Welcome back to the channel everyone today, i want to talk about what happens if the hedges can't pay, for example, what happens if citadel get liquidated and they go under? They go belly up who's going to pay for our shares. Some people have been suggesting. There's a dtcc insurance policy or dtcc themselves will foot the bill or maybe the loss will be spread around all of the different banks across the us. But other people have speculated that.

Maybe the dtcc will end up siding with citadel and will bail them out and not pay us a penny and never buy back our shares or somehow force us to give back our shares and won't pay us for them. But i think a lot of people don't quite exactly understand how a short position works and how a liquidation works. So today i want to break down all of that and explain it for you very, very simply, but guys before i dive into the video. I just want to give a massive shout out to the 3 800 of you that have currently ding that notification bell, because you guys are always the first to watch a new video as soon as it's released so guys be sure to drop a like down below Subscribe to the channel and ding that notification bell, if you haven't already so that you don't miss another video, just like this one and guys if you haven't already be sure to check out the links in the description below to get four free shares with moomi worth Up to 3 350, also once you've signed up with moomoo, be sure to follow me on the platform, because they've got a whole social network inside the app, and now i want to dive straight in with the key information.

So, to start with, i want to explain how exactly a long position works when you trade on margin, so, let's say you're buying a hundred dollars worth of stock on a two to one margin. That means that you're going to be putting in fifty dollars into that trade and the margin provider or your trading platform is going to be providing the other fifty dollars and therefore you've got a hundred dollars in that trade. If the trade goes against, you and the value of your shares falls to fifty dollars. You get liquidated because the trading platform takes back their fifty dollars and leaves you with nothing, because obviously the trading platform doesn't want to lose any of their own money.

Okay, so that's a long position, but how exactly does it work with a short position again if you're shorting a hundred dollars worth of stock, you put in the fifty dollars on a two to one margin and the margin provider or your trading platform provides the other? Fifty dollars, but so with a short position, you're selling, to open so with a long position. Your hundred dollars disappears and you buy a hundred dollars worth of stock. You exchange it but with a short position, you're selling to open, so you sell shares for a hundred dollars and you put your own initial hundred dollars into the trade as well, so technically, there's two hundred dollars in the trade. So obviously, when you short a stock, you don't immediately get an extra hundred dollars into your account.

You put your fifty dollars and fifty dollars on margin into the trade and then obviously you sell to open. So it creates a second hundred dollars because you've sold the shares. Therefore there's two hundred dollars in the trade. So let's say your hundred dollar short position moves in your favor for the eagle eyed amongst you.

You will notice that i did just update this figure because i realized i had an error in my workings. At least i realized now rather than later, but so your 100 position moves in your favor and the stock falls all the way from 100. A share down to zero dollars a share so therefore, of the 200 that was in the trade zero dollars is used to buy back the stock. Let's say the company went bankrupt.

Fifty dollars is returned to the margin lender and then 150 dollars is returned to you, because you effectively made 100 profit on the trade as the stock decreased from 100 a share to zero dollars a share, but because you're on a two to one margin. It's effectively a two hundred percent profit, because your initial investment went from fifty dollars to a hundred and fifty dollars. But what happens if that position moves against you you're, a hundred dollar initial investment of a hundred dollars, a share turns into a hundred and fifty dollars per share, and therefore you've got a fifty percent loss or because you're trading on a two to one margin. You've.

Actually got a hundred percent loss so of that two hundred dollars, that's initially in the trade 150, is used to buy the stock back 50 goes back to the margin owner because they don't want to lose any of their money and you get zero dollars because your Position has been liquidated, so how exactly does this work without the margin and how exactly does it work using citadel as the example? Well, let's say that citadel short one share of amc at fifty dollars per share. Therefore, they've got the fifty dollars that they put into the trades and they've sold to open, so they've sold the share of amc for fifty dollars, meaning there's effectively a hundred dollars in the trade. Let's say, amc runs up to a hundred dollars. Therefore, citadel get liquidated because they need to use that hundred dollars to buy back the one share and therefore there's zero dollars left over for citadel.

Therefore, position liquidation. Now, obviously, it's not quite this simple, because citadel can continually average up their short position. Yes, citadel may have started their amc short position at two dollars a share and therefore should have been liquidated at four dollars a share, but because they continued averaging up it effectively continued increasing their liquidation point. So therefore, maybe they started shorting amc at fifty dollars.

A share but as it starts approaching a hundred dollars, they can continue averaging up and maybe they've averaged up their short position to 75 a share. So therefore, that's the same as citadel opening a short position at 75: a share, meaning they put 75 into the trade. They then sell that share to open meaning they sell for the additional 75 dollars making 150 in the trade therefore increases citadel's liquidation point to 150 per amc share. Now what happens when amc runs up to 150? Obviously, citadel get liquidated and that 150 that's in the trade, is used to buy back those shares and cover their short position.

So therefore, at this point the dtcc aren't even getting involved. It's solely citadel's position in the trade which is used to buy back the shares. So, let's put it into a real world example. As of may citadel's short position was around 57.5 billion dollars.

Obviously, it's not quite that simple, because their short position is made largely from call and put options, but let's just imagine it in a really simple way as if it was purely a short position. So they've started their short position with 57.5 billion dollars and they've sold stock to open, meaning they've sold 57.5 billion dollars and they've got their 57.5 billion dollars in. So that's a hundred and fifteen billion dollars, i think, of their total short position now. Obviously, it's not quite that clear cut, because 115 billion dollars is way more than that amc float and the reason their short position is so high is because their short position is made primarily from put options which are obviously just a collection of 100 shares or the Contract and the rights to buy or sell 100 shares so therefore, when the total value of their position moves against them by 115 billion dollars, the entire position is liquidated and the 57.5 billion that they got from selling the shares and the 57.5 billion they put into The trade is used to pay back us amc shareholders.

So therefore providing amc increases slowly from 100 to 105, 110, 140, 145 and then 150. At that 150 point, when they get liquidated, every single penny that they've got in the trade will be used to pay off us the amc shareholders, but where the problem arises, is what happens if the amc share price skips 150? What happens if the emg share price is running up to 130 140 and then there's a trading hall, a market hall and then when amc opens up, it opens back up at say, 180 or 200, just because there's so much momentum behind the amc stock. Maybe another hedge fund got liquidated and therefore they had to buy back pretty much the entire order book every single order, all the way from 140, 150. 60.

70. 80. 90, all the way to 200. What happens then, now again, this is where the problem arises.

Citadel have got that 75 dollars from earlier that they put into the short trade. They then sold shares to open, meaning they've sold 75 dollars worth of shares and they've got that initial 75 in the trade as well, meaning they've got 150 in the trade. So what happens when the share price runs up to 200 per amc share? Well, obviously, they use the 150 that they've got in the trade to pay off three quarters of our share, leaving them with zero dollars left. But obviously that only covers three quarters of their position.

If we place a sell order to sell amc at 200, they can only buy it back for 150, meaning there's fifty dollars unpaid. Now this is effectively the risky part when the deal goes bankrupt and belly up. This is how we might not actually get paid, because citadel can only afford three quarters of their trade of that position of our sell order. So this is where the dtcc needs to step in and either the dtcc covers that 50 unpaid amount themselves, or they split that fifty dollars between the rest of the u.s banks.

Now this is where dtcc 2021.010 comes into place. Obviously, you've got their sfts and the security financing transactions, so citadel can sell some of their other long positions to cover that 50 unpaid amount. But again what happens if their entire portfolio is liquidated? This is where that 50 unpaid amount is shared between all of the members in the dtcc or all of the members in the sfts. That 50 is shared between all of the u.s banks, but i guess it also depends on whether the dtcc or the sec intervene and make sure that the other u.s banks do actually spread this liability themselves properly or whether somehow the dtcc or the sec bails.

The banks out or even potentially decides not to cover that fifty dollars and just says to us. Well, tough, you got 150, that's close enough now! This is the part that's uncertain. We know said that they are good for most of the position. We know that they can afford to buy back most of our shares, because they've had to put in their own money into the short position at the start, to open the short position and also they would have sold those shares to us, thereby creating effectively double the Amount that they put into the trade, but obviously if amc, runs up so fast and actually jumps over their liquidation point and carries on going before they get liquidated.

That's when there's going to be an unpaid amount that might not be covered. I guess it very heavily depends on what their liquidation point is and how fast the amc stock runs up. For example, if citadel's liquidation point is at 100 or 150 and we start creeping up to that amount. If we hit a hundred dollars dead on and they get liquidated, then every single share will be paid for, but obviously, if it jumps massively over that point - and it suddenly just disappears from a hundred dollars a share and opens back up at five hundred dollars.

A share or a thousand dollars a share: that's when the big problems are going to arise, and this is where the problems arise, because, even though they've got double the amount of their position in the trade, if the amc stock price massively jumps over their liquidation point, They won't be able to afford all of the shares and might not even be able to afford, say 75 or 85 percent of the share. They might only be able to afford, say 10 or 20 of the share. Therefore, if we're trying to place a sell order for a thousand dollars a share and they do get liquidated, they again might only be able to pay 150 of that thousand dollars a share. Therefore, the other 850 dollars will have to be spread between all of the dtcc members.

Hopefully that helps explain exactly how a short position works hopefully explains how to some extent, citadel will be able to buy back our shares, providing that amc price increases somewhat slowly and doesn't massively jump over their liquidation point guys be sure to. Let me know down in the comments below what you think is going to happen to the amc share price. Do you think it'll increase slowly enough for citadel to be able to buy back all of our shares, or do you think it's going to be massively out of control and do you think the sec and the dtcc are going to have to stump up a lot Of cash in order to cover these liquidations and as always guys if you enjoyed this video, be sure to check out some of my others. Alternatively, subscribe to the channel and ding that notification bell, because that way, you'll be alerted when i upload a new video cheers.