Robinhood, the trading app at the center of the retail trading frenzy that rocked the stock market last month, found itself on the defensive Thursday as lawmakers trained their focus on its business model and decision-making in the first congressional hearing examining those events.

Vlad Tenev, the company’s co-founder and CEO, apologized for Robinhood’s performance, including its move to restrict trading in stock of GameStop and other largely overlooked companies targeted by amateur traders organizing on social media. The decision, and similar ones by other online brokers, caught the investors off guard, drew a rash of lawsuits and provoked outrage from lawmakers in both parties.

Tenev said the company has already made improvements aimed at preventing a repeat and pledged further changes.

“I’m sorry for what happened. I apologize,” he said. “And I’m not going to say that Robinhood did everything perfect and that we haven’t made mistakes in the past.”

The wide-ranging hearing stretched over five hours and also featured testimony from Citadel CEO Ken Griffin, Melvin Capital CEO Gabriel Plotkin, Reddit co-founder Steve Huffman and Keith Gill, the trader known as “Roaring Kitty” on YouTube who helped set off the stock frenzy.

Lawmakers touched on everything from a Robinhood competitor’s Chinese ties to whether the practice of short-selling should face new federal regulation.

Yet Tenev and his company absorbed most of the heat. On top of criticizing Robinhood’s response to the trading mania, lawmakers questioned the executive about selling users’ trades to market-making firms such as Citadel Securities to execute, a practice known as payment for order flow.

Rep. Cindy Axne (D-Iowa) was among those who called the arrangement a conflict of interest that disadvantages the users Robinhood says it exists to empower. The app’s users “aren't your customers, they’re your product,” she said. “Your customer is sitting right next to you,” indicating Griffin, though the hearing was conducted remotely.

Tenev acknowledged Robinhood generates the majority of its revenue from the deals but disputed Axne’s characterization, arguing its business model “has become the industry standard for a reason. It's because it's good for customers,” and allows them to trade for free.

Others questioned Tenev on whether the trades are actually free. Rep. Alexandria Ocasio Cortez (D-N.Y.), a leading critic of Robinhood’s role in the GameStop trading, suggested the claim was disingenuous. “If removing the revenues that you make from a payment for order flow would cause the removal of free commissions," Ocasio-Cortez asked Tenev, "doesn’t that mean that trading on Robinhood isn’t actually free to begin with because you’re just hiding the costs?”

On Feb. 18, Rep. Alexandria Ocasio-Cortez (D-N.Y.), a leading critic of Robinhood’s role in the GameStop trading, pressed Vlad Tenev on his business model. (The Washington Post)

Meanwhile, Rep. Jim Himes (D-Conn.), a former Goldman Sachs vice president, pressed Tenev to reveal the aggregate return Robinhood investors have seen on their investments — to allow a comparison, say, with the return from investing in the S&P 500. Tenev declined, and also said he didn’t know whether those trading in GameStop through the app so far have ultimately come out ahead or behind.

The spirited and contentious GameStop hearing seemed to freeze in time when Rep. Emanuel Cleaver II (D-Mo.) asked Tenev about the death of a 20-year-old customer last year.

Alex Kearns died by suicide last summer, after his Robinhood brokerage account appeared to show a negative balance of about $730,000. At the time, the company had emailed him demanding “immediate action” in the form of a deposit of more than $178,000, according to a wrongful-death lawsuit filed earlier this month.

But the sophomore at the University of Nebraska actually did not owe any money at all, according to the lawsuit. The massive losses displayed on his account may have simply indicated that only one side of his options transaction had been processed, the lawsuit states.

“First of all, I’m sorry to the family of Mr. Kearns for your loss,” Vladimir Tenev said at the hearing, in response to Cleaver’s question. “The passing of Mr. Kearns was deeply troubling to me and to the entire company. And we have vowed to take a series of steps, very aggressive steps to make our options products safer for our customers.”

Kearns had repeatedly contacted Robinhood’s customer support team, thinking that he was facing an enormous loss. His family contends that Robinhood’s “misleading communications” contributed to his death.

Tenev said Robinhood has made several improvements to the service following Kearns’s death, including adding the ability to instantly exercise options in the app, clarifying the display of a user’s buying power, and adding a live phone-based customer support for “acute” options cases.

As members of Congress interviewed the key players in the GameStop saga, Reddit users on the investing forum WallStreetBets published live commentary, cheering on Gill, who has become a folk hero in online trading communities.

“Today, the whole world shall know his name,” stated one trending post praising Gill, which went on to use an offensive term for people with developmental disorders that forum users affectionately call themselves.

Much of the commentary seized on the surreal nature of the hearings in which the heroes, villains, crass inside jokes and self-deprecating memes of a once-niche community have exploded into the mainstream, attracting the gaze of congressional scrutiny.

“This hearing is putting us on the map! New hype baby!” one user said, highlighting the excitement of seeing one’s own subculture reflected through the prism of national media.

The forum also provided a platform for users to lash out at their perceived villains, including Tenev, who drew criticism from users who thought he was not directly addressing the questions of lawmakers.

GameStop shares finished the day down 11 percent, setting a new low for the month and continuing a U-turn from astronomical heights in January. The stock is now down 88 percent since then. While the stock briefly surged at the beginning of the hearing following the opening testimony of Keith Gill, who defended his bullish case for the video game retailer, GameStop shares slumped to $40.69 at the closing bell.

Tenev shared the hot seat with some of his fellow witnesses. Citadel founder Ken Griffith also faced some tough questioning, including from Rep. Brad Sherman (D-Calif.), who chairs the panel’s subcommittee overseeing Wall Street.

Rep. Brad Sherman (D-Calif.) and Kenneth Griffin, CEO of Citadel, argued during a House Committee on Financial Services hearing on Feb. 18. (The Washington Post)

Sherman lost his patience with the billionaire hedge fund executive during an exchange about the business model of “free” online trading apps. He was asking about whether Robinhood’s users ended up paying a hidden fee because of the way Citadel Securities prioritizes some trades over others. According to “everyone I’ve talked to in this industry,” Sherman said, Citadel does not find the best prices, or “execution,” for trades it processes on behalf of free online brokerages.

Citadel imposed this hidden fee, Sherman alleged, because Citadel has to pay Robinhood for stock trades. “You’re not making as much on the transaction,” Sherman said. In his response, Griffin confirmed that “the execution varies by the channel of the order.” He compared this to a large bank such as JP Morgan charging different interest rates to different types of customers.

It’s not clear what legislative response, if any, the panel will mount. Waters said the hearing would be the first in a series into the recent market volatility. She told The Washington Post earlier this month her primary aim Thursday would be fact-finding and said lawmakers “have a long way to go” before considering potential new laws.

But the stakes are high. Attorneys in the Justice Department’s criminal division have launched a wide-ranging investigation into potential market manipulation in the trading frenzy and recently issued a subpoena to Robinhood as part of that, a person familiar with the matter said. The investigation appears to be in its early stages, and the Securities and Exchange Commission is conducting its own probe.

9:45 p.m.
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Stocks that investors on Reddit targeted fell in February

GameStop wasn’t the only stock investors on Reddit’s r/WallStreetBets targeted.

Those investors also bought shares for AMC Theaters, BlackBerry and Nokia, sending their prices to record highs by the end of January.

By February, those stocks all nosedived. But AMC, BlackBerry and GameStop are all still up by at least 60 percent in 2021.

9:42 p.m.
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Democrats scrutinize Robinhood’s business model

As lawmakers probed Robinhood on how it generates revenue from big financial firms, some put forward ideas for making its business model more transparent to average investors.

The practice of “payment for order flow” — from which Robinhood CEO Vlad Tenev said the company generates the majority of its revenue — was discussed by some lawmakers concerned that it creates hidden fees for average investors. Payment for order flows have become more common and more lucrative during the pandemic trading boom of the past year, and Robinhood says the revenue it gets from these payments allows it to offer free trading.

Rep. Alexandria Ocasio Cortez (D-N.Y.), a leading Washington critic of Robinhood’s role in the GameStop trading, pressed Tenev on this business model, suggesting the company’s promotion of “free trades” was disingenuous.

“If removing the revenues that you make from payment for order flow would cause the removal of free commissions," Ocasio-Cortez asked Tenev, "doesn’t that mean that trading on Robinhood isn’t actually free to begin with because you’re just hiding the costs?”

Rep. Bill Foster (D-Ill.) said there is no way for average investors to determine how much they are being charged by the middlemen in a stock transaction. Foster said institutional investors run sophisticated tests to determine whether they are getting the best price on a trade, but average investors have no way of knowing whether they are getting the best price.

“Everyday investors do not get the same transparency,” Foster said.

Jennifer Schulp, director of financial regulation studies at the Cato Institute and one of the House witnesses, said companies could make it more clear when the cost of these business deals are being passed on to them.

“People should understand that their broker still needs to make money even if they are proving a zero-commission trading service,” Schulp said.

9:10 p.m.
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GameStop stock sinks 11 percent as hearing enters fourth hour

‘Roaring Kitty’ Keith Gill delivered his opening statement before the House Committee on Financial Services on Feb. 18. (The Washington Post)

GameStop shares finished the day down 11 percent, setting a new low for the month and continuing its slide from the astronomical heights of January.

While the stock briefly surged at the beginning of the hearing following the opening testimony of Keith Gill, who defended his bullish case for the video game retailer, GameStop shares slumped to $40.69 at the closing bell.

All three major stock market indexes fell Thursday, following a disappointing jobs report from the Labor Department that showed the number of new unemployment claims last week rose slightly to 861,000, as the pandemic continues to batter the U.S. economy.

GameStop began its astounding run in January, ballooning from about $39 to $348 at its peak. But the share price stumbled after brokerage firms restricted users from buying more shares. The initial drop triggered waves of selling and put an end to the extreme climb. GameStop has been on a steady fall since the last trading day of January.

After Thursday’s close, shares were down 88 percent from the height of the trading frenzy.

8:50 p.m.
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Lawmakers raise concern about potential ‘naked shorting’

The practice of short-selling — betting against a stock — is legal. But a related practice known as “naked shorting” — placing a higher bet against a stock than the total number of shares available — was banned after the 2008 financial crisis, because it was deemed to play a role in the failure of financial firms.

During Thursday’s hearing, lawmakers raised questions about whether the hedge funds that had bet against GameStop were “naked shorting” the stock. Rep. Ed Perlmutter (D-Colo.) suggested that the high amount of short-selling in GameStop and the huge amount of money Melvin Capital and other short-selling hedge funds lost when the stock surged were indications of potential naked shorting.

“Melvin lost $6 billion in 20 trading days,” Perlmutter said in an exchange with Melvin founder Gabriel Plotkin. He then asked whether Melvin short-sold more shares than GameStop made available: “Did your short positions exceed float?”

Plotkin said the company did not. In response to a similar question later in the hearing, he said his firm’s systems wouldn’t even allow naked shorting.

8:34 p.m.
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Robinhood’s Tenev won’t reveal users’ rate of return

Robinhood CEO Vlad Tenev won’t reveal what rate of return customers have seen on their investments through the app. And he said he couldn’t say off the top of his head whether Robinhood users who traded in GameStop came out ahead or behind in the aggregate.

The company touts that the value of its users’ collective holdings has grown by more than $35 billion. “While markets fluctuate, this tells me that our business model is working for everyday Americans,” Tenev said in his prepared testimony.

But when pressed by Rep. Jim Himes (D-Conn.) to calculate that as a percentage of the platform users’ original investments — to allow a comparison, say, with the return from investing in the S&P 500 — Tenev declined.

The executive said Robinhood doesn’t reveal its assets under management, the other number required to come up with the ratio measuring its customers’ performance.

“Thirty-five billion dollars is a meaningless number,” Himes said. “I need to know what that is in terms of return.”

Tenev challenged the premise. “I think the proper comparison is to customers not investing at all,” he said. Many Robinhood customers “are investing for the first time and are taking money that they otherwise would have spent or consumed,” he said.

Himes said Tenev’s comparison is “most certainly not” the right one. A former Goldman Sachs vice president, Himes opened his questioning by noting that while he supports “the democratization of finance,” retail investors are known by Wall Street professionals as “dumb money, and there are any number of structures that are set up to take advantage of the retail investor.”

When pressed on the issue by Rep. David Kustoff (R-Tenn.), Tenev also acknowledged that payment for order flow — data it sells to third parties on customers’ trades — is the company’s largest source of revenue.

7:46 p.m.
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Robinhood CEO addresses suicide of 20-year-old customer

Alex Kearns died by suicide thinking he’d lost more than $730,000 on Robinhood. His family filed a wrongful-death lawsuit on Feb. 8. (The Washington Post)

The spirited and contentious GameStop hearing seemed to freeze in time when Rep. Emanuel Cleaver II (D-Mo.) asked the chief executive of Robinhood about the death of a 20-year-old customer last year.

Alex Kearns died by suicide last summer, after his Robinhood brokerage account appeared to show a negative balance of about $730,000. At the time, the company had emailed him demanding “immediate action” in the form of a deposit of more than $178,000, according to a wrongful-death lawsuit filed earlier this month.

But the sophomore at the University of Nebraska actually did not owe any money at all, according to the lawsuit. The massive losses displayed on his account may have simply indicated that only one side of his options transaction had been processed, the lawsuit states.

“First of all, I’m sorry to the family of Mr. Kearns for your loss,” Vladimir Tenev said at the hearing, in response to Cleaver’s question. “The passing of Mr. Kearns was deeply troubling to me and to the entire company. And we have vowed to take a series of steps, very aggressive steps to make our options products safer for our customers.”

Kearns had repeatedly contacted Robinhood’s customer support team, thinking that he was facing an enormous loss. His family contends that Robinhood’s “misleading communications” contributed to his death.

Tenev said Robinhood has made several improvements to the service following Kearns’s death, including adding the ability to instantly exercise options in the app, clarifying the display of a user’s buying power, and adding a live phone-based customer support for “acute” options cases.

7:15 p.m.
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Citadel founder questioned on hidden fees of free trading

Rep. Brad Sherman (D-Calif.) and Kenneth Griffin, CEO of Citadel, argued during a House Committee on Financial Services hearing on Feb. 18. (The Washington Post)

Rep. Brad Sherman (D-Calif.) lost his patience with Citadel founder Ken Griffith during an exchange about the business model of “free” online trading apps.

Even though users of online brokerages such as Robinhood charge no fees for stock trading, Sherman was asking about whether its users ended up paying a hidden fee because of the way Citadel Securities prioritizes some trades over others. According to “everyone I’ve talked to in this industry,” Sherman said, Citadel does not find the best prices, or “execution,” for trades it processes on behalf of free online brokerages.

Citadel imposed this hidden fee, Sherman alleged, because Citadel has to pay Robinhood for stock trades. “You're not making as much on the transaction,” Sherman said.

In his response, Griffin confirmed that “the execution varies by the channel of the order.” He compared this to a large bank like JP Morgan charging different interest rates to different types of clientele.

6:58 p.m.
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Robinhood’s Tenet finds himself on the defensive, offers more apologies

Robinhood CEO Vlad Tenev absorbed much of the early heat from lawmakers, who pressed him on limiting users’ ability to buy surging stocks late last month while offering confusing explanations for the move.

Tenev, who apologized for Robinhood’s performance in his opening statement, at times avoided direct answers.

He declined to give Chairwoman Maxine Waters (D-Calif.) the yes-or-no response she demanded on whether Robinhood experienced a liquidity crunch on Jan. 28, though he said at the time it faced no such problem.

And he sidestepped a follow-up from Waters about whether Robinhood’s practice of selling user trades to a market-making firm are in their best interest, considering the company in December agreed to a $65 million penalty for misleading them about how it makes money.

“First, let me say regulatory compliance is at the center of everything that we do,” Tenev responded. “We’ve made mistakes in the past,” he added, before Waters cut him off.

Rep. Carolyn Maloney (D-N.Y.) criticized the company for not alerting customers earlier about its requirement to maintain reserves with its clearinghouse — and not spelling out specifics of how it could restrict trading in its customer agreement. “You seem to reserve the right to make up the rules as you go along,” she said.

Tenev responded with another apology. “I’m sorry for what happened. I apologize,” he said.

“And I’m not going to say that Robinhood did everything perfect and that we haven’t made mistakes in the past. But what I commit to is making sure that we improve from this, we learn from it, and we don’t make the same mistakes in the future. And Robinhood as an organization will learn from this and improve to make sure it doesn’t happen again. And I’ll make sure.”

6:47 p.m.
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On Reddit, users cheer for folk hero-turned-congressional witness

‘Roaring Kitty’ Keith Gill delivered his opening statement before the House Committee on Financial Services on Feb. 18. (The Washington Post)

As members of Congress interviewed key players in the GameStop saga, Reddit users on the investing forum WallStreetBets published live commentary, cheering on Keith Gill, the GameStop enthusiast who has become a folk hero in online trading communities.

“Today, the whole world shall know his name,” stated one trending post praising Gill, which went on to use an offensive term for people with developmental disorders that forum users affectionately call themselves.

Much of the commentary seized on the surreal nature of the hearings in which the heroes, villains, crass inside jokes and self-deprecating memes of a once-niche community have exploded into the mainstream, attracting the gaze of congressional scrutiny.

“This hearing is putting us on the map! New hype baby!” one user said, highlighting the excitement of seeing one’s own subculture reflected through the prism of national media.

The forum also provided a platform for users to lash out at their perceived villains, including Tenev, who drew criticism from users who thought he was not directly addressing the questions of lawmakers.

“Vlad’s tactic is just to say as many words as he can without answering the question so he can take up time. So far it’s not working and he looks like an idiot,” one user said.

Other people on social media poked fun at the visuals of the virtual hearing, the audio interruptions, mic muting and the video backgrounds of the witnesses, including Griffin, whose firm had bet against GameStop.

6:15 p.m.
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Reddit’s /r/wallstreetbets astronomical rise

WallStreetBets, the Reddit forum at the center of the GameStop stock rally, saw an explosive growth in new users last month.

The subreddit had 1.7 million subscribers on Jan. 1, according to Subreddit Stats. Over the next few weeks, it added more than 6 million, with nearly half joining between Jan. 27 and Jan. 29, when the video game retailer’s stock reached $347.51 per share, the highest closing price in company history.

Since then the stock has tumbled. But /r/wallstreetbets has continued to grow and had 9.1 million users as of today.

5:48 p.m.
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Robinhood’s Tenev apologizes for imposing trading limits on GameStop stock and others

Robinhood CEO Vlad Tenev apologized for the company’s decision to limit trading in certain meme stocks as demand for them surged in late January.

“At the end of the day, what happened is unacceptable,” Tenev said in his opening statement. “To us, to our customers, I’m sorry, and I apologize. Please know that we are doing everything we can to make sure this won’t happen again.”

Users and critics of the trading app have speculated it choked off trading to protect hedge funds that had bet against the surging stocks. Tenev said on the contrary, the need to meet “increased regulatory deposit requirements” drove the move. “We don't answer to hedge funds,” he said.

Tenev said the company has taken steps to head off a repeat of that performance, including by increasing its liquidity by $3 billion, “to cushion ourselves against increased collateral requirements and related market stress in the future, despite the unprecedented market conditions in January.”

5:34 p.m.
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The legend of DeepF--kingValue gets a new chapter

Keith Gill, a day-trading suburban dad, may look out of place next to his fellow speakers at Thursday’s hearing, which was slated to feature a billionaire hedge fund founder and two visionary tech entrepreneurs.

But online, Gill is a folk hero.

Reddit forums buzzed with anticipation of Gill’s testimony, which online investors see as the latest chapter in the legend of the man better known by his profane username, DeepF — kingValue. “Today, the whole world shall know his name,” proclaimed one post on the r/WallStreetBets forum, alongside a mock boxing promo poster with Gill’s head superimposed on the body of a heavyweight champ.

Gill, 34, has become the face of the rebellious social media uprising against powerful Wall Street elites. His embrace of GameStop, which he frequently explained in videos on YouTube and posts on Reddit, helped spark the wild surge in the stock price of a fading video game retailer and may have helped grow his own $50,000 stake in the company into a position worth millions.

In his remarks before Congress, Gill appeared to downplay his role in these events, saying he simply wanted to educate other amateur investors about a stock he saw as fundamentally undervalued. “As an individual investor, I use publicly available information to study the market and the value of specific companies,” Gill said. “I consider a complex array of factors and track hundreds of stocks — all in search of market inefficiencies.”

Gill, the son of a truck driver and a nurse, said he learned about the stock market when he helped his friend build software analyzing stocks. He helped develop financial education classes in a job at MassMutual between 2019 and last month, when he left the company at the height of the GameStop boom.

During his testimony, Gill appeared to wink to his online fan base. His background featured a poster of a kitten draped with his signature red headband.

“A few things I am not,” he said at the beginning of his address. “I am not a cat.”

5:16 p.m.
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The GamesStop story told through its stock price

Robinhood CEO Vlad Tenev delivered his opening statement before the House Committee on Financial Services on Feb. 18. (The Washington Post)

GameStop’s improbable run has catapulted its stock to astronomical heights — rising as much as 1,745 percent for the year — propelled in part by ordinary investors, spurred by a Reddit message board and other online trading communities, looking to show up the giants of Wall Street and turn a bold gamble into a fortune.

For many of those investors, however, dreams of riding a rocket ship to the moon of GameStop profits have collided with the stark reality of a collapsing stock price. Shares of GameStop and other highly sought after names including AMC and Blackberry began to falter in late January, when brokerage platforms blocked traders from buying any more shares, and as more people cashed out, converting the frenzied hype and ballooning stock price into sell orders, shoving share prices down a steep slope that they have yet to climb back from.

Since the extreme trading volatility took off in mid-January, GameStop has swelled from about $39 to $348 at its peak, when the “Reddit basket” of meme stocks seized national attention and drew wall-to-wall coverage from media outlets well beyond the world of finance.

During that same period in January, AMC surged from about $3 to a high of $20, and Blackberry doubled from about $12 to $25. As the stocks skyrocketed, the eye-popping gains fueled a YOLO-trading feedback loop, as more investors jumped in so as not to miss out on the massive gains, even as the stock charts showed unbelievable spikes that dared earlier investors to sell and reap gigantic rewards.

Then came the plunge. After flashes of a recovery on the last day of trading in January, GameStop and the others have fallen well below their highs. The roller-coaster graph lines tell the story of both unsustainable, sky-high prices and the huge losses that investors suffered if they bought during the end of the run-up and sold just a few days later. GameStop now trades at less than $50. For the unluckiest traders who bought at the very top, that represents a potential loss of 87 percent. AMC shares have fallen to less than $6 and Blackberry slipped to less than $11.

But for GameStop die-hards, including Keith Gill, a trader known as “Roaring Kitty” on YouTube who helped set off the stock frenzy, the company’s future still holds promise.

In prepared testimony to members of Congress, Gill signaled that he’s in it for the long term, holding his position even as many investors have abandoned the stock.

“I believed — and I continue to believe — that GameStop has the potential to reinvent itself as the ultimate destination for gamers within the thriving $200 billion gaming industry,” he wrote. He concluded with a slogan and mantra of sorts familiar to the users on Reddit’s WallStreetBets forum: “In short, I like the stock.”

5:01 p.m.
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How short selling a stock works

You’ll likely hear talk of “shorting” stock in today’s hearing. But what does that mean?

At the start of the year, GameStop was among the most highly targeted companies by short sellers — investors and funds who bet against a company and are rewarded when its stock price falls. Reddit users on r/WallStreetBets discussed rebelling against these short sellers by attempting a “short squeeze.” These users framed their actions as the little person taking on Wall Street giants.

The mechanics of short selling are counterintuitive. Here’s how it works.