The more you zoom in on the fundamentals of the stock market, the more surreal it becomes. Today the NYSE has designated AMC as “threshold security”, further illuminating the situation of AMC stocks that fail to deliver.
Yesterday, the Tokenist reported on another connection to the great short squeeze saga. TD brokers Ameritrade and Schwab have both announced their increased margin trading requirements to reduce risk for themselves and for traders who wish to get into trading the two stocks short – GME and AMC. As these stocks already have drained $ 12 billion hedge funds, all market players are strengthening their financial walls.
From multiple House hearings on short selling and faster settlement times, to changes in their rules by DTCC, OCC and NSCC, these measures serve as building blocks. to wall what is commonly called MOASS (Mother of All Short Squeezes). While short (hedged) selling is an integral part of the U.S. stock market, MOASS relies on a few key ingredients to represent an anomaly:
- Allegedly Naked Short Selling: Short selling stocks that have not been registered as borrowed. Instead, they swell into existence as derivatives. In turn, this increases the volume of tradable shares visible to users of brokerage applications as ordinary shares.
- Scale of naked short selling.
These two ingredients are strongly believed to manifest themselves acutely in the form of phantom stocks, resulting in a default in delivery of GME shares worth $ 359 million (FTD). They represented over a million GME shares that got lost in transit.
In addition to creating the illusion of owning these phantom or synthetic actions, they have major consequences in the real world. In covered short selling, hedge funds like Citadel are already struggling because they may have to buy back borrowed stocks whenever the stock price rises. In turn, this scenario would create significant buying pressure, keeping the stock price above that suggested by the fundamental analysis of the company.
As mentioned, hedge funds have already bled at least $ 12 billion because of this. However, in addition to this layer covered in shorts, synthetic stocks come into play as they become “real” when shorts are either called on margin or closed. Therefore, this is when their losses are greatly amplified, hence the term “MOASS” accompanied by the adjustment of the rules at all levels to soften the market blow.
NYSE adds AMC to Threshold Securities
One of the regulatory mechanisms to mitigate the risk generated by short selling and its foreseeable delivery failure (FTD) is to place the asset under “threshold securities”. Under the SEC rule set regulating short selling, the SHO Regulation established in 2005, the threshold values under Rule 203 (c) (6) are defined as:
“Threshold securities are equity securities that have an aggregate non-delivery position for five consecutive settlement days with a registered clearing agency (eg, National Securities Clearing Corporation (NSCC)); totaling 10,000 or more shares; and equal to at least 0.5% of the total outstanding shares of the issuer.
In other words, it’s what many believe is a proxy for spotting naked shorts – ghost stocks – that fail to deliver. Pursuant to Rule 203 (b) (3) of the SHO Regulations, members of clearing houses are required to “purchase shares immediately to resolve delivery defects”.
Last Friday, June 25, NYSE – a Designated Market Maker (DMM) – AMC listed as a safe threshold.
Previously, AMC stock was listed on NYSE threshold securities from December 17e to December 28h of 2020. Similarly, GME’s shares had been listed on the stock exchange throughout December 2020 and January 2021.
From the $ 359 million FTD already documented for GME stocks alone during this timeframe, it is understandable why they entered the list. As AMC is there now, this strongly suggests that many trades have already failed. Currently, AMC has 513.33 million shares outstanding. According to the criteria set by rule 203 (c) (6), 0.5% of this number would be eligible for a safety threshold, which means 2.56 million shares.
Adding the five consecutive days to the criteria would add up to an incredible 12.8 million FTD shares at most, which would be 12 times the volume of GME’s FTDs in January. However, another way of looking at it is to interpret the “totaling 10,000 shares” part as the minimum. Depending on your level of confidence in the financial system which is having “regulatory capture” issues, the NYSE quote itself could be used as a sell signal.
For example, if the NYSE later removes AMC from the listing, it would imply that the short-selling invested parties have liquidated their FTD shares. This would then signal to meme shareholders that MOASS died on arrival, triggering a sell before the margin call. While that would require a coordinated level of collusion, with billions at stake, anyone can guess where the red line is drawn.
Do you think the “regulatory capture” of high finance is over-reported or under-reported? Let us know in the comments below.
About the Author
Tim Fries is the co-founder of The Tokenist. He has a BSc in Mechanical Engineering from the University of Michigan and an MBA from the Booth School of Business at the University of Chicago. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division, and is also co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control.