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Not illegal at all. The essence of a legal short is the stock has to be timely delivered to the buyer.
Which is trivial if you sell stock you own but requires an owner to borrow from if you sell stock you don't own.


No, it's more than that.
It's not the process you described at all.
In the US you can't just promise a future delivery, you have to have your hands on shares to short.
You have to have secured the specific share loan before selling the stock short.

There are hiccups in this process due to failed borrows like failed trade settlements, but it's down in the rounding error and can normally be ignored.
It happens, but it's definitely not the main event.
99% of short trades (the SEC's figure) cleared properly even before the practice was made illegal, and even back then another 0.85% cleared late but correctly within two weeks.

Can shares sold short exceed shares outstanding?
Yes, in theory, because stock can be rehypothecated.
You borrow shares from Alex to sell short. Bill is the buyer, and Bill's broker lends the stock to Charlie so Charlie can go short as well.
Thus the number of short shares exceeds the number of shares owned by Alex.
But this is normally a relatively small fraction of the total short count.

Some material rehypothecation presumably happened here despite the explicit efforts of the Reddit bros to prevent it.
But absent relending, any short count in excess of shares outstanding is unlawful.
You don't go short by making a promise to deliver--you go short buy successfully borrowing some shares, THEN selling them.

The FT reports that around 80% of GME shares outstanding (not just float) were sold short.
They wonder why any seemingly bright hedge fund manager would sit in such a risky crowded trade.
I guess those hedge fund managers now have a better appreciation of the risk of a squeeze.
What interests me is how many of those hedgies themselves have "diamond hands"...if they kept their
positions and the share price falls back, their shorts might yet turn out to have been profitable.

Jim
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