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Assumptions: There is a limited number of shares in any given company. Someone that holds shares cannot be forced to sell them if they don't want to. In theory, it's possible for someone to buy out all shares in a company and hold them without ever agreeing to sell them, causing a short squeeze.

What happens to a short seller if when it comes time return the shares they borrowed, there is no market liquidity left and the short seller (nor their broker) cannot buy the shares to return under any circumstances.

Are there standard terms in the lending contracts that cover this scenario? Will it end in a lawsuit? Will it result in criminal charges? If they cannot return the shares, did they essentially "steal" them? Or is there some other "escape hatch"/penalty (perhaps exorbitant) they can pay instead?

Note: I am only asking about the situation where there is literally no liquidity and shares for sale and absolutely no one is willing to sell for any price. I am also not talking about "failure to deliver" for the initial sale from e.g. "naked" short selling.

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  • $\begingroup$ First, if someone holds "all" the shares and doesn't lend them, there will be no short squeeze because nobody will trade in that stock. Seconds, a short seller is required to locate the shares he's going to short before he shorts the stock. $\endgroup$
    – LazyCat
    Commented Jan 28, 2021 at 4:11
  • $\begingroup$ @LazyCat I'm not asking about holding the shares before starting the short ("naked" short selling). I'm asking specifically about the end of the borrowing period for those shares. $\endgroup$
    – WirthLuce
    Commented Jan 28, 2021 at 4:42
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    $\begingroup$ In the 19th century they had a famous saying on Wall Street en.wikipedia.org/wiki/Daniel_Drew#Quotations $\endgroup$
    – nbbo2
    Commented Jan 28, 2021 at 13:43
  • $\begingroup$ @WirthLuce You describe it as if the short seller promises to return the shares, but only bothers to find them at the end of the borrowing period. This is not how it's typically done: you first ask your broker to locate the shares for you. After they confirm they have those shares, you are allowed to short the stock and all the time you are short the stock, those shares are locked in for you to "return". $\endgroup$
    – LazyCat
    Commented Jan 28, 2021 at 23:45
  • $\begingroup$ @LazyCat are you saying the broker is going to guarantee some shares are sold to the short seller at a later date? who's selling those shares? Why can't they be sold to someone else? $\endgroup$
    – WirthLuce
    Commented Jan 29, 2021 at 2:24

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