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Edit:

The question this was closed as a "duplicate" of while related and interesting, does not ask or answer the question I'm asking.

What it asks is what happens with regards to things like votes and dividends while there are outstanding long positions. One of the answers also covers what happens when a short squeeze forces short positions to cover when very little (but non-zero) stock is available for perchance.

Specific it doesn't cover the question of what would happens if shorts are some how force to cover their position when no stock is offered for sale.


Original question:

Basically a short squeeze, but even more so.

  • Person Z buys 10% of the float.
  • They offer to loan it to short positions (with some sort of obligation to return it by a fixed date).
  • The shot positions sell it back into the market.
  • Person Z buys another 10% of the float.
  • Go back to step 2
  • Repeat until Z is long by >100% of the float.

At this point there can be plenty of liquidity as 90+% of the stock is in owned by people other than Z. But what happens if Z then switches to doing nothing at all? They just let all the loan terms expire, collecting the returned shares but refuse to sell anything. Eventually they own all the shares, but someone still owns them more and there are none to buy... at any price.

Granted this is 100% hypothetical and almost surely wouldn't happen in real life, but if it did... ?


The closest situation that I could see actually happening would be a contract denominated in a currency that no longer exists (say it was in DEM before the Euro came along) with no provisions for anything else. But in that case both parties are motivated to resolve the situation. But in the hypothetical above, the long position doesn't care.

At a guess, some court would step in and either declare the long potion to be illegal, force a sale of shares at some set price, force the long position to accept something else of value or just declare the short positions bankrupt and liquidate them.

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  • Do the loans have terms? I was under the impression they didn't. – user253751 Jan 29 at 20:28
  • @user253751 From what little I've looked up, they can, even if not all do. But if that's not possible for some reason, all that is required for the question is a way for Z to obligate the short positions to be covered within some time interval. – BCS Jan 29 at 20:31
  • Some incorrect info. Every time Z buys 10%, he owns more of the float so 90+% of the stock cannot be owned by people other people. There is no loan term with shorting. Borrowers pay a daily borrow rate times the price of the shares that day (both fluctuate). There is no obligation to return it by a fixed date. If Z buys 100% of the float and assuming there are no other shorters, he will own 50% of the outstanding shares (total float plus synthetic long positions). – Bob Baerker Jan 29 at 20:54
  • I suspect there is an issue around the term "own". I didn't know the proper term, but "can sell immediately" is the defining criteria for what I'm referring to. If I buy a share and then loan it out, I can't sell it without getting it back first. And the people who can sell, not those who can't, will drive liquidity, which is the point I was getting at – BCS Jan 29 at 21:13
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    Phil Falcone did roughly this in 2012, and was convicted of securities fraud as a result: en.wikipedia.org/wiki/… – Nick Alger Jan 29 at 22:35