|
|
Post by brentie on Oct 19, 2015 16:59:31 GMT -5
Income rate has changed on your loaned securities
Thank you for participating in Schwab's Securities Loan Fully Paid (SLFP) program. We're writing to let you know that the income rate has changed for the following securities loaned to Schwab through the SLFP program: Security Name Security ID Old Rate New Rate MANNKIND CORP MNKD 28% 30% Income rate changes for a loaned security are most frequently due to fluctuations in the supply and demand for that security. WTF? Does this mean demand to borrow has increased yet again? Fidelity just raised their rate to 32%. |
|
|
|
Post by tayl5 on Oct 19, 2015 17:28:01 GMT -5
The simple answer is naked short selling is illegal. I know there are situations where market makers and perhaps some institutions selling through mechanisms like "dark pools" etc. have a little extra time to match up shares sold short with shares borrowed, but for the rest of us, the shares have to be available to borrow before we are allowed to sell them short. Thanks, tonyz. I figured if you or I wanted to naked short from our retail brokerage account, we wouldn't be given the option. The places with more flexibility and ability to game the system are the issue. Assuming that the posters who add up the share count and reach a total well above the nominal float are correct, some funny business must be going on. I'm thinking that one alternative to shorts stockpiling borrowed shares for another bear attack would be if they were using the shares to cover deals from previous actions that would otherwise be reported as "failed to deliver". If anyone at the SEC is paying attention, that could attract some unwanted attention. |
|
|
|
Post by mssciguy on Oct 19, 2015 17:34:58 GMT -5
tayl5 MNKD stock has notoriously appeared on the SHO list many times, repeatedly and usually seemingly very clear price manipulation (which is illegal). Do a google search, you'll read all about. Reported to SEC dozens or hundreds of times by MNKD longs (including myself). Until the SEC is not staffed by revolving-door GS staffers, including in the enforcement division, we may not see much happening here (unless the illegal actions are perpetrated by foreigners or immigrants, in which case they are sometimes severely penalized -- outsiders are fair game apparently). Sorry, I have to vent occasionally, and sadly, it's all verifiable truth. No foil hat required.
|
|
|
|
Post by dreamboatcruise on Oct 19, 2015 17:38:03 GMT -5
The simple answer is naked short selling is illegal. I know there are situations where market makers and perhaps some institutions selling through mechanisms like "dark pools" etc. have a little extra time to match up shares sold short with shares borrowed, but for the rest of us, the shares have to be available to borrow before we are allowed to sell them short. Thanks, tonyz. I figured if you or I wanted to naked short from our retail brokerage account, we wouldn't be given the option. The places with more flexibility and ability to game the system are the issue. Assuming that the posters who add up the share count and reach a total well above the nominal float are correct, some funny business must be going on. I'm thinking that one alternative to shorts stockpiling borrowed shares for another bear attack would be if they were using the shares to cover deals from previous actions that would otherwise be reported as "failed to deliver". If anyone at the SEC is paying attention, that could attract some unwanted attention. Why would this indicate funny business? Shares can be bought by longs, loaned to shorts, who sell back to longs... indefinitely. There is no limit to how many times the same shares can cycle around that process leading to larger and larger aggregate long and short holdings. At least I know of nothing that would limit it. |
|
|
|
Post by tonyz on Oct 19, 2015 18:04:45 GMT -5
Hi dreamboatcruise - The one step you forgot is there is no profit for the short seller until he buys back and returns the shares he borrowed. One thing that most experienced traders learn is that it is very risky to short illiquid stocks. His profit is the difference between what he sold it for and the price he can buy it back for. A $3 illiquid stock like MNKD can really move if the shorts all run for the exit door at the same. Not predicting, just stating a fact.
|
|
|
|
Post by tonyz on Oct 19, 2015 22:54:51 GMT -5
Anyone who wants to see what a short squeeze looks like check out weight watchers (WTW) today. More than doubled on the announcement that Qprah was going to take a stake and be involved with the company. 71 million shares traded vs avg vol of 750,000 shares and the float is only 57 million, 27% of the float was sold short. I like Oprah but I have to believe the short interest had a lot to do with the spike. Lots of panic buying and being forced to cover. Now if we can only get Oprah to buy a stake in MNKD and start using Afrezza.  Seriously though it does give an idea of what can happen if some unexpected good news hits a large short position. |
|
|
|
Post by tayl5 on Oct 20, 2015 2:32:03 GMT -5
Thanks, tonyz. I figured if you or I wanted to naked short from our retail brokerage account, we wouldn't be given the option. The places with more flexibility and ability to game the system are the issue. Assuming that the posters who add up the share count and reach a total well above the nominal float are correct, some funny business must be going on. I'm thinking that one alternative to shorts stockpiling borrowed shares for another bear attack would be if they were using the shares to cover deals from previous actions that would otherwise be reported as "failed to deliver". If anyone at the SEC is paying attention, that could attract some unwanted attention. Why would this indicate funny business? Shares can be bought by longs, loaned to shorts, who sell back to longs... indefinitely. There is no limit to how many times the same shares can cycle around that process leading to larger and larger aggregate long and short holdings. At least I know of nothing that would limit it. To make it simple for me, let’s consider a situation where I lend 1000 shares and you sell them back to me, I lend those shares too, and you again sell them back to me. My account says I have 3000 shares but only 1000 actually exist. Your account says you’ve shorted 2000 shares. If I then sold my 3000 shares, would anyone track which are real and which are synthetic? If I only sold 1000, would they connect those to the 1000 I originally lent or figure I still had 2000 and not sweat it? The brokerage is doing well charging the interest differential but if something dramatic happens, it sounds like the whole thing could turn into a bad game of musical chairs. As tonyz said, for you (the short) to see a profit you have to cover. Or maybe I’m the bagholder, since you have my money and I have 2000 counterfeit shares and pre-spike collateral for the shares I lent. Is the brokerage on the hook to make everyone whole? I'm thinking this system can work in a liquid market but in a illiquid market could go to hell fast. Maybe there’s a reason why loaned shares are no longer covered by the SIPC. |
|
|
|
Post by prmco26 on Oct 20, 2015 6:53:37 GMT -5
You present an interesting scenario - "It's 10:00PM Do you know where your children (shares) are?" At the end of this potentially explosive work-out, everyone may be scrambling and lawyered-up!
|
|
|
|
Post by dreamboatcruise on Oct 20, 2015 8:26:21 GMT -5
Why would this indicate funny business? Shares can be bought by longs, loaned to shorts, who sell back to longs... indefinitely. There is no limit to how many times the same shares can cycle around that process leading to larger and larger aggregate long and short holdings. At least I know of nothing that would limit it. To make it simple for me, let’s consider a situation where I lend 1000 shares and you sell them back to me, I lend those shares too, and you again sell them back to me. My account says I have 3000 shares but only 1000 actually exist. Your account says you’ve shorted 2000 shares. If I then sold my 3000 shares, would anyone track which are real and which are synthetic? If I only sold 1000, would they connect those to the 1000 I originally lent or figure I still had 2000 and not sweat it? The brokerage is doing well charging the interest differential but if something dramatic happens, it sounds like the whole thing could turn into a bad game of musical chairs. As tonyz said, for you (the short) to see a profit you have to cover. Or maybe I’m the bagholder, since you have my money and I have 2000 counterfeit shares and pre-spike collateral for the shares I lent. Is the brokerage on the hook to make everyone whole? I'm thinking this system can work in a liquid market but in a illiquid market could go to hell fast. Maybe there’s a reason why loaned shares are no longer covered by the SIPC. I think arguments can be made both ways as to whether shorting adds or subtracts from liquidity/volatility, and in reality it probably plays both ways at different times. Certainly the phenomena known as a short squeeze is real, and despite that I would love seeing one for MNKD, they are not necessarily good things for the market. If one owns a stock and keeps on top of their trading enough to sell right at a short squeeze spike you can make out like a bandit, but there are probably a lot of unknowing retail investors that buy into short squeezes near the peak and then get hurt by it. However, I really can't think of situations in any of our past turmoils where some failure in the clearing process related to shorting was a problem. One can arguing that shorting has helped unravel markets, from stocks to currencies, but the counter argument is that usually that is in situations where there is a strong case to be made that there are unsustainable bubbles or currency manipulations by governments that were doomed to fail eventually anyway. Yes, it is your brokerage that you lend to that is on the hook to return shares. It seems highly unlikely that a brokerage would causally or coincidentally become insolvent with a spike in MNKD. Perhaps one could come up with some example of a single stock that might be highly correlated with the overall market in an inverse fashion such that a share spike might coincide with a financial panic capable of making brokers insolvent, but I think you'd have to search for that situation. As stated, I've never heard of that being a problem even in the turmoil of 2008 panic. |
|
|
|
Post by dreamboatcruise on Oct 20, 2015 8:47:09 GMT -5
Speaking of squeeze... I suspect that is happening. Interest paid for loaned shares up and MNKD with significant rise on no "public" news and uncorrelated with broader market and IBB.
Just wish I had a crystal ball to know what a short term peak might be to trade on it. Alas, I don't have the time or experience to do that. So I'm simply a buy and hold when it comes to MNKD.
|
|
|
|
Post by tayl5 on Oct 20, 2015 9:10:30 GMT -5
DBC, thanks for your comments. I think the arguments for shorting and naked shorting need to be separated. The process of borrowing shares, selling them, then buying them back is legal and here to stay, regardless of the merits or lack thereof. On the other hand, selling shares that have not been properly borrowed, or the repeat transaction spiral you mentioned earlier that proliferates "shares", seem like an accident waiting to happen.
Does anyone know if the collateral offered by a brokerage increases in value with the value of the loaned shares? When MNKD shares rose from the low 3s to over 7 in the summer, did your collateral on your loaned shares stay at the level when you loaned them or go up proportionally?
|
|
|
|
Post by ezrasfund on Oct 20, 2015 9:21:13 GMT -5
At Schwab the collateral is adjusted every day after the close, and the cash is deposited into the lender's account (or more recently the cash has been subtracted from the collateral balance.) Another point is that short sellers pay interest on the current value of the borrowed shares, not the value when they borrowed.
|
|
|
|
Post by dreamboatcruise on Oct 20, 2015 9:35:25 GMT -5
DBC, thanks for your comments. I think the arguments for shorting and naked shorting need to be separated. The process of borrowing shares, selling them, then buying them back is legal and here to stay, regardless of the merits or lack thereof. On the other hand, selling shares that have not been properly borrowed, or the repeat transaction spiral you mentioned earlier that proliferates "shares", seem like an accident waiting to happen. Does anyone know if the collateral offered by a brokerage increases in value with the value of the loaned shares? When MNKD shares rose from the low 3s to over 7 in the summer, did your collateral on your loaned shares stay at the level when you loaned them or go up proportionally? I'm unconvinced that "naked" shorting has anything to do with the long term size of the short position. I think that is a short term issue. I could be wrong, but I don't see why interest on loaned shares would get to 30% and higher if long term naked shorting was happening on any meaningful scale. As for the spiral I described, I don't know what criteria would be able to draw the line as long as things are properly collateralized. There really is little difference between that and the idea that if I had really good credit I could borrow money from a bank, deposit it back into that bank and end up borrowing it again. Of course that doesn't happen because there is no money to be made in it. But it theoretically could happen, and would be limited by my credit rating and available collateral. The big picture limitation needs to be that loans are not allowed to accumulate so out of proportion with collateral and asset reserves that a credit/liquidity crisis ensues if there is a pricing dislocation... we need to listen to people like Sheila Bair when they start raising the red flags... perhaps even an Elizabeth Warren when they're talking about the issues of the financial system long before red flags are in order. |
|
|
|
Post by tonyz on Oct 20, 2015 10:04:14 GMT -5
Why would this indicate funny business? Shares can be bought by longs, loaned to shorts, who sell back to longs... indefinitely. There is no limit to how many times the same shares can cycle around that process leading to larger and larger aggregate long and short holdings. At least I know of nothing that would limit it. The brokerage is doing well charging the interest differential but if something dramatic happens, it sounds like the whole thing could turn into a bad game of musical chairs. As tonyz said, for you (the short) to see a profit you have to cover. Or maybe I’m the bagholder, since you have my money and I have 2000 counterfeit shares and pre-spike collateral for the shares I lent. Is the brokerage on the hook to make everyone whole? I'm thinking this system can work in a liquid market but in a illiquid market could go to hell fast. Maybe there’s a reason why loaned shares are no longer covered by the SIPC. OK I'll give it a try... Interesting mind game. You own 1000 shares and you lend them me to sell. Which I do. Since you are the only other person in the market, you buy them. Now I want to sell another 1000 shares short so I borrow another 1000 shares from you which in reality is the original 1000 shares. My account shows I'm short 2000 shares, your account shows you own 3000 shares. This is the ultimate short squeeze in the ultimate illiquid market. You demand the shares you loaned me back. I go to you and want to purchase the 2000 shares. We would have to unwind them 1000 shares at a time and you can demand any amount you want from me and I'm forced to pay it. If you look at weight watchers trading yesterday... that probably had something to do with 71 million shares traded when the float is only 57 million. |
|
|
|
Post by dreamboatcruise on Oct 20, 2015 11:02:44 GMT -5
tonyz... I don't think there is any reason it would need to be unwound in 1000 increments... but yes indeed it would be the ultimate short squeeze because I could basically demand any price I wanted from you. My asking price is "infinity"... or perhaps beyond if I'm Buzz Lightyear. I don't think there is any mechanism in the market regarding shorting to prevent such a scenario though perhaps a stock couldn't be publicly traded with such high ownership concentration. It would seem a fools errand to short in such a scenario... and perhaps in the current scenario of MNKD with such low float, unless you're damn sure that Afrezza will fail pretty miserably. I get nervous about my long position at times... but I sure as heck wouldn't want to be short even if my opinion about Afrezza were flipped. Though obviously some have made out like bandits doing so. They probably have much better information sources than I ever would to be able to time trading MNKD.
|
|
Seriously though it does give an idea of what can happen if some unexpected good news hits a large short position.