this post was submitted on 07 Jan 2024
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Isn't there normally collateral you put in and then if it goes up too much your collateral gets liquidated, but that's the end of it? It is definitely at least possible for your maximum losses to have a cap when shorting.
I am really skeptical that this is how it works, like if such a rapid rise happens someone is really going to go through a legal proceeding against thousands of retail investors individually to collect money they may or may not have? Seems more likely that the possibility is accounted for by the loan being virtual in some sense, the exchange holding the ultimate legal responsibility, and compensating with an extra penalty if you hit the liquidation number and insurance.
The GameStop stuff illustrates exactly what I'm talking about here though, all those people on Robinhood getting force-sold because their ownership of stocks was virtual and the ones actually on the hook to finalize things were the exchange's creditors.
Naturally for a big player putting billions on something they are going to be doing it directly and thus have full legal liability and unlimited potential losses like you say, but I expect losses are probably limited to the collateral amount for regular people in most circumstances, because otherwise it would be a ridiculous mess for the party providing the loans to them.