Shorts explained
Date: 97-09-08 21:39:30 EDT
From: KMukhar
SCHONTZY wrote:
<< My question wasn't about the shorts. I know how they work. My question is about calling in more certificates than exist. 2.9 million exist and 3 million call in by the cartel? 100,000 won't come to the customers who bought them??? And if all 2.9 are being held by the cartel then the stock will not trade. Correct???? In order to buy a stock someone has to sell a stock??? >>
This is an interesting question. Let's simplify the numbers a little. Suppose there are only 100 shares available, but that because of naked shorting, there are 3 shareholders own 100 shares each (300 total). Now all three owners call in their certificates. The transfer agent delivers the first 100, but now has no more to deliver. Someone now goes to the market maker and says, "You sold 200 shares of stock, cough it up." What the cartel expects to happen at this point is that the market makers will try to buy stock on the market, and thus drive the price up. For the market makers to be able to cover, someone has to sell their stock.
Now assume that the owner who possesses the 100 existing shares sells their stock. The market maker buys it, delivers it to the transfer agent who delivers it to another owner. Since one owner sold, the demand for certificates is now 200, 100 have been delivered, and the market makers still have to cover 100 shares. Theoretically the price goes up. The owner of the certificates sells, demand for certificates is now 100, and those 100 are delivered to the final owner.
What if the person who chooses to sell is one without possession of the certificates? Well, the market maker doesn't receive the certificates, since none were given to this owner in the first place, but since that owner sold, the demand for certificates drops again. So essentially the market maker buys back the non-existent shares and they disappear.
The truly interesting question is the last one you posed: what occurs if NO one decides to sell? In this case, your guess is as good as mine.
KMukhar
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From the AOL stock boards on OVIS....
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