Tag Archives: Stock Market

Move to T+1 Trade Settlement Could Crush Short Sellers

US markets will soon move to faster settlement of trades. This change could seriously damage some short selling hedge funds.

From a new report in The Trade News:

The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) are working together to reduce the T+2 settlement cycle in the United States to T+1 by the first half of 2024.

This could quickly lead to regulators requiring that trades settle same day, or T+0, according to a Deutsche Bank report. Faster settlement could have two disastrous effects on short sellers:

Naked Short Selling Gets Harder

Some hedge funds sell short shares without ever borrowing them first. This mostly illegal practice shows up in huge, persistent fails to deliver in volatile meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc.


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If trades have to settle faster, it will be harder to sell short shares you don’t own while possibly locating some shares later. You have less time for your incomplete trade to sit in limbo.

Without this powerful tool to push down stock prices, it will be more difficult for short sellers to tank a stock.

Brokers Are Less Likely to Suspend Trades in Volatile Stocks

Last January, Robinhood Markets Inc. and other brokers stopped users from buying shares of volatile meme stocks like GameStop and AMC. Their rationale was that given how much the stocks’ prices were moving, they couldn’t afford to put up the necessary margin to process the trades.

After buy orders were stopped, GameStop stock plummeted:

Brokers like Robinhood have to post money with clearinghouses such as the National Securities Clearing Corporation (NSCC). The more volatile a stock and the longer it takes to settle the trade, the more money they have to cough up.

If the time it takes for a trade to settle is cut in half, the amount of margin brokers would have to post would likely be cut in half as well. Indeed, reducing margin requirements is one of the main reasons why regulators want to move to T+1 settlement.

Where This Leaves Short Sellers

Short sellers in recent years have had a lot of advantages.

Loose trade settlement rules made naked shorting easier. And if that failed, brokerages might bail you out by stopping retail traders from buying the stock to squeeze you!

And even with these advantages, hedge funds like Melvin Capital lost billions on their short positions. How big would the hole have been without these tailwinds?

The Loophole

There is one good piece of news for shorts: there may be a loophole. SIFMA, a Wall Street Lobby, is seeing to that:

…SIFMA requests an exemption from SEC Rule 15c6-1 for security-based swaps, which are generally bilateral and executory in nature.

This would make swaps exempt from the faster settlement rules. Hedge funds like Archegos have already used these derivative contracts to make massive bets out of the public eye.

If the move to T+1 settlement makes short selling harder, I expect more funds to move into swaps to avoid the rules. I encourage the SEC to find a way to make T+1 apply to swaps transactions as well.

The future is looking darker for short selling hedge funds. The question is, will regulators create a more efficient market for everyone, or let lobbyists pick apart their work piece by piece?

What do you think new settlement rules will mean for short sellers? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

Archegos Used Swaps to Hide Positions; Other Funds Are Too

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Photo: Prominent short seller Gabriel Plotkin, founder of Melvin Capital

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Inside Today’s Early Stage Venture Market

The good times are over. And they didn’t even last that long.

The NASDAQ quickly bounced back from an over 30% fall in early 2020 as COVID raged. The tech stock index reached all-time highs last November, only to plummet a further 29% since.

Now, the tech stock rout is making its way into private markets. So what does this mean for early stage startups and angel investors like me who fund them?

Here’s what I see going on inside today’s market:

1) Deals are taking longer to close. A deal that might have closed in 1-2 months last year is taking 3-4 months now.

2) Valuations are down moderately. I am seeing declines of around 10-20% from the 2021 peak.

Publicly released numbers show less of a correction, but remember that there is often a several month lag between when a deal is priced and when it’s publicly announced. If valuations drop, it won’t be apparent to the general public until months after it happened.

3) High growth companies are still getting plenty of funding.

Seed stage and Series A startups that are growing revenue rapidly, in the range of 10-20% month over month or more, are raising almost as before. These are the strongest startups, and in a tougher market, investors will gravitate toward them.


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4) Some investors are increasing their pace of capital deployment.

I’ve actually invested a bit more than usual in the last two months as valuations have retreated. If you can invest in great companies for less than you could 6 months ago, you may want to deploy more cash than usual.

5) Crypto/NFT projects continue to command crazy valuations.

Bitcoin has fallen by more than half since November. NFT trading volumes on major exchange OpenSea are also down more than 50% since the beginning of this year.

Yet this, the most rah-rah of all venture sectors, seems to be going full speed ahead. I still see extremely expensive rounds in blockchain companies that have few if any customers and often not even a launched product.

The NFT area seems the most overheated of all. I recently saw a $1 billion valuation for an early stage NFT company.

It not only didn’t have a product yet, it didn’t even have a deck.

I expect a brutal correction in these markets in the coming months, leaving behind only the most useful and widely adopted projects.


In all, if startups focus on good, cash-efficient growth, I’m confident they’ll still find the funding they need in today’s market. But companies with no revenue, no product in market, heavy burn, and/or anemic growth are in trouble.

What are you guys seeing in early stage venture markets? And what do you think the future holds?

Leave a comment at the bottom and let me know!

More on tech:

What the Best Founders I Know Have in Common

Amp It Up

The Startup Pitch Checklist

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Hedge Fund Tiger Global’s $17 Billion Loss May Be Biggest Ever

Things seem to be going from bad to worse at hedge fund giant Tiger Global. Its losses for 2022 are up to $17 billion, according to a new Financial Times report:

Tiger Global has been hit by losses of about $17bn during this year’s technology stock sell-off, marking one of the biggest dollar declines for a hedge fund in history.

The run of poor performance means the firm — one of the world’s biggest hedge funds and a big investor in high-growth, speculative companies whose shares have tumbled since their pandemic peaks — has in four months erased about two-thirds of its gains since its launch in 2001, according to calculations by LCH Investments.

Less than a week ago, the Financial Times estimated the losses at closer to $15 billion. But the NASDAQ Composite index of tech stocks has fallen another 9.5% since then.

Tiger’s losses may be the largest in the history of hedge funds. Bridgewater Associates lost $12 billion in 2020, and Melvin Capital took a $7 billion hit last year as meme stocks soared.

But Tiger’s losses dwarf those, and also far surpass some of the most famous hedge fund flameouts ever.

Long Term Capital Management made international headlines and required a bailout when its Nobel Laureate traders lost just $4 billion.

I suspect Tiger’s losses may be even worse than they look. As the Financial Times notes, the $17 billion figure doesn’t include Tiger’s investments in private tech startups.

Tiger was one of the biggest investors in large, late-stage private tech companies. It helped to drive those valuations up 653% since 2018.

Now, the problems in the public markets are beginning to affect private markets as well. Late stage valuations have begun to drop.

Given that the Nasdaq is down over 25% since November, they may have a very long way to fall.

During the bull market, Tiger was well known for doing little or no due diligence and paying extremely high prices. Indeed, its tactics forced other venture firms to shorten their diligence process and pay more.

Now, markets are sinking and easy funding is drying up. Tiger may be stung by its lack of diligence and willingness to bid aggressively as some major startups fail.

Where do the difficult market conditions leave Tiger Global?

So far, there have been no reports of massive margin calls or investor redemptions. But I expect to see a run on the fund’s remaining capital at any moment.

What do you think will happen to Tiger Global and other major hedge funds? Leave a comment at the bottom and let me know.

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Hedge Fund Tiger Global’s Coming Liquidity Crisis

Melvin Capital Faces Investor Revolt

Photo: Tiger Global CEO Chase Coleman

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Hedge Fund Tiger Global’s Coming Liquidity Crisis

Hedge fund giant Tiger Global Management has lost nearly half its assets in 2022. But it’s not pulling back.

On the contrary, it made 16 investments in private tech startups in April, per Crunchbase. That was enough to tie for #1 most active investor in the United States.

This could be a huge mistake.

Many investors will probably try to pull their money from Tiger after the huge losses. What’s more, brokers could issue margin calls due to the massive losses.

The investments in private companies that Tiger is making are illiquid. It cannot get that money back to meet redemption requests and margin calls.

These investments are huge. Last year, Tiger’s median investment size in a startup was $114 million.

So Tiger may have plowed as much as $2 billion into opaque, illiquid company shares. In a month.

That is a very significant sum for a fund that, after its massive losses this year, is down to about $20 billion in assets under management. Tiger started 2022 with about $35 billion in assets.


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If Tiger finds itself unprepared for redemption requests from investors, expect them to gate their fund. This common hedge fund tactic limits withdrawals or prohibits them altogether until markets stabilize.

And that could be a very long time. Any investors who wish to redeem their Tiger investment should consider doing it sooner rather than later, before a gate provision is triggered.

The more dangerous scenario for Tiger is large margin calls from brokers. If Tiger is faced with dwindling liquid assets (its publicly traded stocks) and lots of illiquid assets (its private tech startup shares), Tiger could be forced into a fire sale.

In that scenario, Tiger would have to sell desperately to meet margin calls, taking whatever price is available. The whole market knows Tiger is long growth tech stocks, so it will short those stocks.

This could force Tiger into even more desperate selling until it goes bankrupt.

There’s no telling if Tiger will implode or manage to right itself. But I strongly urge the fund’s managers to avoid illiquid investments at this time.

What do you think will happen to Tiger? And which hedge funds do you think are next for big losses in this tough market?

Leave a comment at the bottom and let me know.

Have a wonderful weekend everyone! 👋

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

How Giant Hedge Fund Tiger Global Blows Up

Melvin Capital Faces Investor Revolt

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Photo: Tiger Global CEO Chase Coleman

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Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Massive hedge fund Tiger Global Management is down nearly 50% so far this year, according to a new report from the Financial Times:

Tiger Global’s flagship hedge fund was dealt a fresh blow in April and is down more than 40 per cent this year, in the latest sign of how star investors who rode the big rally in tech stocks have been wrongfooted by a sharp pullback.

Tiger Global’s hedge fund lost 15.2 per cent in April, according to a person familiar with the matter, taking it down 43.7 per cent in the first four months of 2022. This year’s losses and a 7 per cent reversal in 2021 mean that the Tiger Global hedge fund’s gain of 48 per cent in 2020 has been completely erased.

The group’s long-only fund lost 24.9 per cent in April and is down 51.7 per cent in 2022, the person said. Across the two funds, the firm managed about $35bn in public equities at the end of 2021.

The losses are some of the biggest in the history of hedge funds:

Back of the envelope calculations based on the reported $35bn size of Tiger’s overall public equities book at the end of last year indicate that it has probably suffered a nominal loss of at least $15bn in 2022.

Given that there were 82 trading days in January-April, this works out to be a loss of roughly $183mn every day that markets were open this year. Or $28.1mn every hour that US markets were open.

Tiger has been torched by plummeting tech stocks. Its short positions have failed to make up the difference.

I predicted a meltdown at Tiger Global on this blog on February 7th. It took less than 3 months.

Two things happen when a hedge fund drops by half: people assume it can go down all the way, and top employees start leaving.

After all, they could soon be out of a job anyway. Even if not, hedge funds can’t charge that juicy 20% performance fee until they make back all their losses.

This means no big bonuses for a long, long time.

Tiger’s problems are compounded by major stakes in many tech startups. The hedge fund roiled the venture capital world by putting huge sums at eyewatering prices into late-stage companies in the last few years.

As an angel investor, I’ve had many deals that Tiger is in cross my desk. I can confirm they tend to invest huge sums (often over $100 million) in startups at staggering valuations.

Tiger is also well known for doing little if any due diligence on these companies. It’s likely that Tiger’s fast-and-loose approach could have led it to invest in many weak or even fraudulent companies.

Tiger’s losses may be much worse than 50% when you account for its startup investments. Valuations of late stage companies like those Tiger invests in are down over 20% from last year.

It’s easy to hide those losses because unlike publicly traded stocks, the price of these privately held shares seldom changes. But sooner or later, the chickens will come home to roost.

Money locked up in startup investments could also cause a liquidity crisis for Tiger. If investors are spooked by losses and ask for their money back, Tiger can’t get back money it invested in startups.

This illiquidity also makes Tiger vulnerable to margin calls. After its huge losses, brokers may demand more collateral.

With big losses in public markets and the rest of its money locked up in private ones, Tiger may not have the cash.

So what’s next for Tiger?

Melvin Capital recently tried to remove it’s “high water mark” so it could start charging performance fees again. Investors balked, and now the fund may shut down.

Tiger, reeling from losses and with no fat performance fees in sight, could shut down too. Or perhaps it will be rescued by a sudden upturn in tech stocks.

But until then, Tiger CEO Chase Coleman must be dealing with some very angry investors.

What do you think will happen to Tiger and other hedge funds suffering from huge losses? Leave a comment at the bottom and let me know.

More on markets:

How Giant Hedge Fund Tiger Global Blows Up

Hedge Funds Pull Back from Tech Amid Big Losses

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

Photo: Tiger Global CEO Chase Coleman

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Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

A proposed SEC rule could starve hedge funds of cash by making it nearly impossible to raise money from pension funds. From the magazine Risk:

Pension funds in the US may be unable to invest in hedge funds if a sweeping package of financial reforms by the markets regulator is passed in its current form, warn hedge fund managers and lawyers.

The US Securities and Exchange Commission is proposing a rule that aims to stop private fund managers evading legal liability for actions leading to investment losses. Hedge funds depend on this indemnity to obtain insurance.

The SEC released the proposed rule in February. From the SEC’s press release:

The proposals also would prohibit all private fund advisers from engaging in several activities, including seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity…

Without indemnification, insurance becomes prohibitively expensive or completely unavailable. And without certain types of insurance, institutions including pensions won’t invest in a hedge fund.

This could starve hedge funds of cash. A huge percentage of hedge fund assets come from pension funds.


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An exact count of the percentage of hedge fund assets that come from pensions is difficult to find, given limited disclosure requirements. But investment data company Preqin estimates that 40% of hedge fund assets come from pensions.

Public employee pensions alone invest hundreds of billions of dollars in hedge funds, with even more coming from private company pensions.

If this SEC rule passes in its current form, hedge funds could lose nearly half their assets. It will be difficult to find another source of such huge sums.

You can bet that hedge funds will fight this rule like hell. And with their high priced lobbyists, they may well succeed in killing it.

But if not, hedge funds may be facing some very lean years ahead.

Do you think the SEC will cause a mass exodus from hedge funds? Leave a comment at the bottom and let me know.

Have a wonderful weekend everyone! 👋

More on markets:

Archegos Used Swaps to Hide Positions; Other Funds Are Too

Melvin Capital Faces Investor Revolt

AMC Fails to Deliver Pass 1.3 Million in Latest Report

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Archegos Used Swaps to Hide Positions; Other Funds Are Too

Bill Hwang, founder of Archegos Capital Management, was charged yesterday with racketeering and securities fraud. How Hwang hid his positions teaches us a lot about how markets work today.

How Total Return Swaps Work

Archegos Capital Management controlled a majority of the shares of several large public companies without making any of the usually required disclosures. It was able to do this because it used a derivative called a total return swap.

A total return swap is pretty much like owning a stock. You get the gains if the stock goes up, you lose money if it goes down.

But you don’t technically own any shares.

Instead, you have a contract with a bank to get the gains and pay the bank for any losses. To hedge its risk, the bank will buy the shares, rather than you buying them.


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Hedge funds like Archegos love this arrangement because it lets them hide positions from the market and exempts them from disclosure requirements. Bankers love it because the swap comes with juicy fees.

These swaps even let you trade on huge margin. And they’re easy to get.

What’s a Few Felonies Between Friends?

Hwang had been convicted of fraud for actions at his prior fund, Tiger Asia. He was also banned from continuing to trade in Hong Kong, so he switched to US stocks.

But why let a few felony convictions get in the way of a great deal? Credit Suisse booked $16 million in fees from Archegos in 2020, likely leading to fat bonuses for the bankers involved.

How Hedge Funds Can Use Swaps to Hide Short Positions

Hwang used total return swaps to hide bets that stocks would go up. But they could just as easily be used to hide huge short positions.

If a hedge fund wanted to short a stock without anyone knowing how big their exposure is, a swap would be the natural choice. The fund could do numerous swaps with different banks, as Archegos did.

With the hedge fund’s bets split between various banks, no one would know how vulnerable the fund is to a short squeeze.

Had Melvin Capital been smart enough to do this last year, retail traders might never have known how exposed it was to GameStop Corp. shares. But they did know, and they used that knowledge to squeeze Melvin.

You can bet that other funds have learned from Melvin’s mistake.

What Investors Should Know

The bottom line is that it’s extremely easy for hedge funds to hide their positions today. It’s happening every day, and we only heard about Archegos because it blew up.

But you can be sure that other funds are out there hiding massive positions at this very moment.

What trades do you think hedge funds may be hiding? Leave a comment at the bottom and let me know!

More on markets:

Melvin Capital Faces Investor Revolt

Citadel Under Federal Investigation

FBI Raids Short Sellers

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Melvin Capital Faces Investor Revolt

Just after announcing plans to re-institute performance fees, failing hedge fund Melvin Capital has backtracked. From the Financial Times:

The US-based firm, which lost 53 per cent in January last year after betting against retail investor favourite GameStop, had written to investors only last week with plans to remove a so-called high-water mark, which stops a fund charging performance fees until losses have been recovered.

But within a matter of days, after receiving “candid” feedback from some investors, founder Gabe Plotkin has admitted he was “initially tone deaf”. 

After being shellacked last January, Melvin was down 39% for 2021. It lost another 21% in the first quarter of this year.

That puts the fund down approximately 52%, or more than half its capital.

Hedge funds generally charge 2% of assets a year in management fees. They also take 20% of all gains as a performance fee.

The performance fee is the real prize. But there’s a catch: the fee is governed by something called a “high-water mark.”

This means you can’t lose money, then charge investors a performance fee as you make it back.

High-water marks exist for a very good reason. Without them, a fund could be incentivized to repeatedly lose money then earn it back, collecting fat fees every time while investors make nothing.

To attempt to remove the high water mark, and charge people a fortune to make back the billions you lost, is the height of hubris.

Plotkin’s investors seem to be as affronted by his proposal as I am. So where does that leave Melvin Capital?

Since investors won’t let them remove the high-water mark, it could be years before Melvin can charge performance fees again, if ever. Their better traders are likely to leave for greener pastures.

Meanwhile, the fund is also caught up in a federal investigation of improper activity by short sellers.

With angry investors, no juicy fees in sight, and a federal investigation looming, I expect Melvin to shut down soon. This would leave Plotkin free to create a new fund and start earning fees again while distancing himself from the Melvin dumpster fire.

For those who will be tempted to invest with Plotkin again, remember these wise words:

What do you think is next for Melvin Capital and Gabe Plotkin? Leave a comment at the bottom and let me know!

More on markets:

Melvin Capital Under Federal Investigation

Melvin Capital Down 21% in Q1

Mass Firings at Citadel Right Before Federal Probe

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Feds Charge Stock Manipulators Who Stole $194 Million

The federal government has charged a fraud ring that manipulated numerous US stocks. The group netted $194 million in ill-gotten gains over several years.

From Compliance Week:

The SEC’s charges, contained in three separate complaints filed in the U.S. District Court for the Southern District of New York, allege that the defendants secretly held large, controlling positions in so-called “penny stocks” issued by microcap companies.

From 2013 through at least 2018, defendants’ goal was to secretly gain control of thinly traded microcap companies, hire stock promoters to generate demand for their shares, and then profit by selling those shares illegally to unsuspecting investors,” stated one SEC complaint.

The criminals hid behind a variety of shell companies and offshore accounts. They employed various schemes such as “painting the tape,” or trading shares between each other at inflated prices to make the stock seem more valuable then it was, according to the DOJ press release.

This is a common strategy. Once the price has risen artificially, the shares are then dumped on an unsuspecting bag holder who thinks he’s bought a “hot stock.”


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The defendants are charged with securities fraud, wire fraud, money laundering, and other charges. They could face up to 20 years in prison, per count.

The key point to remember is that this type of manipulation happens in securities markets every day. And it’s not confined to small stocks.

As investors, we have to be on the lookout for it.

And just as there are conspiracy to pump stocks, there are conspiracies to crash them.

Short selling hedge funds Melvin Capital and Citron Research are being investigated by the FBI for possibly conspiring with research firms to publish false reports on stocks. Sabrepoint Capital paid a researcher to publish false, negative information about Farmland Partners on Seeking Alpha, a recent court case uncovered.

Here are a few guidelines to avoid being caught up in these schemes:

1) Don’t believe everything you read.
2) Don’t buy a stock just because it’s going up.
3) If someone you don’t know calls you to promote an investment, hang up.

I hope the DOJ prosecutes this fraud ring vigorously. I also hope they uncover the many more that are still in operation.

What do you think about this massive fraud? What other frauds do you think may be lurking in financial markets?

Leave a comment at the bottom and let me know!

Have a wonderful weekend everyone! 👋

More on markets:

AMC Fails to Deliver Pass 1.3 Million in Latest Report

NYSE Investigating Shopify Stock Plunge; Citadel Involved

AMC Now #4 Most Shorted Stock

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AMC Fails to Deliver Pass 1.3 Million in Latest Report

Fails to deliver in shares of AMC Entertainment Holdings, Inc. passed 1.3 million in the latest SEC report. In nearly a year of reporting on this, this is one of the highest figures I’ve seen.

Fails to deliver hit 1,327,129 on March 23. They settled at 103,223 at the end of March, the last date for which information is available.

Even that is an exceptionally high level compared to other stocks.

AMC sometimes does a lot of volume, so we should correct for that.

Let’s compare the fails to deliver and number of shares traded for AMC and a few major stocks. Below, I use volume data from Yahoo! Finance.

Here are the numbers for March 23:

StockFails to DeliverVolume% Failed
AMC1,327,129170,142,6000.780%
AAPL1,15098,062,7000.001%
AMZN812,790,6000.003%
GOOG01,265,1000%
MSFT260825,715,4000.010%

If you look at another day, the numbers change a little, but the overall picture remains the same. AMC has far more trades failing to clear than other stocks, both in absolute number and as a percentage of shares traded.

Why are so many AMC trades failing to clear? In stocks with a persistent pattern of fails to deliver, such as AMC, naked short selling is a common culprit.

Naked short selling is the mostly illegal practice of selling short shares you did not borrow first. Later, the trade fails because the shares never existed in the first place!

This is a powerful way to push down a stock’s price. If you need not find shares to borrow, you can sell short as many as you like, putting the stock under pressure.

Moreover, the SEC fails to deliver numbers may be an undercount.

Once a trade has been failed for an extended period, the Depository Trust & Clearing Corporation (DTCC) puts it an “obligation warehouse.” Once the trade is there, it effectively disappears.

Poof.

I suspect hedge funds are using naked short sales to manipulate the price of this popular stock. And the DTCC is making it easy for them by wiping their obligations.

To me, the only real question is, how long will they be allowed to get away with it?

Why do you think AMC fails to deliver are so high? Leave a comment at the bottom and let your voice be heard!

More on markets:

FBI Raids Short Sellers

NYSE Investigating Shopify Stock Plunge; Citadel Involved

Citadel Paying Over $1B a Year for Order Flow

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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 $15 on your first order.