Selling is relinquishing ownership of something in exchange for money. The key thing here is that you own the stuff that you sell.

Short-selling, on the other hand, is selling stuff that you don’t own.

the mechanics

When you enter a sell order, the first thing your broker does is to check to see that you own the stock and in the account where the sale is to occur. If the stock isn’t there, and if the broker has no reason to believe the stock will be in the account on settlement day, the sale won’t happen.

For professional short-sellers, this is usually not a big issue. The would-be short-seller arranges for the broker to borrow the stock in question. Stock lending is a big business, with most institutional equity managers participating as lenders. The borrower puts up collateral and pays a fee for the loan. The fee involved varies based on the scarcity of the issue in question.

As things stand today, a trade in the US that takes place on Monday (meaning the buyer and seller agree on terms on that day) settles two trading days later (meaning the securities and the cash officially change hands then). So in reality, the broker who is carrying out the sell-short order doesn’t have to have the stock on hand right away. He has two days to arrange the stock loan needed to settle the trade. As of this May 28th, however, settlement in the US is going to shift to trade date +1 rather than the current T+2., making it more difficult, I think, to short stocks that are closely held or which have low trading volume.

hedge funds

A generation ago, hedge fund strategy was just that, hedging. The goal would be that the fund would have no net exposure to the stock market. It would get there by funding all of its long positions with an equal amount of short-selling–meaning it would have no net exposure to the ups and downs of the overall stock market. Today, though, hedge fund has lost its original meaning; it just means private + not long-only. Why? I don’t know. My only thought is that the long-short paradigm demands a very high level of skill.

“naked” shorts

This means shorting a stock without owning/borrowing it. It’s illegal to do in the US. And it’s what Trump Media and Technology Group Corp (DJT) is saying is behind the precipitous fall of its stock over the past month. Hard to understand how this can be the case, though. Also, DJT is reported to be one of the most expensive stocks to borrow, which implies to me some combination of high demand and low availability of shares.

Gamestop (GME), an epic short squeeze

GME is still around, and selling for about $10 a share. During early 2021, a “meme stock” rally pushed the stock from ~$2 a share to $120 or so in less than a month. Three factors made this short squeeze successful, I think: the stock was illiquid; short interest was very high; and the shorts were concentrated in one place, Melvin Capital.

I know almost nothing about Melvin, but I imagine its thinking was that GME’s business was dying and the firm would sooner or later be forced into bankruptcy. If so, its stock would then become worthless, and Melvin would make an immense amount of money by closing out its short position (i.e., buying back the stock it had borrowed and then sold) for pennies.

What the meme stock rally organizers understood–and Melvin hadn’t–was purely tactical, I think. If they could get the stock moving up to, say, $10 a share, the owners of the stock lent to Melvin would most likely begin to call their shares back so they could sell. That would “squeeze” Melvin, which no longer had them. The firm would have to go back into the market as a buyer–and an aggressive buyer, at that–as it rebought the shares it was being required to return. Of course, the callbacks would also begin to snowball as the price went up, putting ever more upward pressure on Melvin to buy back GME.