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Shorts repaying 4 shares on split dividend day???

Buckminster

Active Member
Aug 29, 2018
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This seems very unlikely. Anyone have any hard evidence of this? Could different MMs handle it differently?

Knowing that Elon has discussed burning the shorts, people's imagination is working overtime most likely.

Because that's how dividends work.

It's explained in exactly the paragraph you quoted in your post.



That's not correct.

The guy who is now the owner of record (which is neither the lender of the share, nor the short of the share-it's the guy who BOUGHT the shorted shares from the shorter) gets the 4 extra shares from Tesla as a dividend.

The short OWES the original lender 4 extra shares that he WOULD HAVE gotten from Tesla as a dividend- and he owes them on the same date the dividend would've been paid.

You don't get to just owe those 4 extra shares "whenever"

You can still repay the 1 original share whenever. But the 4 dividend shares you own ON dividend day.


If it's a dividend.

If it's a normal split, then yeah, you just now owe 5 whenever instead of 1 whenever.

THAT is why split vs dividend matters for shorts.

So @ihors3 says 10.53M shares short (on Aug 7th), so at current volumes that would take a couple of days for the shorts to cover, if that was the only trading happening. In reality they have a few weeks in which to cover, so it will probably only add about 1M shares/day to the trading. But then there's the snowball effect of pushing the price higher, so they need to cover as soon as they can, so...

Edit: another way to look at it. Tesla will issue 4*186M new shares. But the broker's books will show an extra 4*10.53M shares owned either by the owner of record or the lender. 10.53/186 ~= 5.6% of the new shares that are unaccounted for, and that will come straight from the shorts, one way or another. So, because TSLA is so heavily shorted, there actually is a value increase of about 5% per share. I think.

Not if it's a dividend, no. That's the key difference from a regular split.




Yes. For the cash amount of the dividend.

In this case, the dividend is 4 shares of stock

Thus, on August 28th specifically, they must pay the lender of the 1 share, 4 shares of stock.

They can't pay them with anything else. And they can't wait later to pay them either.


In short (pardon the pun)-

They don't magically "owe" them 5 shares anytime instead of 1 share anytime.

They owe them 1 share anytime just as they did before, and they own them a 4 share dividend ON the date the dividend is paid- August 28th.


All of this assumes 2 things:

it IS a dividend and not a regular split.

And-

They are still short T-2 days from the registered date (Aug 21).

So there's gonna be shorts rushing to cover in the next ~5 trading days to avoid all this.

And then more of them rushing to come up with 4 post-split shares per borrowed share by August 28th.

No, they absolutely can not.

The dividend isn't cash. In any amount. It's 4 shares of stock.

They don't get to pick how they provide the dividend to the lender- it must be exactly what a holder of record would've gotten if they'd not lent the share.

Likewise they can't give a lender a share of stock worth what a CASH dividend would've been worth that day going the other direction.





The difference is they owe them 4 shares on August 28th specifically.

Not "anytime they decide to close their short"

That's a huge, huge difference.

Of course it does.

They are required to pay the lender the full dividend ON the dividend payment date.

That's a forced payment on a specific date.





Post SPLIT they would.

Post dividend is not the same thing

Post dividend they still owe 1 share anytime they wish to close their short.

But they owe 4 shares on august 28th specifically




If it's a dividend it means exactly that.

They owe 4 shares (per borrowed share) on August 28th to the lender of the shares.


Split and dividend are treated differently for shorts from each other.

@Knightshade Why are you speaking so certain?

A short's obligation is between them and their broker. You are saying the broker will force the short to immediately cover 4 post-split shares on the effective date. This does not make sense from the broker's perspective.

Why would they do that when:
1. Those 4 post split shares are immediately available to borrow again, meaning the short can just cover and then short again immediately.
2. The short is their customer, and doing this will upset their customer.
3. The broker themselves can benefit from the shorts continuing their original position because the broker keeps a portion of the interest.

The share lender has to be given 4 real voteable shares, they can't be "fake" non-voteable shares like the one they are holding in place of what they lent out.

But, after thinking about it some more I think the broker will just handle this for the shorts in the background. There are plenty of shares available to borrow, so the broker will just borrow 4x more shares and deliver them to the lenders, and then update the shorts account to reflect that they lent those out as well. And once they have delivered those shares to the lender they can then borrow and lend them out just like the original shares.

mayhem

@Knightshade et all

a forward stock split is categorized as a dividend event. stop getting hung up on the language. its a split.

the dividends category in the world of corporate actions include stock divs, cash dividends, and forward splits. and no, forward split isn’t taxable in US.
a spin-off can be. a cash div is, even a regular stock div (income)
not a split.
reverse splits are reorganizations.

next,
if you have have 100 shares you’ll now have 500, if you hold until ex date monday 8/31

just like if you’re short 100 you’ll be short 500
the borrow of 100 shares to cover your short becomes a borrow of 500 shares at 1/5 the price

and yes, the stock loan contracts are marked to market.

and no, you don’t owe 500 shares back if short on record date, or pay date. you’d just stay short, but now 5x, until you chose to close out. the loan contract stays open as long as you’re short.
..unless you are on the end of a fail to deliver to nscc in which case you’d be bought in. but tesla is liquid right now, and not hard to borrow.

if you were short a stock when a cash div went ex-date, you’d be debited the cash div amount on pay date.


friday 8/28 is the last day to open or adjust a position to be affected by the split

if you close or adjust your position on friday 8/28 those positions traded will not be affected by the split.

if you have 1 november20 1500 call
for example

it will now be 5 november20 300 call

at least if the oOCC handles it like they’re handling appl

https://infomemo.theocc.com/infomemos?number=47369
 

bballshinobi

Member
Jul 12, 2020
35
176
Las Vegas
Do brokers have to deliver dividend on the payment date 8/28? I can’t imagine the burn if shorties have to use pre-split shares to satisfy those stock dividends. Maybe the brokers will just let the shorties settle up on 8/31 with the post-split shares?

Either way, if this really is structure as a stock dividend, it’s forced buying for shorties I think
 

Boomer19

Active Member
Jun 10, 2018
2,238
9,560
CT
This seems very unlikely. Anyone have any hard evidence of this? Could different MMs handle it differently?

Knowing that Elon has discussed burning the shorts, people's imagination is working overtime most likely.

what is unlikely. you quoted a bunch of posts that said many different things
 

Boomer19

Active Member
Jun 10, 2018
2,238
9,560
CT
Do brokers have to deliver dividend on the payment date 8/28? I can’t imagine the burn if shorties have to use pre-split shares to satisfy those stock dividends. Maybe the brokers will just let the shorties settle up on 8/31 with the post-split shares?

Either way, if this really is structure as a stock dividend, it’s forced buying for shorties I think

NO, they don’t

no, it’s not, and your dates are off

reread my post quoted by buck above
 
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Buckminster

Active Member
Aug 29, 2018
3,142
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UK
My first and last post on the question of "Will this stock split 'dividend' force short covering?":

1) Someone asked for an example of such forced covering happening before. The Yes team failed to provide any.

2) Someone posted an FAQ from a corporation doing a 2:1 split using the same "dividend" language. Nothing was said about shorts being forced to cover.

3) Someone stated that Overstock tried a complicated strategy to force short covering -- a strategy that would be unnecessary if a simple stock split with "dividend" language would do it. The Yes team failed to address this statement.

4) Rob Mauer just did a video on the stock split, which he had started researching before today. As usual, his analysis seems quite well-researched and thorough, but said nothing about shorts being forced to cover.

Those four observations settle the debate for me.

It's not a dumb question. The question is due to the wording from Tesla: "Each stockholder of record on August 21, 2020 will receive a dividend of four additional shares of common stock for each then-held share, to be distributed after close of trading on August 28, 2020."

Hence, the question is regarding what happens to shares traded from Aug 24-28. Thus far, I haven't seen a very good answer to this other than insisting that nothing happens. If that is the case, why is Aug 21 even mentioned? Why not just have Aug 28 be both the "stockholder of record" date as well as the distribution date?

OMG HERE, example from Eastman, already posted upthread, that explains exactly how this all goes down. TL;DR it's a stock split (like Tesla says in the title of the announcement) and TSLA will trade at the new price on August 31st. Any of the "weirdness", including shorting, that has been discussed over the last 30 pages will be handled behind the scenes and is really nothing for anyone here to need to worry about.

What is the effective date of the split?
There are several key dates:

The Record Date – September 15, 2011. Stockholders “of record” (that is, whose shares are registered in their names) of common stock at the close of business on the “record date” are entitled to receive one additional share in the stock split for each share held of record on the stock split record date.

The When-Issued Trading Date – September 16, 2011. From the record date to the distribution date, two separate markets will likely exist for Eastman common stock on the New York Stock Exchange (the “NYSE”). The “regular way” market, reported under the Company’s normal “EMN” symbol, will continue to trade at the higher pre-split price. Since sellers in the “regular way” market will receive full value for the shares they sell and are not entitled to the split shares they will receive by virtue of being holders on the record date, they transfer their rights to the split shares to their buyers by means of “due bills”. The NYSE recognizes that stockholders might alternatively want to sell only the “new” split shares while retaining the “old” shares, and this is accomplished by creating a “when-issued” market at the post-split price. When-issued trading is reported under the company’s normal NYSE symbol with a “WI” appended at the end (that is, “EMNWI”). When-issued trading ceases on the stock split distribution date. It is expected that the NYSE will authorize a when-issued market for the new split shares under the “EMNWI” symbol. This will occur only between the September 15 record date and the October 3 distribution date. Trading in the when-issued market will reflect the anticipated split value of Eastman shares. Eastman has no involvement in when-issued trading. Check with your broker if you are interested in when-issued trading.

The Distribution Date – October 3, 2011. This is the date when the new stock split dividend shares are distributed and American Stock Transfer & Trust Company, our stock transfer agent and registrar, mails written notice to stockholders indicating their split-adjusted share amounts and makes book entry adjustments to the accounts of record holders.

The Ex-Stock Split Date – October 4, 2011. The date Eastman common stock will begin trading on the New York Stock Exchange at the new split-adjusted price.


RECORD DATE FOR TESLA: AUG 21
WHEN ISSUED TRADING DATE FOR TESLA: AUG 22
DISTRIBUTION DATE FOR TESLA: AUG 28
EX STOCK SPLIT DATE FOR TESLA: AUG 31

As for shorting:
Before: There are 186M shares outstanding. 12M shares sold short, so 198M shares people think they own.
After: There are 930M shares outstanding, 60M shares sold short, so 990M shares people think they own.
Before: ~$17B of shares sold short.
After: ~$17B of shares sold short.
If a short wants to cover their position, they have to buy 5x as many shares as before but they will be 5x cheaper. No change.

All you need to know is that on August 31st, the share count or contract count will 5x for everyone with any position (long, short, derivative) and the price will 1/5th. Let's move on.

Yes I agree, this stock dividend is engineered to target the MMs that are abusing their naked shorting priviledges to further their own proprietary trading.

Everyone else will be either okay, or unaffected. It's the manipulators that are headed to the mill to have their grist ground down.

As I have said previously, there are effectively no retail shorts left with open positions on TSLA. It's all deep pocketed MMs now, the likes of Jonass and MorganStanley and their ilk.

Their money won't help them now, nor will their priviledged postions as MMs operating under the cover of Regulation SHO (the Market Maker's exemption from the SEC prohibition against naked short selling). They will have to cough up actual shares, and any failure to do so will be recorded in the legally required 13-day FTD reports.

TL;dr Hiro is my new hero. ;)

P.S. Start here on FTDs (then GIYF)

SEC.gov | Fails-to-Deliver Data

With the Stock Dividend, Tesla will only issue new shares for registered owners of shares, which will be ennumerated as of Aug 21, 2020. These are not synthetic 'short' shares, but real shares which will have to be provided by the holder of the short contract as part of their legal agreement and obligation entered into when they decided to sell the share short.

It's not about the money; shortzes will have to provide the actual share itself on Aug 28th. The only way to do that will be to buy an actual registered share, not by borrowing more shares. They can not create shares by shorting for the purpose of a share dividend. Only real shares allowed.

This restores the law of supply and demand to a (badly-distorted) market, where it has been sorely lacking for many years. Only the Company, Tesla, has the sole sovereign right to issue new shares. No MM can usurp that right (at least not without reporting it as an FTD after 13 days) ;)

yep, lots of mixed info

bottom line, everything you need to know about the split is:
  • the dividends category in the world of corporate actions include stock divs, cash dividends, and forward splits.
  • forward split isn’t taxable in US (dilution)
  • a cash div is, even a regular stock div (income)
  • but not a forward split. that’s the difference.

  • if you have have 100 shares you’ll now have 500, if you hold until ex date monday 8/31
  • just like if you’re short 100 you’ll be short 500
  • the borrow of 100 shares to cover your short becomes a borrow of 500 shares at 1/5 the price
  • stock loan contracts between brokers are marked to market.
  • you don’t owe 500 shares back if short on record date, or pay date. you’d just stay short, but now 5x, until you chose to close out. the loan contract stays open as long as you’re short. unless if tesla became hard to borrow, you’d be “bought in”. but unlikely.

  • alternatively if you were short a stock when a CASH DIVIDEND went ex-date, you’d be debited the cash div amount on pay date.


  1. friday 8/28 is the last day to open or adjust a position to be affected by the split
  2. if you close or adjust your position on friday 8/28 those positions traded will not be affected by the split.
  3. ex date is what matters for trading....you trade friday it’s pre-split, at start of trading monday it’s post-split

  • if you have 1 november20 1500 call for example
  • it will now be 5 november20 300 call
originally I posted incorrectly on this options adjustment point on @Papafox page, but it has been deleted.
the tesla memo will be out shortly

forward split usually bullish, hence the after hours positivity
  • but it doesn’t actually “force” shorts to “cover” so i dunno where that is coming from.

Guys, you are mixing up a dividend event and a split event

if you are short during a split you are NOT forced to cover. you can choose to cover. or you can keep your short open and become, in this case 5x shorter.

now if the stock becomes less liquid you MAY be bought in (forced to cover) but that’s unlikely since tesla is easy to borrow right now.

@Artful Dodger @WarpedOne
when the proceeds form the split are allocated by the street, shorts will be more short at less price, an equity neutral event.

that’s not to say a rise in stock price won’t cause some to cover.

but, the shorts are not forced to cover or buy back or delivery anything until they close their short. pay date, record date, ex date won’t force them to do so on their own.
i

I have NOT been reading your guys' exchange other than this post but Boomer has it right in my understanding.

I believe it is simple and not necessarily super-dramatic. Shorty has been loaned 1 share today, and at the end of the month, that one share simply becomes 5 shares, and he now owes back 5 shares WITHOUT BEING FORCED TO PAY AT THAT MOMENT
But price will be shooting up and shorts are F'd regardless. Also this may have an effect on Naked shorted synthetic shares but that is a conspiracy wrapped in a tinfoil hat that I don't care to get into

For those who don't want to go through 20 pages of confusing debate on simple math and well-understood procedure, here is a TLDR about the split:

1) The split itself is supposed to have zero impact to any market participants, be it stock holder, option trader, short seller etc, all the positions will be adjusted so the value stays the same. You can't create or destroy value for anyone because of a split announcement, or it will be done all day everyday or forbidden by SEC. It is a well-understood process that has been practiced so stop fantasizing shorts being screwed by the split itself (but they will be burnt by the accompanying psychological effect, see below)

2) Stock split and stock dividend in this case are just the same thing with different legal term

3) Although the split itself should have no effect, the market usually see it as a bullish move for various reasons (e.g. better liquidity for small investors, company will only split when they know their stock is going to keep going up etc.), so you will usually see a nice bump after a split is announced (see APPL or GOOG on their split in the past).

there is a difference between a stock dividend and a stock split

one is an income event
one is a dilution event

however, the category is dividend/distribution for both, when speaking in terms of corporate actions and how the street refers to them.
DTCC for example, categorizes distributions as:
cash divs
stock divs
spinoffs
forward splits

but there’s clearly different tax implications for a split, than a dividend

@jeewee3000 @Nocturnal

the legal mumbo jumbo used in prospectus is confusing. please don’t be confused by this.

it’s a forward split. equity neutral event.

5x shares
1/5 price

whether long, short, a stock loan contract between brokers, a pledge to OCC, whatever

i keep getting disagrees and i’m just trying to help straighten out peoples expectations.

the bullish action can cause shorts to cover, but the split in and of itself does not force a short to cover as many have said. shorts will not be forced to return shares by ex date or pay date

although they will owe more shares becuase theta are short more shares. but the split doesn’t enact a deadline to return or cover these shares.

that doesn’t mean it can’t happen. it could also go down too.
@Knightshade

This.

Yes, there is no technical/fundamental reason why a stock split should affect share price but there is a psychological component. And as much as we try to make sense out of the market, a great deal of trading behavior is very influenced by the psychological, despite what we traders might like to tell ourselves sometimes.


It's gotta be reiterated that this is a very straightforward operation.
I caught disagrees for saying that the verbage used for the stock split announcement is TYPICAL and nothing to worry about. I don't care on a personal level about the disagrees but I am a little concerned for anyone that legitimately DOES disagree.

That word "dividend" has been featured in every stock split I've been a part of. Admittedly that's been a few years but it's just not that exotic. It is NORMAL.

It's been done a million times and it is not complicated and it does not have pork stuffed in it like a bill in the senate

This is a straightforward and normal stock split.
Stock splits are generally bullish for reasons that are largely but not strictly psychological.
Nothing weird is gonna happen.
Short squeeze likely anyway.
 

SpaceCash

Intergalactic Planetary, Planetary Intergalactic
Jul 5, 2017
1,648
12,266
Earth
So why won't the SP go to $300 on the 21st? Will TSLA have 2 tickers during the week commencing the 21st?
because they take care of all that sugar behind the scenes so that you, the shareholder and owner of value, experience an accurate and seamless transition. The value of your holdings does not drop to one fifth at any time in the transition, so that is not reflected. It's a crazy thing to believe in my opinion, and has never happened before. It's not going to happen now. Tesla's split is not some magical anomaly.

Your broker does all kinds of background paperwork for you. That's their function and job.

Splits are not a revolutionary thing.
 

Buckminster

Active Member
Aug 29, 2018
3,142
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UK
06c2d558f2549fa6074a5d312b3a2d68.png
 

Buckminster

Active Member
Aug 29, 2018
3,142
15,695
UK
I have suspected this for years. FINRA reports on about only half of NASDAQ's total trading activity which occurs on any given trading day (lot's of trading not reported by FINRA). Further, it is mostly those large brokers and hedge funds who DO NOT report through FINRA, making them more likely to be short sellers. There's a lot of secrecy involved.

But it's grammar-school easy to imagine a scheme where two market makers collude to evade the 13-day FTD reporting requirements:
  • Broker 'A' sells naked shorts on Day 1
  • by Day 12, Broker 'A' has still not located shares
  • instead of covering, Broker 'A' buys more shorts from Broker 'B'
  • after a while Brokers 'A' and 'B' are routinely swapping naked shorts
  • the 13 day reporting clock is reset indefinitely, thus the rule is nullified
After a legimate short sale, the share count is supposed to be preserved and trackable. But MMs violate this requirement via their short sellers exemption to do their own proprietary (for profit) trading. Let's use an example to see how this problematic short selling can be broken up:
  • before a short sale, let's say there was exactly 1 share total available to borrow
  • in a legimate short sale, the share count is supposed to be preserved and trackable
  • after such a short sale, there are 2 legitimate share owners and a 1 debtor:
    • the original owner (the lender), and
    • the purchaser of the borrowed share (although this fact is hidden from the new owner), and
    • 1 borrower (the short seller) who has a contractual arrangement to purchase a share to replace the one they borrowed through their broker
    • they have a margin arrangement or capital reserve requirement with their Broker to enforce this commitment
    • Share accounting: 2 shares - 1 promise = 1 share
    • thus the share count before and after a legitimate short sale is 1
  • MMs can use their privileges to do problematic naked short selling: (the case not just when a broker fails to locate a share to borrow, but when they personally engage in propriety trading by conducting short selling on their own behalf):
    • there is no borrower, no 3rd party with a separate capital reserve
    • share count is violated, since the Broker never attempts to locate a share
    • the role of the law of Supply and Demand is circumvented in setting the share price by skewing the Order Book always to the down side
    • Brokers can create infinite synthetic shares over the short term, but always a long enough term to break up a rally (say a few hours or days)
    • all of this is done in secrecy, away from the view of the SEC or reporting requirements
So, how does a 'Stock Dividend' break up such a scam? Although any MM who has a large, unreported backlog of synthetic shares created to support their own proprietary trading (with the express goal of depressing the SP), they CAN NOT use their market maker's exemption to create new shares (they only have the right to borrow shares 'in the blind' with the understanding that they will eventually locate them).

This will not be the case after a 5:1 split. With 12 million shares sold short (as of July 31st), after the split their will be a need to identify 48 million new shares to attach to the existing shorts. This is an accounting problem of enormous magnitude for Broker's that have outstanding FTDs on their books.

It will be like a game of 'hot potato', where other MMs will suddenly be unwilling to swap naked short shares as they scramble to locate shares for their own accounts.

Again, this will not be a problem for any MM that has been conducting their business of short selling properly. It will however be a huge problem for any TSLA market maker who has been engaging in proprietary short selling using their 'Madoff exemption', and without a 3rd party to cover those shorts. It will be their own capital reserves that will determine if they can survive the stock dividend, and the relative size of their short position at risk.

I expect some of the 28-odd market makers in TSLA will not survive this. It's notable that Deutsche Bank has recently announced that they are abandoning their role as MM for TSLA, since they were one of Tesla's most vocal critics and had some of the lowest price targets on the street.

TL;dr no MMs will be harmed by the TSLA stock dividend unless they have been acting improperly. We are about to get a glimpse behind the curtain of secrecy on Wall St.

Cheers!

@avoigt @SpaceCash @Hock1 @Boomer19 @Fact Checking
 

daniel

Active Member
May 7, 2009
4,842
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Kihei, HI
I'm pretty sure that shorts will be as unaffected by the split as longs will be. Because the exchanges and the brokerages work all that stuff out so it's seamless for the investors.

It does seem odd to me if the record date and the split date are different, but I'm pretty sure the folks in charge know what they're doing. After all, they make money when the market goes up and they make money when the market goes down. And as somebody noted above, they do stock splits all the time.
 
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daniel

Active Member
May 7, 2009
4,842
3,655
Kihei, HI
Can you short one share? Someone try it out and let us know what happens haha

Not me. If it surges 10% you're out over $150!

But the answer could probably be found in your brokerage's web site.

A quick google search suggests (source may or may not be reliable) that you can short odd lots (less than 100 shares) but there may be additional fees. May vary from brokerage to brokerage.
 

daniel

Active Member
May 7, 2009
4,842
3,655
Kihei, HI
P.S. Tesla is the most-shorted company on the market, and look at its performance! If you'd bought ten years ago your investment would now be worth just over 68 times what you put in. $100,000 would have become $6.8 million.
 

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