If we dispense with the metaphors, when a company goes bankrupt generally the value of everything goes to 0. Options values are zeroed out - so if you're short puts you'd lose and if you're short calls you'd win. Visa versa if you have a long position.

Similarly, if you're long shares then the value of the shares you have drops to zero. If you're short shares, then there is no longer anything to cover and you keep the money you received for selling your shorts minus any premium you might have paid to borrow the shares.

Theoretically you still have to "buy" the shares back to return them to who you borrowed from. but since the value of all the shares is now 0 most brokers are just going to write this off.

Lots of people have a fundamental misunderstanding of what shorting a stock is, and think that there's some theoretical limit to how much stock you can short. There isn't; If I short a stock by selling it to you, you can then lend those maybe-existent shares to someone else. This is how you can short over 100% of existing shares.

The whole market is mathematically built on the assumption that you can sell a promise to something you don't have. All the tinfoil hat folks thinking there's some huge conspiracy are barking up the wrong tree and are making the wrong argument. Everything being done is both legal and mathematically sound. The argument that everyone should be making is whether or not this is an ethical practice, and whether firms should be allowed to leverage to this extent (especially when it involves consumer money, where the customers may not be fully aware of the amount of leverage a firm is using). Tighter regulation is needed to reign in practices like this or at least make what's going on clearer, but I personally find that unlikely in the current political environment.

No, I don't even work in the financial sector. I just have a good idea about how corporate accounting, purchasing, trading work.

I answered that, but I should have been a bit clearer.

The person who ordered the 100 but only received 10 takes a loss on the value of 90 widgets on their books. They will not receive the product and can write off the resulting loss. Additionally, they have the right to make a bankruptcy claim against the seller for the value of 90 widgets and may recover a portion of that value. Making this claim may or may not be worth it based on the time and effort required, the likelihood of being paid, and the value of the contract.

Everything else I mentioned is created specifically to hedge against the likelyhood of this happening.

Businesses like known costs, even if those costs are sub-optimal. That's why businesses might buy insurance for contract fulfillment on large orders like like I mentioned. If the value of that contract is $500 million and they take delivery over time, a business would much rather pay a 3rd party say $750k to insure the small percent chance of losing most of that value from non delivery and simply not take the risk of losing that 470 million in product, or whatever it is.

But the short and most basic answer to your question is that the buying business just takes a loss.

There is nothing illegal about shorting over 100% float. We could argue about whether it should be illegal (probably should) but there's nothing saying they couldn't do it right now. Option volume on many stocks also adds up to more than the sum of the shares they promise. Should that be illegal?

If anyone is to blame, it's probably Robinhood. They should not have disabled buying.

That being said, again they didn't do anything illegal. They're allowed to change their offerings at any time and for any reason, and people using them agreed to that when signing up for the service. If you want a broker that doesn't fuck you over, then you're going to be paying commissions.

I say all this as someone who was there for the whole GME debacle and pulled a significant amount of money out of RH as a result. There very likely is nothing illegal going on here. Why cheat when you can make money without cheating?

The purchaser would have a claim against the bankruptcy for the value of the widgets, but would likely take a haircut on the value.

This type of account isn't odd, it's absolutely the norm. Selling promises for future delivery is baked into our economy at a very basic level. Sure, companies going bankrupt happens - but it's part of the cost of doing business and the likelyhood of it happening is low. If the buyer is big enough to hold sway or the order is large enough, they might have specific language about cases of failure to deliver. They might even buy insurance on the delivery if it's something gigantic. Say McDonalds pre-purchasing 200 thousand tons of next season's potato harvest. I'd eat my hat if a delivery contract like that doesn't carry insurance.

This is such a basic accounting concept, it's no mystery at all with even a basic understanding.

Say I'm an importer that sells widgets and you want to buy 100 of them from me. You don't need them all right away though. You need 10 a month to make your product.

In order to get a better deal, you go ahead and pay me for all 100 up front.

I have 50 in my warehouse so I go ahead and ship those to you. I need to order 100 more. I haven't done that yet. You don't need them yet, and won't need them for 5 months. I could potentially wait 4.9 months and you wouldn't know the difference. Eventually I'll buy those other widgets and then ship them to you, but there's no reason to do it yet.

I've sold you an asset, but I haven't bought it yet.

Being that this is Citadel though and not a widget importer, I assume this just means they have a net short position on something which they haven't covered yet.