Technically the tesla shorters lost themselves a billion $... But probably not in reality...
Here's a thought:
Say I'm an insto; call me X.
X borrows 1 million shares from Y.
Y says great, that'll cost you some fee and I want them back in a month. Y is happy because they have a virtually no-risk position in this little game.
I short sell these shares for avg $10 each. $10m.
A month goes by, price is now $15. Bugger. X has to repay borrowed shares. Option 1 is to buy on market; $15m; hand back shares to Y; X just lost $5m plus fee.
Option 2 is to borrow 1 million shares from Z; hand those shares back to Y. All good, X takes option 2.
Z is happy, they get a fee and want their shares back in a month. Y is happy, they got "their" 1m shares back, and a lending fee.
X is super happy, all it cost X was the fee to Y.
The market thought X had to buy on market to cover, and that this "mistake" had cost X $5m.
Wrong.
Now, if the same thing happens again, X just borrows another 1m shares from someone else (or perhaps even from Y again! Because Y knows X is good for the loan!) to pay back Z the 1m shares.
X keeps this up until the share price drops relative to their latest short sell price, in which case they buy up cheaper to cover. As long as the average cover (buy) price is lower than the average short (sell) price, they are ahead. Fees considered also of course.
Rinse repeat, rinse repeat, rinse repeat.
Add in some conveniently gloomy market and company analysis and that'll help their case... Analysts - get on to it!
The only way they can lose is if the price just keeps rising steadily, with no opportunity for them to pick up some downward pips. Is that possible...? Nah, they just double down on the shorts and trigger more stop losses and force cheaper shares to become available on market!
They essentially cannot lose. They are not relying on an endless supply of borrowed shares, they just re-borrow and repeat!
Q's:
Do they do this?
Is it legal?
The tesla example that Thesi posted mentioned fees of 1% rising to 3.5%; due to the volume and comments about daily costs, it appears these are annualised borrowing fees. Not much really. Sounds affordable...
So, perhaps those 60 million borrowed shares don't even need to be bought back to be returned... They just borrow more and continue the game. The actual share price is therefore meaningless to them, unless they can trigger an exit from retailers or others and therfore cover on market to make money. Share price stays flat or rises; no problem, costs them nothing except the 1 or 2 % fee?!
I think we are perhaps overestimating the effect of short covering on the share price... The above method would allow them to cover on market at their leisure (no time pressure) in order to eventually wind down their overall borrowed amount of shares... They can do this on the dips;
No rush, no fuss. In other words, they are (may be) under no stress to cover their short positions on market just because the share price is rising...
Would be keen to hear from others on this concept...
Surely someone here must've worked for one of these insto's at some point?! Or are they all sworn to secrecy or something?!
Where are the "whistleblowers" who can shed some light on this for the rest of us?!
Cheers
Expand
