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How the GameStop hustle worked

How hedge funds and brokers have manipulated the market
by Lucy Komisar
Part 3 - Meet the Investigators
There are conflicting arguments about whether GME was a battle of long and short hedge funds, whether retail investors through Robinhood and other trading apps played a significant role, or maybe both.

Robert Shapiro, chairman of the economic advisory firm Sonecon and undersecretary of commerce for economic affairs under Bill Clinton, believes the war between hedge funds theory, with a healthy dose of “pump and dump” market manipulation and naked short selling. Shapiro has testified before the SEC and criticized it for failing to take effective measures against naked shorting.

Writing in Washington Monthly, Shapiro explained, “The nearly five-fold jump in GameStop’s average trading volume from July to December signaled that large institutional investors were buying [and selling] the stock … The wild swings in those share prices reflect hundreds of millions of shares being traded each day, mostly in big blocks and presumably from one hedge fund to another.” He estimated that some 20 million or more of the GameStop shorts were never borrowed and never delivered to their buyers.

Additional documentation of the GameStop manipulation comes from a handful of people on the WallStreetBets spinoff site Superstonk, who have painstakingly analyzed filings to the SEC and FINRA (the brokers’ “self-regulator”), stock reports from Bloomberg, and other public sources. (“Stonk” is their hokey way of saying stock.) Much of the data reported here is taken from their posts, which are all public and verifiable.

It’s important to note that only the SEC and the DTCC can get the trading documents that would show proof of any fraudulent scheme. But the Superstonk users, through publicly available data, detected patterns that make a strong case at least to investigate the matter.

For example, u/broccaaa, a Superstonk user, looked through SEC filings for funds with large GME positions. Big losers like Melvin and Maplelane had no shares in GME, and large puts, which are options to sell. According to u/broccaaa, this is a common characteristic in stocks with large unsettled trades, where the shares have not been transferred. He described it as “supportive evidence for naked short trades … around the end of December and early January short interest and fails to deliver were through the roof.

The float is the number of shares a company has issued that are available for investors to trade. All the shares are held in the DTC (Depository Trust Company), the “vault” of the DTCC, and “owners” have only digital entitlements. In the run-up to the short squeeze, Bloomberg Terminal data routinely showed well over 100 percent of GME float held by institutions, not including retail investors. (This ramped down massively after the short squeeze.)

Some of the extra shares result from the fact that, during the time between a short sale and settlement, both parties have legitimate digital entitlements. And due to the nature of SEC filings, there could be double counting. But the evidence shows that many of those shares never settled. The issue is fails to deliver.

Under SEC rules, shares of companies that fail to deliver in the previous five trading days are put on a “threshold list.” GameStop’s first date on this list was September 22, 2020.

Shares failed in massive numbers in the following months, leading to GameStop being put on the threshold list for 39 days between December 8 and February 3, with hundreds of millions of shares failing to deliver.

How could GME be on the list for so long? Regulators have the authority to find out which brokers failed to deliver, facilitating naked shorts. But the DTCC has historically beaten back attempts to reveal naked short selling culprits, or even to tag “borrowed” shares (called the hard borrow) so they can’t be “located” more than once. I’ve written previously about how DTCC pulled back on backing a centralized database that would prevent the same shares from being used for multiple short sales.

There is no lawful way for a stock to be on the threshold list for months,” said John Welborn, who teaches economics at Dartmouth. “The only explanation is regulatory apathy, or worse.” Because compliant regulators choose not to track shorts, traders can engage in mischief.

But how can we know that counterfeit shares were created for GME?


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