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 on AMC:
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