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GME Ok so I don't know legal rules or how firms like Robinhood are regulated so I have a question for people who are knowledgeable.  
Suppose the following scenario:
I am Robinhood app.  My retail customers hold 20 million shares of GME on my books (no clue the actual number).  Now I loaned out many of those GME shares to citron and underwrote their short contracts.  Now citron uses me (robinhood) to hold the short contracts for citron.

Now let's say retail trader A buys those short contracts being held on Robinhood's books.  The short contract comes due and retail trader A exercises the option, I would assume that Robinhood would simply credit retail trader A's account with the share of GME.  In a legitimate world then Citron would have to provide Robinhood with a share to cover this trade.  But suppose that retail trader A doesn't sell the share, he decides to just hold it on Robinhood's books.

Now as long as the retail trader doesn't sell the share no money has left Robinhood nor does Robinhood have to demand shares from Citron.  As long as nobody demands money Robinhood in theory could owe its retail traders far more shares then they actually had.

Is it possible for Robinhood to have more shares owed to its retail customers than Robinhood actually owns?  and if so how would anybody know it's happening?

So let me clarify this.  Suppose Robinhood started out this fiasco having retail holdings on their books of 20 million shares.  They lent out 10 million shares to short.  The shorts were exercised and the retail traders that exercised the shorts kept their shares at Robinhood.  So now Robinhood only has 20 million shares but owe their retail customers 30 million shares.
Is that possible?  

could they fractional reserve on shares like this?

This scenario could help explain Robinhood's actions.  They are literally an insolvent institution who is unwilling to liquidate other positions to cover what they owe their retail customers.
Please tell me this is illegal and they would get caught?

  If this was a bank in this scenario it would be insolvent and the Fed would close it down, but its not a bank.  Further it's not money it is the creation of stock out of thin air and this is really bad if its allowed.  

Timothy A Wunder

Clinical Professor of Economics

Department of Economics