Strategy ape here.
I’m deep into Part 2 of The Sun Never Sets on Citadel (HOLY SHIT IT’S GETTING WILD), and in light of dlauer’s awesome post today I’d like to clear up some of the terms we use.
I see many apes throwing around the terms “synthetic” shares or “rehypothecated” shares interchangably. They are NOT interchangable – they do NOT all mean the same thing. Here is what they mean:
SYNTHETIC
A synthetic share (or any synthetic position) is using a couple of options to mirror the price of a stock.
- HOW: 1) You
buysell a put. 2) You buy a call. 3) You do 1+2 in a way that they “mirror” the price of the stock. Meaning: a $1 gain on the stock = $1 gain in your position, a $1 loss on the stock = $1 loss on your position. - WHO: Hedge Fonds and other market players who want to adopt a position but don’t want to own the stocks. They don’t care about voting, and maybe they don’t want to declare a position or affect the price of the stock with their purchase, or whatever. Also the options position is generally cheaper.
- Additional features: you can pair it with a bond, if you’re really into cosplaying your options to make them look extra stock-like.
- Do Apes have these?: NO.
- SO… this is like MEGA BLOCKS. Nobody believes these are Legos, except people who know nothing about Legos.
PLEDGED
A share that a Market Maker says it will get from the market. The DTCC says a pledged share is real, so it’s real.
- HOW: 1) A MM takes an order for a share, and fills the order even if it has no share yet. 2) The exchange and DTCC want you go have confidence in buying, so they back up that pledge and say that it’s a legitimate share. They are the final say. It’s a share.
- WHO: Market Makers make these. This is a legitimate practice, nothing shady – if done correctly (I’ll explain in a minute). But they CAN be abused. MMs are known to “rent out” these shares to Hedge Fonds (*cough* Citadel and Melvin *cough*) at the expense of investors.
- Additional features: can make a real share disappear IF the MM buys a share off the market and closes out the pledge (basically tells you it’s a real share, then takes one off the market to even it out). OR becomes an FTD if the MM is late in closing the pledge.
- Do Apes have these?: YES
- Are these naked shorts?: NO – but if the MMs neglect them they will be! (will always be a real share to Apes tho)
- SO… Your mom calls to tell you to get the chicken out of the freezer. You say you will. That is the pledge. Whether or not you do it, well… In themselves, pledged shares are not bad. The US markets are really attractive because of the liquidity provided by MMs. That said, you need a level of integrity in closing them out which the MMs and DTCC haven’t demonstrated yet, sooo…
FTD
A share that a MM said it would get BUT DIDN’T, the lying shit. FTD means “Failure To Deliver”.
- HOW: 1) MM creates a Pledged share, 2) Don’t close it out. 3) Waits until the T+x timeframe is completed.
- WHO: Market Makers, or anyone who “rents” out Pledged shares from them.
- Additional features: FTDs have another T+x expiration date that afterward become counterfeit shares, straight up. So information on FTDs is gathered into reports for FINRA, etc.
- Do Apes have these?: NO (this is MMs & DTCC’s problem, not yours)
- Are these naked shorts?: YES, oh hell yes.
- SO… you didn’t get the chicken out of the freezer, and you hear your mom coming home. This is where they become naked shorts. This is why the GME cycle is tied to FTD expirations. This is why they are doing weird things to not have these shares reported – because it shows how bad the naked shorting is (which can trigger a squeeze). They DO NOT want their mom to know the chicken is still in the freezer.
HYPOTHECATED/REHYPOTHECATED
A share that has been borrowed, and maybe RE-borrowed (that’s the “RE” part of “Rehypothecated”).
- HOW: 1) Borrow a share from James. 2) Sell that share to Michelle. 3) Re-borrow that exact fucking share from Michelle. 4) Sell to Chris… and so on. (Note: every time you borrow you create an “IOU”)
- WHO: Anyone who is fucking crazy enough to create multiple IOUs, and their broker lets them do it.
- Additional features: Removes the share rights from the lender. Lending out shares might be done by the broker (not by James, Michelle…). Borrower pays daily interest on each IOU. Aggregate short volume gets tallied into fun stats like Short Interest, etc.
- Do Apes Have these?: YES (but it’s the borrower’s problem, not yours)
- Are these naked shorts?: KINDA (same same but different)
- SO… “hypothecating” is fancy for traditional shorting. It’s not “naked shorting” because there’s a share there, but how many times do you have to rehypothecate a single share before you say “maybe I’m just printing shares here?” At some point it’s no different than counterfeiting shares, except that you pay interest on every IOU.
CONCLUSION
Look, the financial sector isn’t exactly trying to clear things up for us – they’re actually trying to hide shit instead. So let’s be smart Apes about it.
THE IOUs ARE THE NAKED SHORTS, born from Market Makers & Hedge Fonds. Full stop. Rehypothecating, and FTD’s create the IOUs. The only reason the IOUs aren’t straight up counterfeit is because of technicalities that the MMs/HFs are abusing.
And we know they are abusing the rules. They know that we know they are abusing the rules. The shares ARE counterfeit, even if they technically aren’t yet.
Marge knows too 🙂
TL;DR
- Synthetic = NOT naked shorts, you should stop saying this
- Pledged = OK, until it’s not
- FTDs, Rehypothecated = IOUs = NAKED SHORTS
EDIT: u/vsync correctly pointed out the description of the synthetic option is pretty… um, crayon-ish. Please see their awesome comment for more nuance, if you’re into that kind of thing 🙂