Let's imagine (purely hypothetical) that a hedge fund has shorted 100% or close to 100% of existing shares and has to cover them by Friday.

What happens on that Friday when the hedge fund has to cover? Surey the price would go up but:

  • is it true that they are forced to buy any stock ? What if the stock price is 100x ?
  • not 100% of the stock is available for sell anyway, regardless of the price, because some shareholders are simply not selling their share. What happens to these share ? Can the shareholders be forced to sell through their broker?

Assume that there are two traders, borrower (B) and lender (A) and both traders are at the same broker.

If (B) wants to short a stock, he borrows the shares from lender (A). If a lender (A) subsequently decides to sell his long stock, the broker will look at other accounts to borrow replacement shares so that (B) can remain short. If none are available, he will contact other brokers in an attempt to borrow replacement shares. If the stock is non borrowable, the broker will notify borrower (B) that he must cover the short position by 4 PM. If (B) does not do so, the broker will do a forced buy in.

The second situation in your scenario is the shorter's ability to maintain the margin requirement as share price increases. The margin maintenance requirement (MMR) is the amount of collateral (cash or marginable securities that must be maintained to support a short positions. It's 30% unless you're trading leveraged securities or your broker imposes stricter margin requirements. A margin call occurs if your account equity drops below the MMR. A simple example:

Short 1,000 shares of XYZ at at $13. The initial margin requirement is $6,500 which is 6,500/13,000. The equity is $6,500.

If XYZ rises to $15, the equity drops to $4,500 and the margin becomes 30% (4,500/12,000). If XYZ rises higher than $15, the shorter must provide additional margin. So it is impossible to hold onto the short position if the stock price is 100x. You'll be forced to cover or the broker will do it to you. Note that it is better to close the short position yourself because the broker will not work the position. He will just buy the shares in the after market when bid/ask spreads are usually wider, a disadvantage to you.

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    But what if the broker / shorter literally can't close the position because there is no more liquidity to buy back the remaining share ? – lezebulon Jan 27 at 0:39
  • @lezebulon - how can that happen? At least the guy who wants his borrowed shares back is willing to sell, why else would he want them back? – Aganju Jan 27 at 1:35
  • There is always liquidity. The question is, at what price? – Bob Baerker Jan 27 at 2:10
  • @BobBaerker what do you mean exactly ? that's the question I'm asking in my main question. What if I owned 100 GME stocks and I completely forget they are in my portfolio? How do the short seller recover it ? Can they just force me to sell even though they cant even contact me ? – lezebulon Jan 27 at 2:24
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    @lezebulon - I don't think that you understand the process. If you own the stock, no one can force you to sell it (ignoring mergers and buy outs). If you own the stock in a margin account (cash account stock cannot be loaned out) and you want to sell it, the burden of finding replacement shares is on the borrower's broker. It's his problem to solve. Only the short seller can be forced to buy the stock to cover. – Bob Baerker Jan 27 at 2:59

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