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Apple jacks prices to juice profits because $19.3B a quarter isn't enough
(www.theregister.com)
this post was submitted on 26 Oct 2023
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I agree that it doesn't rub me the right way. The mechanism is interesting though.
Essentially what it is is you borrow a share of stock of Company X from John Smith.
You now owe John Smith 1 share and you sell that share for current market value of $100.
You now have $100 but still owe John Smith 1 share of stock, and interest based on how long you take to give him his stock back.
The stock now drops to $10.
You buy 1 share of stock for $10 and return the stock back to John Smith as well as some interest.
You now have a net +$90 (minus some interest) you didn't have at the start of this. Voila, profit from stock going down. John Smith's share is worth less now, so he loses out.
Why would John loan someone a share of his stock? Well if it maintains it's value or goes up, then it's you who lost because you owe John a share that you have to purchase for the same or more than you got for it, plus interest too.
The heart of the mechanism is loaning stock, aka loaning property of value. So preventing it might be tricky.
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.
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.