Shoot, that's a trusting attitude you have there on a stock that's fluctuating at greater than 50% a day sometimes. My take-away from today differs. Isn't collateral 102% on the prior day's close? And no matter what the contract says, I fully expect the broker to stick the losses with the customer and then argue over it in court.
Maybe it is too trusting of an attitude.
Worth noting, even then TSLA wasn't gyrating 50% a day, day after day. I wouldn't have lent out my Gamestop shares (and I do have 100 now - I didn't know this was coming, but I did intentionally step in front of the train, as my own contribution to the financial burning of the shorts) for the primary point I see you making.
But the point is that the short seller is, in effect, maintaining two different piles of cash (collateral loan with me as beneficiary, margin loan with their broker). One of those loans is solely payable to me in the event that my broker is unable to return my shares to me on demand. That COULD be in such a dynamic environment as we've seen recently, but every broker can and should manage their business in such a way as to optimize returning shares on demand (a right that is part of lending out the shares). Failure to deliver even once is bad - failing to deliver in that fashion at scale will mean they're bankrupt.
That's what the MARGIN requirement is for the short seller. Under the margin rules of their broker, the need to maintain sufficient margin to be able to purchase the stock at market (their broker can make the demand / margin call when the account is insufficient, up to and including liquidation with no warning). With something as volatile as Gamestop, the broker should have long since shifted any short sellers to 100% margin. Or as IB did, because they can't own their shares outright (they've only borrowed them) - IB instituted the 300% margin requirement for anybody with an open short sell position.
Which would matter if the hedge funds used IB as their broker. IB could have used this opportunity to get on a soapbox and speak up for their customers, and explain what was going on and why. They have a unique insight. They failed their customers, and the market, when they didn't speak up.
The second account that you mention - the 102% collateral - is changed daily by my broker, and is 102% of the ending value of the shares that day. That account is solely payable to me, the lender of the shares, should my broker be unable to deliver (which means that their counter broker was unable to deliver, which means the short seller was unable to deliver). And I know up front when I make the lending agreement that the collateral account is marked to market at the closing price each day. It's there for bankruptcy by my broker so my assets aren't tied up while they go through bankruptcy, but I also take on the risk of my broker being unable to avoid bankruptcy and get my shares for me on demand.
All of the brokers are highly motivated to keep that from happen (my first protection) AND I have that 102% savings account (no interest - that's to the benefit of the bank that is providing the collateral account) as my final backstop to being unable to get my shares back.
There were also people at the time when I was learning more about that, that found the protections inadequate / too risky for their taste. I respect that point of view. The point isn't that there is a right and wrong decision about this - it's to understand can be done to reduce the risk, and explain the market mechanisms in place, to ensure that all market participants have an even playing field that includes the protections the brokers needed for the settlement problem being talked about now.
Selling shares short needs to require that they be borrowed first (which is true for all short sales with one exception - the market makers can "create" shares by naked shorting those shares) AND that the brokers do a better job of managing their risk. Market making status needs to be significantly more restricted AND the settlement window for naked shorts performed by market makers needs to be dramatically shorter in time. I think I saw an 11 day settlement (trading days) at some point (but don't quote me on it) - the real point is they have a longer settlement window.
In fact that points to the only way that 150% short can happen - as naked short shares approach the end of their settlement window, you go into the market and buy-to-close your currently open naked shorts that are inside of settlement, and you simultaneously sell-to-open new shares to stay flat. There are probably rules about self-dealing to stop buying and selling from yourself, but you can still swap shares around in a share swapping ring, keeping everybody inside of the settlement window, and keep enough shares up in the air to have 150% short interest. Heck - you don't even need (as best I can tell) to pay interest on your naked short shares! What's not to like!?!
I think that the better risk management doesn't apply to more normal circumstances - they do an excellent job of managing the more typical risk that they see in the market. Which even includes Tesla for at least 5 years (Tesla never saw anything vaguely like 150% short, even in it's most shorted early day. I want to say the peak was something more like 20%; maybe somebody else remembers).
At the 150% level, the short sellers can't just buy 1/2 of the total shares and use that to extinguish those extra 50% of shares that they manufactured. That implies that 1/2 of the company is available to buy. With Tesla as an instance, you'd probably need to buy closer to 100-125% of the shares in the float in order to get the 50% total you need to close the short. Any guesses at what would happen to the TSLA share price with that kind of buying demand?
I think our group estimate for TSLA was something like 25% buying for the S&P inclusion plus related buying, some of which effect was muted by naked shorters, and that official announcement plus actually happening, depending on how you size that up, looks like a roughly 100% run (between the announcement surge into the low 600s, and then the post-announcement run up to the mid 800s).
For a much smaller issue, with a dramatically higher short interest - shares going to the moon sounds completely reasonable to me.