Business & Investment

GameStop: 100% short cell in stock.It happened in the Gamestop frenzy

New York: One of the focus of the US House of Representatives panel on Thursday seems to be the short-selling role at GameStop. market Mayhem.

Executives from transaction platform Robinhood Hedge funds Melvin Capital and Citadel will be grilled following a retail-led trading frenzy. GameStop And other significant short circuits stock..

The short cell, which contains details in this memorandum of hearing, is a positive move as it can be used in hedge positions, more accurately assessing stock prices and exposing fraud such as Enron and Theranos. May become.

However, broker Robin Hood CEO Vladimir Tenev recently pointed out that some of the shares involved in the “meme stock” rally were shorted by more than 100%. This means that more stocks have been shorted than there are tradeable stocks.

“I think it’s morbid,” he said in an all-in-podcast here late last Friday. “You fall into this situation, which can destabilize financial markets.”

How does short selling work?
Shorting stocks is usually a bet that the stock price will go down.

The short seller agrees to borrow the shares from the broker, sell them to the market, buy back the shares at the agreed time and return them to the lender. Shares can be obtained from the broker’s own inventory or from customers who allow the broker to lend the shares.

If the stock price falls when it is time to return the stock, the short seller can buy back the stock at a lower price than originally paid and secure profits.

If the price rises, the short seller will have to buy back the stock at a higher price, resulting in a loss.

In the meantime, the short seller pays the lender interest on the value of the stock and gives the lender additional income.

Is it dangerous to lend stock?
not really. The borrower will pledge collateral. Usually here it is 102% of the previous day’s settlement price. The borrower can request shares at any time.

How can I reduce more than 100% of a company’s stock?
When a short seller borrows stock from a lender and sells it back to the market, like the previous owner, the new owner of the stock is free to lend them and does not know they are on the other side. .. Short sale.

Settlement time is 2 days after transaction. At that time, you can lend the same stock over and over again. This allows you to short more than 100% of the stock float on paper.

According to financial analytics firm S3, GameStop’s peak short interest was 141.8% of the January 4 float.

In a recent research note, S3 argued that the traditional method of calculating float percentages was flawed because it used old data. According to S3, US investors need to mark a stock shortage, and regulators report these numbers twice a month, ten days late.

Since GameStop’s saga, we’ve been asked to improve transparency about short cells through more frequent reports.

What is a short squeeze?

When the price of a significantly shorted stock soars, short sellers are forced to buy back the stock at a higher price in order to close their position, further pushing up the stock price.

According to financial analyst Ortex, GameStop’s stock shorts cost a total of $ 12.5 billion in hedge funds in January.

Is there a limit to sales?

Okay. In 2004, the US Securities and Exchange Commission banned bare short-selling, the practice of short-selling before borrowing stock, except when market makers provide liquidity.

GameStop: 100% short cell in stock.It happened in the Gamestop frenzy GameStop: 100% short cell in stock.It happened in the Gamestop frenzy

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