It is illegal to be naked short in excess of float except for market makers who have to take the other side of a trade.
It was not the market makers who were naked short. It could be in theory, but not in this case, at least not yet.
Hedge funds wanted to short and they have to borrow stocks to do so.
The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.
It should be the responsibility of the brokerages and market makes to not let hedge funds get 140% short. But they did, and I believe on purpose.
Since the public cannot be 140% long, except via options, who was effectively long the other 40% of the shares?
The brokerages and the market makers. To get even more shares for themselves, they restricted trading.
So while these Redditt traders did well, the market makers also gained immensely on the meteoric rise. The more the merrier. They screwed the hedge funds big time and purposely so.
A side artifact of points #1 and #2 is when the shorts are all squeezed out the market makers are the only ones who are short.
When that happens, the bids plunge and the market makers cover lower.
Publication Date: 30 January 2021
Publication Site: Mish Talk Global Economics Trend Analysis