• jdeath@lemm.ee
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    1 year ago

    Perhaps also interesting is the fact that a loan never happens.

    Instead, a contract is sold. The contract is for an option to buy (or sell) 100 shares at a certain price (strike).

    So there is no loaning of shares, really. But the seller of an options contract has the obligation to sell (or buy) the shares at any time until the contract expiration date.

    Sometimes, market participants borrow the shares instead of owning them. This is what I consider the shady part. Certain participants get a long time to “locate” the shares and are given a lot of leeway to do so. Often in the name of liquidity, they will just sell contracts without even going through the trouble of borrowing shares. They are allowed to if they believe they can locate the shares later.

    This entire process allows for certain parties to basically create infinite shares from nothing. Believe it or not, this often gets abused. Money is basically siphoned from public companies in order to enrich Wall St.

    When the stock price moves too much, which would put the stock counterfeiters at risk of insolvency, trading is halted.

    • GaMEChld@lemmy.world
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      1 year ago

      Yeah, the problem sounds like we should be not allowing recursion, or regulating how many levels of recursion of allows for a reasonable level of liquidity and velocity of cash in an economy. Allowing for it to infinitely nest guarantees a bubble is going to pop somewhere eventually.