Dr. Goodbomb speaks: why the shorts must cover
Greetings friends. Goodbomb here. I'm a brand spak'n newbie but I've been in this stock and followed it closely since day 2 of the RM. Many thanks to all the original gang for their hard work, endless explanations, constant calming of fears, and generally good to excellent sense of humor. I finally decided to break wind, I mean silence, and jump into this diverse discourse because, quite frankly, many of the new folks are freaking me out. I am very confident in this short play. What concerns me is that a bunch of folks are going to panic for no good reason and make this way harder than it should be. So please, please, please.......relax. Read below & smile, feel better, enjoy life, be nice to your wives and children and girfriends and pets. After all it's just money which doesn't by one moment of happiness (well, that's about all it buys).
In the last week I have noticed a question repeatedly being asked: what exactly will force the shorts to cover? I have read many responses (not all) and it seems some folks are still concerned. It seems the general answer is "they have too" to which others respond "why" followed by the reply "because they have to" and so on. I think perhaps I can share some things that might be of encouragement to the faint-hearted. But first a little background on me:
I'm a real Doctor but my name really isn't Goodbomb
I'm really smart, but I suck at stock trading (just started this summer- put several grand in a TD Ameritrade (note I did not say AmeriTURD & I will not tolerate such pottytalk from anyone- they have actually been very fair & helpful, especially since the AWYB trading halt- they have yet to give me cause for consternation, and in fact have provided just what I have needed)
I'm humble (very, very humble)
I intend to not suck forever at stock trading
I intend to make money on this stock
I may lose everything on this stock (If you can't take the pain, don't play the game)
So here it is. Unlike other posters with disclaimers, I personally guarantee at least some of what I say might be sortof true. I invite the experienced and wise among us to fill in the blanks and correct any details were I might be off a tad. If you are worrisome and uninformed, please don't question me because, quite frankly, I'm about to tell you everything I know.
Why the shorts must cover, by DR Goodbomb:
First of all there are two important things I think I learned: 1) all certs are physically stored at the CEDE (except those requested by stockholders for paper delivery?) and 2) all public stock trades are tracked by the DTCC (or DTC?). When I enter a buy order on a stock, my brokers name (TD AmeritradeNOTturd) or their agent (MM) is associated with it. When the sell occurs, CEDE logs the sale of X shares from your broker (say E-TradeNOTturd) to my broker (or you brokers MM to my brokers MM). In other words they have direct access to all public trades and keep track of who sold to who (or is it who sold to whom?). In fact they actually "hold" ownership of the stock and manage something like a gazillion dollars (a number bigger than I can count). The actual stock certs stay put at the CEDE, but ownership is changed and recorded electronically in real time (or near real time).
The DTCC knows if a given broker has shorted stock. FOr example they know how many shares of AWYB TD Ameritrade had at the biginning of the month, how many they bought and how many they sold since. If TD sold more than they had, then they are obvioulsy short. BUt I understand this happens all the time and there are a bunch of goofey rules and games and tricks that are used to keep everything floating along. For example, if a certain MM is short, he (or she) will just borrow them prior to them being "due" and pass the short to his buddy- around and around it goes- all within (or having the appearance of being within) the rules.
When the certs are recalled in the case of AWYB, the CEDE will phyiscally send (as in the mail or whatever) the stored certs (all the float minus any certs held physically by individuals?) to the TA. The DTCC will also look at who owns shares and who is short shares and let everyone that is short know that they are, well, SHORT. At that point, all shorts (anyone who sold more than they had) will be forced to cover. BY cover, I mean go buy the shares and cancel their debt. When they buy, the DTCC will show they have increased their shares until the plusses equal the minuses and all is good.
This all workes cleanly for the retail shorts (brokers, etc.) I'm not certain if the MMs can still play games. But recall that all transactions must ultimately go through the TDCC (even little IOU's written on yellow stickies passed from MM to MM) sooner or later must be recorded, else they are not transactions.
SO WHY MUST THE SHORTS COVER WHEN THE DTCC NOTIFIES THEM? Because if they don't, they will be fully identified. Their names will be passed on to the TA, or the company (Harvard), NASD, and ultimately the SEC, FBI, CIA, GOD ALMIGHTY (you get the point, I'm sure). For a broker or MM to "just say no" at this point would basically get them fired, or arrested, or shot or publically humilated or burned at the stake. And very few will through away their career or company for a few million dollars.
THe reason they normally get away with it is the ball keeps being passed from hand to hand. In total, there are still many shorts, but no one is ever on the hook because they just pass the ball around (remember the game of hot potato?)
So this play is definitely going to expose all short positions and result in convering.
Now one thing that does have me a bit confused is this: for the shorts to cover, the stock must be trading. But for it to be trading, the certs must be pulled and shorts notified. I suspect that they way this will work is that the shorts will be given an opportunity to cover for some period of time after they have been notified.
Well that is everything I know, and a few things I don't know. Again, you pro's among us please chime in and correct anything that needs it.
In summary, my friends: PLEASE DON"T FREAK OUT!! this is a real short. It may be prolonged. IT may get hairy. It may look like there is no covering for a while. People will continue to join in the conversation and raise concerns. Honestly, why anyone would by a stock and then start getting all chicken-like is beyond me. If we lose at this, then we lose at this. But at least go down having done your best, with dignity and courage. Don't let the smorts and grunts and headfakes of the MM linemen cause you to flinch. We have the ball, and they have no defense other than the grunts and snorts and headfakes. Go team.
God bless you all,
Goodbomb
