AMC on the Threshold List: Strong Evidence of Naked Short Selling

For months, investors in AMC have suspected a conspiracy by hedge funds to drive down the share price via an illegal practice called naked short selling. Strong evidence of this emerged Friday with the listing of AMC on the NYSE’s Threshold Securities list.

Let’s back up: what is naked short selling? In a normal short sale, you borrow the shares and then sell them, agreeing to return them at a later date and hoping the price drops by then, netting you a profit. Naked short selling is selling shares short (betting against the price) that you have not actually borrowed.

Naked short selling is illegal unless it’s a bona fide attempt by a market maker to meet demand. This usually occurs in thinly traded stocks. AMC is the exact opposite, and is often one of the most traded stocks in the market.

Stocks can also wind up on the Threshold List because of fail-to-delivers (trades not being completed) due to administrative errors. But the fail-to-delivers must be substantial: at least 0.5% of all shares outstanding. AMC has been on and off this list for months, along with other meme stocks like GameStop. AMC has high short interest, numerous hedge funds betting against it, and many appearances on the NYSE list. So, I think naked short selling is the likely reason for the fail-to-delivers, not innocent errors.

Naked short selling is illegal because it is a powerful way to push down a stock’s price artificially. If a seller need not even find the shares and borrow them, they can short sell any amount. They could even sell more shares than exist! And no pesky interest to pay on those borrowed shares. Naked short selling is a tool that manipulates stocks and kills investor confidence, the lifeblood of markets that allow companies to raise funds.

So what happens now?

Regulation SHO requires that participants of a registered clearing agency must immediately purchase shares to close out failures to deliver in securities with large and persistent failures to deliver, referred to as “threshold securities,” if the failures to deliver persist for 13 consecutive settlement days.

If hedge funds have to close out their short positions, that involves buying. A lot of it. This could strain the capital of funds that are already nursing wounds from betting against meme stocks, pushing them closer to the edge.

It could also cause another short squeeze, pushing AMC’s price much higher. The stock is up 28-fold so far this year, but it’s possible we ain’t seen nothin’ yet.

More great content on the threshold listing here and here.

More on AMC:

HIGH FREQUENCY TRADERS MAKE BILLIONS ON AMC, MEME STOCKS

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

HEDGE FUNDS’ AMC DOOMSDAY SCENARIO

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High Frequency Traders Make Billions on AMC, Meme Stocks

On a side street at the southern tip of Manhattan, behind a long line of metal vehicle barriers, stands a tall glass building. Seventy-six stories up, a team of PhD’s tune computers to trade shares just a fraction of a second faster. This small, secretive firm accounts for at least 5% of all stock trades in America. This company is Hudson River Trading (HRT).

Founded by computer scientists from Harvard and MIT, HRT has quadrupled its head count in the last seven years as profits explode. Driven by the boom in meme stocks, 2021 may be the best year yet for HRT and other high frequency traders:

Hudson River Trading, a 400-person proprietary trading firm that specializes in equities and stock options, reaped about $1.2 billion from trading in the first quarter, an increase of more than 150% from a year earlier, according to people with knowledge of the results.

HRT and other high frequency traders profit from the bid-ask spread, or the difference between what a stock sells for and what it costs to buy. Those spreads tend to increase when markets are volatile, as markets in AMC and other meme stocks have been.

Hot stocks like AMC have also driven incredible trading volume, with the modestly-sized theater operator sometimes the most traded stock on the exchange. More volume gives companies like HRT more chances to collect that juicy bid-ask spread.

Citadel Securities, a market maker hated by many meme stock investors, is also making vast sums from the boom in meme stocks:

Citadel Securities and its majority owner Ken Griffin are among the big winners from a boom in retail investing, cashing in on the zero-fee trading that has lured huge numbers of first-time investors to the US stock market.

“Not only are retail market makers getting increased trading volume, they are likely getting increased profitability per trade,” said Tyler Gellasch, executive director of Healthy Markets Association, a trade group.

High speed trading firms get these orders from brokerages like Robinhood. Robinhood gets payments from those firms for steering orders their way, rather than charging users commissions. This practice is controversial, and Citadel has been fined for giving retail investors worse prices than public markets.

As stock after stock soars amid the social media frenzy, firms like HRT and Citadel may have some very profitable days ahead.

More on AMC:

HEDGE FUNDS LOSE $12 BILLION ON AMC AND GAMESTOP

HEDGE FUNDS’ AMC DOOMSDAY SCENARIO

HEDGE FUNDS BURN $6 BILLION IN A MONTH SHORTING AMC (AND OTHERS)

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Hedge Funds Lose $12 Billion on AMC and GameStop

Hedge funds’ losses on meme stocks have reached staggering levels:

Hedge fund losses since the start of the year from betting against just GameStop, AMC and Bed Bath & Beyond total more than $12bn, according to data group S3, while bets against a number of others have each run up additional losses of hundreds of millions of dollars. More than half short sellers’ $5.1bn of losses betting against AMC this year have come in June.

“In two waves, a few hedge funds have seen modestly sized short positions turn into extinction-level events,” said Andrew Beer, managing member at investment firm Dynamic Beta Investments. Funds that suffer multiple rounds of losses on short bets “will face difficult questions from investors as to whether their risk management failed to adapt to a changed market environment”.

Other short bets haven’t fared much better:

An index compiled by Goldman Sachs of stocks favoured by retail investors has almost doubled since June 2020, while another that tracks companies that are targeted by short sellers has gained 28 per cent.

More here.

Many in the financial industry complain that it’s difficult to know which stock will attract the attention of retail traders next. But watching online message boards is already common practice at Asian funds. There are even some excellent, publicly-available sources that identify the stocks that are most popular on Reddit’s Wallstreetbets, one of the main discussion boards for retail traders.

Swaggy Stocks produces one such chart,which every hedge fund manager should have bookmarked. I would suggest avoiding a bearish position in any stock on this list. A name with moderate interest today could become the most talked about stock tomorrow, leading to a huge price spike. The most dangerous names on this list are those with both high interest and a lot of shares sold short. Those stocks, such as Workhorse Group Inc., are particularly ripe for a short squeeze.

I wonder how long investors will be patient with colossal losses in hedge funds. They are supposed to be the shrewdest players at the poker table. But as the losses mount, they’re no longer looking so smart.

More on AMC and hedge funds:

HEDGE FUNDS’ AMC DOOMSDAY SCENARIO

HOW AMC IS BLOWING UP THE HEDGE FUND INDUSTRY

HEDGE FUND TORCHED BY AMC

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Bada Bing’s Real-Life Mob Connections

The Satin Dolls strip club in Lodi, NJ was made famous in The Sopranos as the Bada Bing, the home base of the Soprano crew. But what’s less well known is that the bar’s connections to the mafia go far beyond appearing in an HBO series.

Satin Dolls was started in 1989 by Brian Kelley, a retired New York Giants linebacker. But the real power seemed to lie with Vincent Ravo, a shadowy figure that appears nowhere on the liquor license or in the club’s financial records. Ravo was paid $500 a week as a consultant handling renovations to the club. Strangely, those payments didn’t stop when the construction did.

How many bars do you know of that employ a consultant? I can’t name another. And if they did, they’d probably write the checks to that person directly, right? But Ravo’s name appears nowhere in disbursements from Satin Dolls. Instead, the checks are always written to someone else: his brother, his wife, or others.

Ravo’s criminal record meant that he was banned from working in or owning a bar under New Jersey state law. But not only did he have a hidden interest in Satin Dolls, he also had off-the-books interests in several other bars in north Jersey.

Ravo was not just any criminal. A state investigation named him as a likely associate of the Genovese crime family, which had substantial interests in northern New Jersey and was perhaps the most powerful mafia family in the country. And his misdeeds go far beyond violating liquor or tax laws. Prominent author Dan Moldea named Ravo as one of the people who may have disposed of the body of former Teamster President Jimmy Hoffa.

Today, Satin Dolls seems to be a legitimate enterprise whose only known mob connections are in the world of television. But I found this convergence of fiction and history a fascinating one.

Have a great weekend everyone!

More on the mafia:

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Hedge Funds’ AMC Doomsday Scenario

Hedge funds have been perfectly capable of blowing themselves up with common trades like shorting and selling call options. But with the epic rise of AMC Entertainment Holdings, Inc. stock, there lurks another potential danger for hedge funds. And this one could be worse than anything else we’ve seen.

Aside from shorting and options trades, another common way to bet against a company is to purchase credit default swaps (CDS). These are insurance on a company’s bonds. If AMC were to go bankrupt, that insurance would skyrocket in value, since everyone would want protection for their imperiled portfolio. But if AMC soars, that insurance could quickly become almost worthless.

Why would hedge funds turn to CDS to bet against AMC? Because they’re being cut off from their traditional bear trades like shorting and options. Many prime brokers, who process hedge fund trades, have banned such moves in AMC, GameStop and other meme stocks, afraid they’ll be left holding the bag if hedge funds can’t cover their losses.

The CDS market is massive, covering protection on over $10 trillion in credit. CDS is especially dangerous for several reasons. The market is extremely opaque; these derivatives are usually custom-made for each buyer and trade away from any exchange. The leverage available with CDS is unbelievable: buyers usually only need to put up 1% of the value of all the protection they want to buy. So, if a hedge fund plunked down $10 million, they could be exposed to the swings in a $1 billion portfolio of AMC bonds. Even a small drop in AMC’s default risk would have major implications.

CDS also includes a feature similar to margin calls in stocks: collateral. Both parties commonly have to post collateral when their position moves against them. If AMC stock continues to soar, making it easy for the company to raise money and taking bankruptcy off the table, a hedge fund’s CDS could plummet in value. The fund could face sudden and massive demands for collateral because its CDS covers such a huge amount of AMC bonds. These collateral calls could quickly bankrupt a hedge fund.

Will this doomsday scenario come to pass? Who can say? But with other avenues to bet against the likes of AMC rapidly closing and ever increasing pressure to redeem large losses, hedge funds may be attracted to this risky strategy.

A wiser path would be to avoid betting against anything with a cult following as powerful as AMC.

More on AMC:

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How AMC Is Blowing Up the Hedge Fund Industry

Yesterday, high profile hedge fund White Square Capital announced plans to close down after big losses in GameStop. New York-based Mudrick Capital just took a massive loss on AMC. Melvin Capital is down by nearly half as AMC, GameStop and others continue to move against them.

These are not isolated events. There is a long term trend toward lower inflows to hedge funds:

This trend is much worse than it seems if you dig into the type of funds that bet against companies like AMC: long/short equity funds. They are the most common type of hedge fund, holding 28% of the industry’s assets.

But this strategy is dying. Long/short equity funds are seeing some of the largest outflows:

No wonder investors are losing patience: such funds have underperformed the market every year since 2011, often substantially:

Indeed, many long/short equity funds were shutting down even before 2021. I suspect those returns will be even worse this year, with high profile blowups in meme stocks.

If you’re a pension fund or college endowment, two types of institutions that often invest in hedge funds, why should you pay their high fees in return for such miserable performance? Hedge funds typically charge 2% of assets every year, plus 20% of any gains. What do I pay for my Vanguard S&P 500 index fund? 0.04% of assets every year, and not a dime of the gains.

Long/short equity funds aren’t providing much real value. What’s their strategy, to short stocks like AMC because they trade above their fundamental value? Everyone knows that. The Reddit crowd’s play is entirely technical: they hope to profit from a short squeeze or gamma squeeze.

Let’s compare this to another form of investing popular with pensions and endowments: venture capital. I invest in startups myself, so it’s a world I’m familiar with. What investors in startups do is entirely different from a long/short equity fund. We have to evaluate obscure, early stage companies with little publicly available information. We have to judge technologies most of the public hasn’t even heard of yet. And we aim to provide a lot more than money: investors often give advice and make key introductions.

Oh, and our money is locked up for about 10 years, versus easy liquidity in stock markets.

That said, even venture capitalists often fail to provide good returns. But here’s the approach I’d recommend for hedge fund investors:

1) Invest in hedge funds that have real performance and a strong value-add, and/or…

2) Invest in index funds, and/or…

3) Invest in something like venture capital, which can add real value

The hedge fund emperor has no clothes. And investors are beginning to wise up.

More on AMC:

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Why AMC May Be Even Hotter Than You Think

It’s no secret that AMC is going vertical lately:

But this and other meme stocks may be even hotter than they appear based on prices in public markets like the New York Stock Exchange. The reason is a quirk in how retail orders are handled:

The prices of so-called meme stocks may be distorted because the majority of trades in those names are executed away from public exchanges where share price formation occurs, the head of the New York Stock Exchange said on Wednesday.

Meme stocks have a much higher interest from retail investors than most companies. Since retail orders tend to be processed on private platforms, this could have a significant distortive effect on the price reported in public markets.

If many of the trades done by the most enthusiastic buyers aren’t reflected in public prices, this would make the stock seem less desired than it is. So despite AMC’s staggering rise this year, the real enthusiasm may be understated.

In meme stocks, individual traders contribute as much as 70% of the volume, Cunningham said.

The majority of retail orders bypass exchanges because of an arrangement called payment for order flow, in which retail brokerages sell their customers’ marketable orders to wholesale brokers. The wholesalers match the orders internally, trying to profit off of the bid-ask spread, while offering retail traders the best market price or better.

If meme stock enthusiasm is understated, hedge funds trading against the retail hordes should exercise extreme caution. London-based White Square Capital announced plans to close down today after substantial losses in GameStop. Massive losses in AMC and others could cause many more casualties.

The true power of the retail investor may be even greater than it appears.

More on AMC:

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Hedge Funds Burn $6 Billion In a Month Shorting AMC (and Others)

Several hedge funds that lost a fortune shorting GameStop in January have sustained further losses betting against meme stocks like AMC:

Melvin Capital and Light Street Capital, two US hedge funds hard hit by the January rally in stocks popular with retail investors, suffered further losses in May.

Hedge fund losses from betting against five popular meme stocks — GameStop, Bed Bath & Beyond, AMC, BlackBerry and Clover Health — total about $6bn since the start of May, according to the data firm Ortex Analytics. Peter Hillerberg, Ortex’s co-founder, said funds had recently reduced their short positions in meme stocks but that short interest remained “at very high levels”.

These losses are likely heavily concentrated in AMC, since it outperformed all the other stocks on that list by a wide margin in May, nearly tripling in value.

Hedge funds have been hit so hard that their prime brokers, the banks who fund their trades, are cutting them off:

Wall Street’s top brokers are quietly tightening their rules for who can bet against retail traders’ most-popular meme stocks.

The changes mean some hedge funds and other institutional investors now face higher collateral requirements or are limited from shorting certain stocks, the people said, asking not to be identified discussing internal policy decisions.

Hedge funds have been moving toward options and away from short selling to place their bets against AMC and other meme stocks. But losses from bearish options bets can also be substantial, as Mudrick Capital recently proved. Such trades may not be covered under some of these policies against short selling. Jefferies, however, has wisely included naked option positions (a particularly risky trade) on the list of meme stock bets it will no longer handle.

I have to wonder how long investors in hedge funds will put up with massive losses in volatile stocks, even as index funds post solid returns with minimal fees. If the hedge fund managers guess right on the direction of a highly volatile meme stock, they pocket 20% or more of the gains. If the stock moves against them, it’s the investors who are left holding the bag.

Heads they win, tails you lose.

More on AMC:

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This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.

Hoboken’s Most Powerful Gangster

Inside a low-slung building surrounded by trees in southern Minnesota, there is an old man. Now ailing and in his 90’s, he was once one of the most powerful members of the American mafia. This building is Federal Medical Center Rochester. This man is Louis “Bobby” Manna.

Genovese family consigliere Louis “Bobby” Manna, right

Manna was born in Hoboken in 1929 and, by the 80’s, he had reached the pinnacle of the underworld: consigliere in the Genovese crime family. Of the family’s 14 capos, 4 operated in New Jersey and reported to Manna directly. His empire included a $20 million a year gambling ring, the largest port on the east coast, garbage contracts, and union corruption that netted millions more in ill-gotten gains.

Manna ran this empire from Casella’s Restaurant in Hoboken, a bunker-like structure with almost no legitimate clientele. There, he met with his capos and ruled on disputes. Even corrupt police officers came there to pay their respects.

But despite Manna’s power, all was not well for the Genovese family’s vast operations in the Garden State. John Gotti, leader of the larger Gambino family, wanted a piece. After the Bruno/Scarfo family of Philadelphia fell on hard times, Gotti insisted on taking their lucrative South Jersey rackets, leaving only the less profitable territory in the north to Manna and the Genovese.

Manna couldn’t accept this. He was also incensed by Gotti’s murder of the prior Gambino boss, Paul Castellano, in blatant violation of Cosa Nostra’s rules. As the summer of 1987 faded into fall, Manna began to plan Gotti’s murder.

With lookouts everywhere and his own soldier as the owner, Manna felt comfortable at Casella’s. Perhaps a little too comfortable. He spoke openly of killing Gotti, even using Gotti’s full name and instructing his lieutenants in detail how to murder the Gambino boss.

Perhaps so used to power, Manna destroyed himself by his brazeness. An FBI bug picked up the conversation, along with many others. Manna was convicted of multiple murder plots and sentenced to life imprisonment in 1989 under the RICO Act.

Manna’s story has an intriguing postscript: in his 90’s and facing the coronavirus pandemic, he petitioned the court to release him to live out his last days with his stepson in Bayonne, NJ. A Change.org petition even circulated to spring the elderly convict from prison.

Federal Judge Peter Sheridan ruled against Manna in December 2020, likely consigning him to death behind bars.

Shortly therafter, his former headquarters was demolished to make way for a park.

More interesting spots in New Jersey:

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AMC Shorts Lose $500 Million in 1 Day

Despite losses of over $1 billion last month, short sellers remain attracted to AMC like moths to a flame:

Investors shorting “meme stock” AMC Entertainment Holdings (AMC.N) are estimated to have lost about $512 million on Monday after a rally that sent the cinema operator’s shares up more than 15%, data from financial analytics firm Ortex showed.

They are up against staggering volume from retail traders, among others:

Recent reports from brokerages Fidelity and Freetrade show AMC has been the most traded stock by their customers, many of whom are small-time investors.

More here.

These losses by short sellers likely understate the total losses by AMC bears. Many have taken option positions that benefit if AMC’s price drops. Those positions are going sour rapidly, leading one hedge fund to lose approximately $400 million earlier this month.

There are other strategies AMC skeptics could adopt, like buying puts (limited downside) rather than selling calls (unlimited downside). Or, they could buy credit default swaps on AMC’s bonds.

But AMC’s volume is more than double that of any other stock today and a substantial percentage of shares are still sold short, making another short squeeze a possibility. The safest spot for bears is on the sidelines.

More on AMC:

Photo: “Burn Money” by purpleslog is licensed under CC BY 2.0

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Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been good so far. More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days. With their 1% management fee, this could save you $250 on a $100,000 account. I will also get a fee waiver for 90-365 days, depending on what type of account you open.

iHerb

The only place I buy vitamins and supplements. I recently placed an order and received it in less than 48 hours with free shipping! I compared the prices and they were lower than Amazon. I also love how they test a lot of the vitamins so that you know you’re getting what the label says. This isn’t always the case with supplements.

Use this link to save 5%! I’ll also get 5% of however much you spend, at no cost to you.

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me. Every fruit and vegetable is super fresh and packed with flavor. I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy! I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order. I’ll also get $10.