America's No. 1 financial conglomerate

Chapter 583 Hand in hand, they jumped into the abyss

Leaning against the custom-made leather headboard, covered with a soft silk blanket, his gaze was fixed on the high-definition television hanging opposite him.

On the screen, a financial news anchor is delivering a bombshell report that is shaking Wall Street in a calm yet urgent tone.

According to multiple sources, the U.S. Securities and Exchange Commission (SEC) is preparing to launch a full investigation into YueDong Games, which is suspected of financial fraud.

The TV screen switched to the stock price chart of Leap Games, where the blue curve that had once soared and broken through the $300 mark had a nearly vertical downward line at the end.

Watching the dramatic market movement and listening to the series of negative news listed by the anchor, Ernst's brows gradually relaxed. He finally understood why Parker Houston was so excited on the phone, even claiming that this capital showdown would be decided within half a month.

In stark contrast to the despair of retail investors, short sellers were celebrating the stock of YueDong Games.

Within a single day, according to the latest holdings data disclosed by the SEC, several top Wall Street hedge funds, including Lone Star Fund and Tiger Fund, have begun shorting YueDong Games.

The news of financial fraud today is like a shot in the arm for this capital hunting game. More Wall Street institutions will surely follow suit and join the army of shorting YueDong Games.

"They're recklessly adding fuel to the fire, trying to drag this train of greed and desire straight into hell," Ernst murmured, his tone filled with complex and unfathomable emotions.

He genuinely doesn't know whether he should thank these reckless financial institutions or condemn their greed for shorting his own company.

Jessica, nestled in his arms, seemed unaffected by the tense financial news. She fiddled with her beloved, listless giant caterpillar toy, her clear eyes filled with curiosity, clearly completely oblivious to what Ernst was saying.

"These people are targeting Jumping Games, but judging from your tone, it sounds like you're happy about it?"

Sensing the bewilderment of the person in his arms, Ernst was in a good mood and didn't mind being a temporary financial mentor.

"Short selling, you know what that means, right?" Ernst pinched her, then raised his hand and gently patted Jessica's pert buttocks twice, warning her restless little hands to behave.

Jessica pouted in dissatisfaction, a hint of coquettishness flashing across her delicate face, but she still obediently threw away the caterpillar in her hand, looked up at Ernst, and answered crisply, "I know, isn't it just borrowing stocks from a brokerage firm, selling them, and then buying them back at a lower price after the stock price drops to a certain level, making a profit from the difference?"

"Not bad, you understand it very well." A hint of surprise flashed in Ernst's eyes. He hadn't expected that Jessica, who usually seemed to only focus on fashion, art, and travel, would actually know so much about this kind of financial operation.

Don't be fooled by the fact that these Hollywood stars are all rich. Most of them entrust their money to asset brokers who only know how to look at numbers and don't even understand basic financial knowledge.

Jessica, instead of showing joy at the praise, let out a soft snort of dissatisfaction, her small nose wrinkling slightly as if to express her protest.

The way the other person spoke just now made it sound like they were treating her like a complete idiot.

Ernst chuckled at her charmingly naive appearance, reached out and ruffled her soft, long hair, and continued, "What about naked short selling? Have you heard of it?"

"Uh..." Her face, which had been showing some dissatisfaction, froze instantly.

Jessica blinked her confused eyes and tentatively repeated the unfamiliar term "naked short selling?" This was truly the first time she had heard this term, and she had absolutely no concept of it in her mind.

Ernst glanced at the television screen. There was no more important news being broadcast, so he simply turned off the TV, lay back, and adjusted to a more comfortable position.

Jessica immediately snuggled up to him like a clingy kitten, finding a more comfortable spot in his arms and practically piling herself on Ernst.

Her soft body pressed against his, the faint scent of gardenia perfume lingering around his nose.

"Naked short selling, simply put, is short selling without borrowing shares beforehand," Ernst said slowly.

Jessica was stunned for a moment upon hearing this, then, as if she had heard something unbelievable, she reached out and gently patted Ernst's chest, saying with a hint of coquettishness and confusion, "You're just teasing me! How can you short sell without borrowing shares? If you don't have any shares in hand, how can you sell them to buyers? This doesn't make any sense at all."

Ernst took her restless little hand in his hand, gently pinching the soft, chubby cheek with his fingertips, and asked, "Who says you can't short sell without borrowing stocks? Wall Street's financial players have plenty of ways to circumvent the rules."

"For example, these financial institutions can design and sell some call options first." Ernst paused here, turned to the other person, and asked, "Do you know what a call option is?"

Sure enough, Jessica's little head swayed gently from side to side, clearly unaware of what was happening.

Ernst, however, was quite patient. "Simply put, a call option is a contract between a financial institution and an investor, agreeing that on a specific future settlement date, the investor has the right to purchase a certain number of shares of the target company at a fixed price specified in the contract. And this contract itself can be traded on the market."

To help Jessica understand better, Ernst used the example of Leap Games: "Take Leap Games for example, its stock price has already fallen below $230."

"Suppose an investor is very optimistic about the future of YueDong Games and believes that its stock price will break through $300 in three months. Then he can sign a call option contract with a Wall Street financial institution, agreeing to buy 1000 shares of YueDong Games stock from the institution at a fixed price of $250 three months later." "In this case, the financial institution itself does not hold any YueDong Games stock, but can still sell this call option to the investor."

"If YueDong Games' stock price really rises to $300 in three months, then investors can buy the stock at the contract price of $250 and then immediately sell it at the market price of $300, making a profit of $50 per share. 1000 shares would be $5."

"Financial institutions, on the other hand, are required to purchase shares from the market at a price of $250 to fulfill the contract and bear the corresponding losses."

Jessica frowned slightly, her small head clearly struggling to process what was happening.

She could understand the operating logic of financial institutions. As long as the stock price of Leap Games continued to fall, the institutions would not need to actually buy the stock to fulfill the contract, or they could buy the stock at a lower price and thus make a profit from the price difference.

"But why?" Jessica looked up, puzzled. "If that investor thought Leap Games' stock price would rise to $300 in three months, why would they incur the cost of buying this call option and agree to trade it at $250?"

"Isn't it cheaper and safer to buy stocks directly from the stock market now for less than $230?"

Ernst smiled upon hearing this. "That's a very good question, but there's a major difference between already buying and buying options, and that's the amplification of the leverage effect."

"Leverage?"

"Yes, leverage," Ernst explained. "If an investor were to buy 1000 shares of Jumping Games stock directly on the market, it would cost around $23."

"But if he buys call options, he only needs to pay a relatively small option premium, such as $5 per share, so for 1000 shares he would only have to pay $5000 in total."

"If the investor has sufficient creditworthiness, or the transaction amount is not particularly large, he can even obtain this option contract without paying a single penny through margin trading." "When the option expires in three months, if YueDong Games' stock price really rises to $300, the investor does not need to actually buy and sell the stock. He can simply transfer the option contract to other investors and directly earn a profit of $5 from the price difference."

"To earn $5 in profit with a $5000 investment, the return rate is as high as 1000%."

"But if you buy stocks directly and make a profit of $23 on a $7 investment, the return is less than 30%."

"That's the magic of leverage; it allows investors to make big profits with small investments, earning returns far exceeding their initial capital."

"So, this is how naked short selling works?" Jessica suddenly realized, a hint of excitement flashing in her eyes. She hadn't expected that such a method could be used in the financial market; it was even more exciting than gambling.

Ernst gently shook his head and corrected, "It can only be said that this is a relatively safe and low-risk method for financial institutions to conduct naked short selling operations."

"The most direct and more aggressive way to play naked short selling is for financial institutions to place short selling orders directly in the stock trading system, selling a large number of non-existent YueDong Games stocks, and then buying back enough stocks at a low price from the market within the specified settlement period to complete the delivery process and thus profit from the price difference."

"Currently, the Nasdaq Exchange operates on a T+3 settlement cycle, which means that if an investor places a trading order on a trading day, the funds and securities only need to be settled by the third business day."

"As long as financial institutions can purchase enough shares from the market to close their positions within the three-day settlement period, then this kind of sell-then-buy operation is compliant."

"That's way too dangerous!" Jessica's face showed shock, and she subconsciously raised her voice. "If everyone does this, wouldn't the market be flooded with non-existent ghost stocks?"

"What if the stock price suddenly surges during the settlement period, or the number of shares on the market is insufficient to meet the settlement requirements? Wouldn't that lead to a default and a financial crisis? Wouldn't that involve many innocent investors?"

Defaults and financial collapses are just one of the risks associated with this practice. More seriously, for companies with small circulating shares and low market capitalization, they can easily become tools for financial giants to manipulate the market. These institutions use large-scale naked short selling to drive down stock prices at any cost, creating market panic, and then buy at rock-bottom prices to reap the profits. This severely undermines market fairness and stability, leaving countless small and medium-sized investors with nothing.

Therefore, almost all stock markets around the world prohibit naked short selling. The United States was the slowest to react in this regard, and it was not until 2005 that it officially introduced rules requiring securities to be located before short selling.

But now, this is indeed a gray area on Wall Street.

The current state of Leap Games is precisely in such a gray area, where it is being relentlessly hunted down by short-selling forces.

"I understand!" Jessica suddenly seemed to have her meridians opened up, and she raised her head sharply, her eyes sparkling with excitement.

Then, with a hop, he sat on Ernst's lap, his soft body weight pressing down on him instantly.

Caught off guard, Ernst let out a muffled groan and nearly rolled his eyes out at her sudden action.

Fortunately, he was in a state of peaceful sagehood at that moment; otherwise, the consequences would have been unimaginable.

Jessica realized she might have made a mistake, so she quickly steadied herself, put her little hands behind her back, and gently stroked the area, saying with a hint of apology and coquettishness, "I'm sorry, be good, I'll reward you later."

Ernst glared at her, annoyed, and said irritably, "Why are you so agitated?"

Jessica's cheeks flushed slightly with excitement. She leaned down, her nose almost touching Ernst's. "Because I finally understand what you meant by that!"

"The more institutions that short Leap Games, the more shares they will need to settle on the settlement date. But Leap Games has very few shares in circulation. Once the number of shares to be settled in the market exceeds the actual number of shares in circulation, these institutions will be unable to close their positions and will be at your mercy!" Ernst looked at the light in her eyes and smiled with satisfaction.

Indeed, just as Jessica said, these greedy guys are blinded by their own desires, hand in hand leading Wall Street into the abyss.

When the number of shares to be settled in the market far exceeds the actual number of shares in circulation, it will trigger an unprecedented short squeeze.

At that point, driven by short sellers frantically buying shares to complete the transaction, the stock price of Leap Games will soar to an unbelievable astronomical price.