How hedge funds and brokers have manipulated the market
by Lucy Komisar
Part 5 - Massive Shorts and Short Interest
An obvious sign of market manipulation is massive short interest, the number of shares that have been sold short but not yet covered. These could be legally borrowed shares that were first located. However, GameStop did have more than 100 percent short interest, including 140 percent in January, which means more shares were reported as being short sold than all the shares that should be available to trade.
u/rainforest11 of Superstonk explained that FINRA reported short interest at 226 percent of total float at the height of the GME frenzy in January. This means that more than twice as many shares as exist in reality had been sold short at one point. As late as January 28, it was reported by S3, a market data company, to be 122 percent.
Counterfeit shares were likely used as “loans” to cover the naked short attacks that knocked down the share price. With short interest well above 100 percent of the float, there were not enough real shares to borrow. That is why there were fails to deliver to the buyers.
The chart below shows the percentage of GameStop shares that failed to deliver between the beginning of January 2020 and the end of January 2021. The FTDs, between 1 and 5 percent of total shares, may seem like small numbers, but as the website Where Are the Shares asks, “Would it be okay if 1 percent, 2 percent, 4 percent of your bank deposits failed to show up?”
u/rainforest11 of Superstonk explained that FINRA reported short interest at 226 percent of total float at the height of the GME frenzy in January. This means that more than twice as many shares as exist in reality had been sold short at one point. As late as January 28, it was reported by S3, a market data company, to be 122 percent.
Counterfeit shares were likely used as “loans” to cover the naked short attacks that knocked down the share price. With short interest well above 100 percent of the float, there were not enough real shares to borrow. That is why there were fails to deliver to the buyers.
The chart below shows the percentage of GameStop shares that failed to deliver between the beginning of January 2020 and the end of January 2021. The FTDs, between 1 and 5 percent of total shares, may seem like small numbers, but as the website Where Are the Shares asks, “Would it be okay if 1 percent, 2 percent, 4 percent of your bank deposits failed to show up?”
The short squeeze was nearly a disaster for the hedge funds. u/rainforest11 explained, “Assuming the [share price] rocketed to $1,000 or beyond … hedge funds would likely go bankrupt as financially speaking there would be no way they would be able to cover all their shorts, and presumably entities that lent the short side hedge fund the shares to short would be holding the bag.”
But although GME’s momentum was at an apex on January 28, with the stock jumping to $513 a share in pre-trading, Robinhood suddenly shut off the ability to buy GME. Several other brokers followed. Immediately after this block on buys, FTDs and short interest dropped massively. The price also nosedived, which is what the naked shorters wanted.
u/broccaaa wanted to prove the manipulation, how naked short sellers can acquire shares and close the FTDs. He designed an algorithm to detect a type of option known as a “deep in the money (ITM) call,” which allows buyers to purchase shares significantly below the market price.
“As FTDs were spiking and the situation became more and more unsustainable for the shorts towards the end of January, illegal Deep ITM options purchasing was used to naked short and cover FTDs,” he said. The chart below, compiled from historical options data, shows that on January 27, 25 million shares were acquired in this fashion. Overall, this technique conjured up to 150 million naked short shares. The blue line on the chart tracks fails to deliver as a percentage of float. These nearly disappear after January 27.
But although GME’s momentum was at an apex on January 28, with the stock jumping to $513 a share in pre-trading, Robinhood suddenly shut off the ability to buy GME. Several other brokers followed. Immediately after this block on buys, FTDs and short interest dropped massively. The price also nosedived, which is what the naked shorters wanted.
u/broccaaa wanted to prove the manipulation, how naked short sellers can acquire shares and close the FTDs. He designed an algorithm to detect a type of option known as a “deep in the money (ITM) call,” which allows buyers to purchase shares significantly below the market price.
“As FTDs were spiking and the situation became more and more unsustainable for the shorts towards the end of January, illegal Deep ITM options purchasing was used to naked short and cover FTDs,” he said. The chart below, compiled from historical options data, shows that on January 27, 25 million shares were acquired in this fashion. Overall, this technique conjured up to 150 million naked short shares. The blue line on the chart tracks fails to deliver as a percentage of float. These nearly disappear after January 27.
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