People seem to get excited (right or wrong) when they see the short position is a high % of float, i.e. that there are so few available shares that there's bound to eventually be a short squeeze.
    I have a question on this assumption: if the float is 10 million shares, couldnt shorts have 2 accounts by the same broker, in one account they are short even 20 milllion shares, and the other account they are long 20 million shares (i.e. they have sold to themselves) without any decrease in the 10 million float?

    If so, the shorts can & probably do deceive longs into believing they are in danger, when they really aren't--and the longs end up buying at real high prices before they are in for a big surprise.

  2. NoDoji


    Not sure where I originally found this tidbit, but it's interesting:

    "Short interest as percentage of float is one measure of the market's outlook on a given stock; a higher short interest ratio indicates more pessimism, because a higher proportion of a company's total float has already been sold short. The short interest and short ratio can be deceiving, however, when a company has many convertible securities outstanding and is perceived to be at risk, because convertible and options arbitrageurs will often sell the stock short to manage risk with their long positions in these other instruments. Technicians (Technical Analysts) interpret this ratio contrary to one's initial intuition. Because short sales reflect investors' expectations that stock prices will decline, one would typically expect an increase in the short-interest ratio to be bearish. On the contrary, technicians consider a high short-interest ratio bullish because it indicates potential demand for the stock by those who previously sold short and have not covered the short sale. A technician would be bullish when the short interest ratio approached 5.0 and bearish if it declined toward 3.0.”
  3. Good stuff, but it doesnt answer my question.
  4. with off exchange dark pools, who can be confident of the true short interest..

    why should 2 accounts make any difference since shares must be borrowed from inventory to sell short, no matter where it sits.

    now naked short selling (an industry upon itself in Canada) is always hanging around. I haven't heard of a naked short interest prosecution to hit the papers.

    the SEC is nowhere to be found on the issue.
  5. There are many games in the stock market but I don't think this is one of them. What you described is much more easily accomplished by naked shorts. They start shorting a weak company, get longs excited about the lower prices and possibility of short squeezes. Then they naked short some more! Flooding the market with endless shares in exchange for real cash.

    The hope is you will ruin any chance the company has at raising capital via stock sales and will eventually go bankrupt so the shares never have to be re-bought.

    Of course if the company has a strong business model and real profits, naked shorting would ultimately fail. This is why naked shorting should be legal!
  6. Ask yourself this: Is the situation described above any different technically then 2 individuals, one with a long and the other with a short position? From the brokers, and therefore market standpoint, theres no difference between the situation described and 2 individuals with different direction of positions. Unless both positions were used from the same pool of cash, it is most likely indistinguishable and therefore irrelevant in theory, since its no different from a hedging position within the stock.
  7. Actually, you are right, there is no difference between the both, and therefore my point becomes bigger. If there are 10 million shares float, it is possible to borrow against that 10 million shares, which now means people can buy 20 million shares, which then enables another 10 million short, which means 30 million longs, etc. etc. I.e. 10 million float can have 30 million shorts and NO naked shorts at all!! The condition is of course that the shorts are able to locate by which broker the shares are located so they can be borrowed against. And since the shorts typically hire the specialist to work in conjuction with them (i.e. prime brokerage services) and the speciliast is privy to know where the shares are being held (e.g. Timber Hill, Penson, etc.), then it seems to me one certainly must be careful (even by a strong stock) to not get too excited about big shorts relative to float.
  8. cant find the reference, but I believe a Canadian company tried a buyout for all the shares (60 million) of company X and 80 million shares were tendered...

    the hazards of naked short selling..

    the extra 20 million shares and the holders had to be wondering...
  9. One of the great short selling stories is from 1993 about LTV.

    "No, the Chicago Stock Exchange doesn't like Leon Greenblatt--and it's not just because of his, well, unconventional personal style. Three years ago, at age 33, Greenblatt did something that brought down upon him the kind of regulatory wrath--a $6 million fine--that is usually reserved for insider traders and penny-stock peddlers. Greenblatt provoked the Chicago exchange's ire during an audacious arbitrage play on the shares of bankrupt steelmaker LTV Corp. Greenblatt sold more LTV stock than actually existed, replacing it with cheap warrants--and reaping a $27 million profit in 22 trading days. So far, he has gotten away with it--and won a little-noted legal victory in the ongoing war between longs and shorts.

    In LTV, Scattered found a huge anomaly: The company had announced a plan of reorganization under which its existing stock would be replaced by new stock. Stockholders received warrants entitling them to purchase some of the new stock at a price of about 3.2 cents per share. Even after the plan was confirmed, the old stock traded at an average of 18 cents. Since the warrants greatly outnumbered the existing shares, Scattered kept selling stock and buying warrants until it had sold 180 million shares--58 million more than existed."
  10. It doesn't really matter. The key to finding a short squeeze is high short interest and a rising price pattern. If the stock is falling like a rock, the shorts are typically right and will support their conviction.
    #10     Jun 15, 2008