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Hot Topic Inc. Message Board

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  • mawchek mawchek Nov 28, 2000 8:42 PM Flag

    HOTT Short Covering?

    Ed, the securities lending associated with short
    sales does not impact the number of shares outstanding
    or other company-reported share figures. As part of
    a short sale, the shortseller's broker arranges to
    borrow sufficient shares from a lending agent to effect
    delivery to the purchaser. These agents are normally large
    institutions serving as custodian for pensions, foundations
    and other large owners of the stock. State Street and
    Chase are among several custodian banks that provide
    this service. Securities law requires reregistration
    of the shares so that clear title can be transferred
    to the "new" purchaser. This effectively removes the
    original owner from the shareholder rolls. Standardized
    securities lending industry agreements entitle the lender to
    all economic rights of beneficial ownership to the
    shares, including any dividends, splits or rights
    distributed during the loan period. The shortseller is
    required to fund these payments for the lender. In effect,
    the original owner's holding is no longer counted
    among the shareholders of record, the new purchaser is.
    This avoids the double-counting of
    positions.

    You can read more on this, if you'd like, at the
    Robert Morris Associates website. Hope this helps.
    Mawchek

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    • Maw: thanks for covering 'short covering' process. Very helpful.

      (OT) And Deli: thanks for the 'rad' definition. I guess for awhile you thought I was a very major player! :)

      Mr. O.

    • >>You can read more on this, if you'd like,
      at the Robert Morris Associates
      website.

      Thanks for the reference, but I think I'll pass. Your
      explanation was clear and plenty helpful.

      So, the
      system ensures that shorting doesn't result in double
      counting of shares -- but maybe double counting would be
      better. I'm probably confusing myself, but I kinda see
      this working like the money multiplyer (or whatever it
      was called -- it's been 20 years since I studied it)
      in macro economics. If the bank lends out your
      money, it doesn't affect the amount in your account;
      similarly, my broker can let my shares be shorted and the
      title transferred to someone else, and as far as I know
      those shares are still in my account. Lending increases
      the money supply, so I think shorting increases the
      supply of shares -- at least until the loans are paid
      back.

      Ok, I'm being dense and rambling. I
      should have been satisfied by Mawchek's fine
      explanation. I'll go to bed now and kick myself along the
      way.

      ed