One share can be shorted multiple times. This needs to stop.

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In light of what happened with Gamestop and AMC's respective stocks, there will be lots of hearings and calls for reforms in short-selling. What I really hope is that predatory hedge funds and their lobbyists don't get their way and undo SEC rule 204, which regulates the close out requirements for shorts- i.e. when a short seller is on the hook to actually buy a stock they borrowed. 

Currently, short-sellers are forced to deliver on their short sale transaction by no later than the beginning of regular trading hours on the settlement day following the settlement date. The predatory hedge funds will call for this requirement to be relaxed to give short sellers more time to buy the stock and close their positions. They will argue that giving short sellers more time will reduce the rush to buy back the shares and help avoid a short squeeze. Giving them more time will only enable them perform these charades on many more good companies - they almost destroyed Tesla not so long ago. 

What needs to be reformed is preventing the same share from being shorted multiple times. This is one of the primary reasons why GameStop short interest exceeded 140%.

I know that float doesn't include everything that is outstanding. There are restricted stocks that are held by institutions, investment funds, board members etc., and these don't float on the exchange. A short seller could borrow shares from these institutions, so it is possible for shorts to exceed float. However, in GameStop's case, the total outstanding shares were lower than the number of shares sold short. This happened because a short-seller (A) could borrow a share, sell it to someone (B), B's broker could then lend the same share to another short-seller (C) to sell it short again. This needs to end. Multiple people cannot own the same one share. 

I know short selling is a vital part of the ecosystem: it protects us from overpriced stocks, and protects us from pump and dump actions. Melvin Capital, Citadel and the other predatory hedge funds involved in GameStop's short sale were expecting GameStop to go bankrupt, meaning they'd never have to cover (return the shares). That's why they kept shorting the stock even when shorts exceeded the number of outstanding shares. 

These punks had it coming. They can't sell what doesn't exist. I hope the SEC identifies this as one of the major gaps in existing securities laws and rules.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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