The lawsuit regarding the D-Limit order type is taking place on Monday, October 25th. Citadel is suing the SEC arguing that this new order type from the IEX Exchange will harm tens of millions of retail investors, via Reuters.
But will it?
Let’s dive deep into what the IEX Exchange is supposed to do for retail investors, how the D-Limit order will innovate the market, and what it will mean for AMC and GME.
Welcome to Franknez.com – I’ve been doing some more digging and what’s occurring with Citadel and the SEC is a lot bigger than I thought. This is an important time in history.
Let’s get started!
Impact Of IEX Exchange In Markets
So, what is the IEX Exchange anyway? IEX, or the “investors exchange” is a fair and transparent stock exchange dedicated to investor and issuer protection.
There are more than 150 broker members using it and around 10,643 unique symbols currently being traded.
The innovation behind the IEX Exchange relies heavily upon it’s D-Limit order type that is supposed to outperform displayed order prices on other exchanges.
This means that predatory strategies such as market arbitrage, where high frequency firms profit from lower prices in foreign exchanges, will no longer be able to do so.
High frequency trading has been used against retail investors to not only gain better prices on stock from other ‘slow loading’ exchanges, but by also using this advantage to sell stock significantly cheaper.
So when you find an exchange that is showing lower prices, hedge funds betting against certain tickers may borrow high in another exchanges while benefiting the difference from selling the stock in those displaying lower prices.
The D-Limit order uses AI technology that provides more consistent and accurate data across all exchanges.
This order type is going to provide high quality prices in the market and is truly innovative and for retail.
How Will The IEX Exchange Affect Citadel Securities?
In short, Citadel Securities and other high frequency trading firms will lose a lot of money.
The reason being is they are making money every second from using this high frequency trading technology to their benefit by getting better prices than anyone else in the market.
The IEX Exchange would put Citadel Securities in the same courtyard as retail investors, leveling the playfield.
IEX would create a foundation for a fair market and Citadel Securities is suing the SEC for it.
The use of high frequency trading is not protecting retail investors, on the contrary it’s betting against them and the SEC has recognized this saying, “Citadel enjoys unfair advantages over other participants”.
Fighting against this order type is like getting angry for having to share your cake at your own birthday party.
Citadel processes close to 50% of the entire market’s orders. The company would face massive losses from eliminating high frequency trading alone.
Not to mention, the heavily shorted stock they have been betting against.
What Would IEX Mean For AMC and GME?
We know that high frequency trading gives these firms a trading edge over heavily shorted stock.
They’re able to locate and identify foreign exchanges where the price is significantly lower, and use these means to cheat the system by buying back borrowed shares low; profiting the difference from selling high and driving these stocks down.
IEX would seal these cracks in the system. The D-Limit is meant to keep prices equal and consistent throughout the markets.
This order type will essentially put a halt to high frequency trading, changing the entire game in the markets.
We would have transitioned from an older world of finance, to an innovative one that may bring more participants to the market.
So, How Will This Affect AMC And GameStop?
The price moves based on supply and demand would be significantly more accurate.
I would expect massive price moves from retail momentum finally display in the lit market.
IEX is the first step towards a fair market and retail investors must support it’s innovative structure to fight high frequency trading.
Only then could we move on to the checklist of eliminating dark pool trading and other predatory strategies.
What Are The Chances Of The D-Limit Order Type Being Approved?
This would highly depend on the judge(s) looking into this matter. There are a lot of factors that can take place here and Dave Laurer, a former Citadel Securities employee said it well in a recent interview with Trey.
He mentioned you never know what kind of deals are being made behind-the-scenes that may influence certain decisions.
And although Dave Laurer wasn’t very optimistic, I believe the energy we should be feeding is that of positive impact and real change in the markets.
The D-Limit order type would be a significant innovation in our markets and must be upheld.
It would be up to retail investors to fight for justice and a fair market should it not be upheld in court.
This is a developing story so make sure to subscribe to the blog or follow me on social media to get notified on the next updates.
Is The D-Limit Order Type That Good?
To put things into perspective, the IEX Exchange has done numerous tests observing the accuracy of the D-Limit order type.
Just when we thought GameStop’s short squeeze was over we begin to see GME gain some momentum. GameStop has been the heart of the wallstreetbets movement and continues to have a strong sentimental hold on retail investors and gamers alike.
The retail investors who missed GameStop’s first squeeze either bought AMC shares or bought GME while it was still high. And if you got in when it fell back down to $40, well you’re doing pretty well right now. So, will GameStop see a massive short squeeze again? Here’s what we know.
Welcome to Franknez.com – the blog where you can digest content on personal finance, side hustle ideas, entrepreneurship, and trending investing topics.
Lets get started!
GameStop closed at $186.76 on Tuesday October 19th.
Trading volume is currently sitting at 2 million with 2.8 million being GameStop’s average volume. Today’s move was amazing for the ape community.
Understanding the short-seller
GameStop has taken the entire internet and finance world by a storm. What is happening nowadays. Retail investors over at r/wallstreetbets have opened Pandora’s Box on short-sellers and hedge fund institutions.
Short-sellers are investors who short the stock.
Shorting a stock is the process by which sellers essentially bet on the stock price to drop. They borrow stocks at a higher cost and sell the stock low, profiting the difference.
We’ve seen GameStop drop down and consolidate at $40 after its gamma squeeze peaked close to $500 per share back in January. As of October 19th it is trading around $186.76.
The stock has made a massive climb after some serious consolidation. It looks like GameStop is prepping itself for another gamma squeeze.
Could we finally see that GME squeeze everyone’s been waiting for?! I think its time.
See, GameStop’s short interest is still rather high and not all short sellers closed their positions back in January. This means the stock still has loads of room to go bonkers.
What is a short-ladder attack?
A short-ladder attack is a strategy performed by short-sellers where they bid on the stock at a significantly lower sell price and purchase it from one another. Thus, driving the share price lower.
How do you spot a short-ladder attack? When the stock knows nothing but gains, but something keeps pushing it down until over and over again, that’s when you’ll know.
Why GameStop has potential for a second short squeeze
Short-sellers didn’t learn their lesson from the first time. GameStop stock is still being heavily shorted.
With GameStop becoming a technology company, its value has not only significantly gone up but it now has even more potential to keep driving its momentum.
Retail investors have a strong conviction towards GameStop investment. This means they’re not willing to sell the stock which in turn creates a supply and demand scenario with short-sellers who have to close their positions.
Short Share Availability and Short Borrow Fee Rate
You can see GameStop’s short share availability and short borrow fee rate using this link (via. Fintel)
This number of course changes every day and can be expected to rise as hedge funds continue to short GameStop stock. However, the short borrow fee rate isn’t a catalyst for GME to squeeze.
I’m excited for my subcommunity that holds both GME and AMC stock because both are about to skyrocket past Pluto.
GME Stock Analysis
Roensch Capital goes over the data for trending stocks. The information is very easy to understand and gives you insight in the market from an analysts perspective.
Be sure to check out recent videos as they’re being uploaded to stay updated with any changes that occur in the market with GameStop.
It is important to note that I am not a licensed financial advisor. Like many traders and self taught investors, all speculation is based on educated estimations based on highly reliable analysis, patterns, and documented news charts.
Volume is key to a second GameStop short squeeze
Just like AMC, GameStop will need to see a continuous runup in share volume.
When retail investors continue to buy and hold GameStop stock, short-sellers shorting the stock eventually have to buy back the stock. This demand and supply scenario results in various gamma squeezes.
The gains we’ve seen with GameStop have been a series of gamma squeezes, or incremental gains.
Usually what follows after gamma squeezes is a short squeeze if it has enough volume. The volume of shares depends on how much retail investors are purchasing GameStop stock or selling it.
How Soon Will A Second GameStop Short Squeeze Happen?
There is so much volatility occurring in the stock market at the moment. Such volatility is usually a sign of an upcoming short squeeze as we saw back in January.
Not only are retail investors experiencing a lot of volatility, but GameStop stock seems to be in bullish territory which is great for volume.
FOMO (fear of missing out) continues to bring in new retail investors which is a great driving factor to the stocks volume.
GameStop announces fourth quarter earnings for 2020 (ARCHIVE)
GameStop announced that it will be releasing its fourth quarter and fiscal earnings for 2020 on Tuesday, March 23rd after trading hours.
This announcement is very important because owners of the company will go over earnings, as well as future assessment that let retail investors know the direction of the company as a whole.
This of course can have a very good impact on the stock price should the reports come back positive.
Here is the link to GameStop’s news release –> LINK.
However, like most companies affected by the pandemic, the numbers for the last quarter weren’t the best. This shouldn’t affect the stock price moving forward though. There’s too much sentiment surrounding this stock now.
Retail investors now have the power to save any company they wish to save. Now it’s only a matter of time for GameStop to step up and raise capital so that they can innovate and provide more value back.
GameStop is currently looking for ways to operate more efficiently. While the Reddit community was able to keep them from going bankrupt, the company as a whole will need to continue kicking butt.
Here’s what’s been going on with GameStop recently.
Current GameStop news
GameStop introduces Matt Furlong as the new CEO of the company.
GME shares are still up nearly 1100% this year-to-date with the company’s valuation at $15 billion.
Bullish GameStop options are still currently being heavily traded
Prior to GameStop, Matt Furlong worked at Amazon in Australia overseeing the growth of operations. He also worked in brand and marketing for Procter & Gamble years before.
The skills to grow operations and to properly brand and market will benefit GameStop immensely.
What can retail investors do to tackle shorting?
If retail investors want to counter GameStop’s stock price from plummeting, they’ll have to continue to hold and buy the stock.
This short squeeze play will require patience.
If you hold a position in GameStop, it’s important that you ask yourself what your reason for holding is. Does your DD provide you with the confidence to stick to it longer if need be? If so, stick to your convictions and trust the process.
Unfortunately, I didn’t get in on GameStop before it gamma squeezed so I took a position in AMC instead. Taking this position has been one of the best financial decisions I’ve ever made.
I would take a position in GameStop if it was more affordable. Regardless, I like the stock and I love the community even more.
Will GameStop finally short squeeze?
I think GameStop is preparing itself to put short sellers out of their misery. The stock has been havoc to hedge funds and we can tell they’re giving out primarily due to this massive breakthrough we’re seeing now.
And although I personally don’t hold GME stock, I have a lot of awesome memories at GameStop which I would actually like to share with you at the end of this article.
Now let’s talk about a little justice. A major hedge fund that was attacking GameStop has now been reported to lose a significant amount of money.
Ladies and gentlemen this is massive. Melvin Capital is a hedge fund that has been shorting both GameStop and AMC stock.
Melvin Capital suffered a 49% loss it’s first quarter of 2021, via. Markets Insider.
Here’s why this matters:
Not only are shorts losing money every day but huge hedge funds are bleeding
This is a huge win for retail investors
Unless shorts close their positions, hedge funds will continue to suffer
Interest rates can skyrocket for short sellers enabling them to close their positions
We’ve see GameStop’s short borrow fee decrease but I wouldn’t be surprised if it begins moving back up very soon. Hedge funds have been trying to obliterate our beloved GameStop from the face of the planet. Something about them losing a lot of money feels like justice.
Believe me, I’m 100% for making money. The ethical way. You should be supporting beloved companies, not targeting them just because you see an opportunity to kick someone when they’re down.
Karma is about to get a lot worse for hedge funds betting against both GameStop and AMC.
As long as the stock continues to be shorted and held, GameStop can expect a series of gamma squeezes to continue pushing the stock up. This will inevitably lead to the ultimate short squeeze.
Fundamentals can also drive GameStop’s stock price up. The company will have to run efficiently by being able to meet projected goals. Although this is not a fundamental play, mainstream media still has some influence over this.
Short sellers continue to face devastating losses from shorting GameStop. Hedge funds are about to burn their second hand after playing with fire again.
Gamma squeeze vs Short squeeze
A gamma squeeze are momentum gains. These usually occur from call options closing in the pocket resulting in heavy buys or purchases in the market.
A short squeeze is vigorous and can spike with no warning. This is where you see 100% gains in a matter of seconds and minutes. A short squeeze can even reach 1000% and 10,000% gains.
Leave a comment below. Do you remember your first GameStop memory? I’m sure you have many. I remember the first time my brother and I went inside a GameStop it was unreal.
It was my first time inside an actual video game store. The coolest thing was seeing how many different games and accessories they had for all the consoles at the time.
Some of the most awesome memories at GameStop was seeing that brand new game on display. For me, it was Guitar Hero. My god. Seeing all the marketing behind the game and the guitar in display was heaven.
I also remember the employees giving you close to nothing for a used game, lol. What are some memories you have of GameStop? I would love to hear from you. Leave them in the comment below.
A quick message from Frank Nez:
A lot of you have been sharing my posts on Facebook Groups, Reddit, Discord chats, and Twitter. Words can’t explain how grateful I am for you sharing these articles. Thank you.
A while back I wrote an article debating which stock you should invest in, AMC or GME stock? The premise of that article was to identify which stock was more convenient for the new retail investor.
See, both are great momentum stocks to hodl, but GME stock is a lot more expensive for the newcomer to buy. And although AMC has now become the more popular stock, I have a good feeling those hodling GME stock can still see massive gains. Here’s why.
Welcome to Franknez.com – today I want to talk about GameStop stock, ticker symbol GME. Lets look at the data that states this stock is not done climbing up.
Lets get started!
If you’re like me, you probably didn’t get a chance to get in on GameStop before it began to create a ruckus in the financial world. Or perhaps you were lucky enough to get a few shares.
I’m a strong AMC shareholder and will not buy GME stock only because I rather increase my position in AMC. AMC’s short interest is higher, utilization is higher, and so are the shares on loan. It’s also more affordable.
But don’t get me wrong, the reason I’m publishing this post today is because GME stock has enough data that proves it has more juice to squeeze. So, if you’re holding GME stock, this article should help you armor up your conviction towards your stock.
A high demand for shorting GME stock means there’s a play to squeeze shorts out of their positions. GME shareholders still have a chance to make a ton of money.
Short sellers have not backed off from shorting GameStop and continue to play with fire.
Will Utilization Go Up Again?
If more short sellers open short positions then GameStop’s utilization will certainly go up. At the moment, it seems that there’s only 34% of the stock that’s being borrowed.
I personally don’t think shorts will try to go up against GameStop again. Those that are still shorting it have been holding on for quite some time. However, it’s only a matter of time before they too close their positions and GME stock surges again.
GME Stock: Shares On Loan
GME’s shares on loan refers to the number of shares that are being borrowed. GME stock has approximately 6.80 million shares on loan. We essentially convert the utilization percentage into the actual number of shares that are being borrowed.
That’s a lot of shares that still need to be covered by short sellers borrowing the stock.
GME stockholders could take advantage of the fact that the stock has been on discount recently. Especially if you’re still looking to increase your positions in GameStop stock.
Otherwise, GME stock is a hold play right now where patience will bear some sweet fruit very soon.
This puts short sellers under tough conditions since they’ll need to keep more cash at hand to continue borrowing AMC and GME stock.
And although we’ve seen a little bit of institutional selloff, Charles Schwab continues to hold GME stock. An institution that has not sold GameStop is Vanguard. Vanguard is one of AMC’s biggest institutional holder who continues to buy the stock to-date.
So if there’s something GameStop shareholders can take from this is that institutions are still holding GME stock, and there are still enough short sellers to squeeze out of their positions.
How High Will GME Stock Go?
So, can GME stock reach $1,000 per share. It’s certainly a possibility given that GameStop’s dark pool trading percentage is rather high, according to Stonk-O-Tracker data.
Dark pool trading in GameStop has ranged between 30%-50%. This means 30%-50% of short selling has occurred behind closed doors. Short sellers are able to keep their short borrow fee down with this loophole as well as conjure up naked shares to swap with one another.
However, they’ll eventually have to close every synthetic share they’ve ‘borrowed’ to short the stock. This is massive for GameStop just as it is for AMC.
Is It Too Late To Buy GME Stock?
I would say that you will no longer be able to buy GME stock below 3-figures. If this figure is too expensive for you to build your portfolio then it absolutely is too late.
However, if you’re looking to diversify your momentum stock portfolio, GME stock could be a good stock to hold. Otherwise, you’re better off buying the heavier shorted stock that is significantly more affordable at the moment, AMC.
Subscribe for more stock market news
If you enjoyed this article be sure to share it with someone who needs to see it and subscribe for more stock market and investing news.
New articles are posted daily and emailed out to each reader. Or you can follow me on social media to see when I share a new publication.
Are you holding GME stock? Let me know in the comment section below how high you think the stock can go.
“Be unafraid to criticize those who reach for the lowest common denominator, and who sometimes succeed in finding it.” – Christopher Hitchens, Letters to a Young Contrarian
In the world of finance contrarians play a unique role, tempering speculation and exuberance with skepticism and doubt. Contrarian investing styles are often associated with hedge funds – privately managed investment vehicles that pool large amounts of capital and utilize complex, deep value trading instruments like short sales, derivatives, futures contracts and private equity to generate wealth for their clients.
Whereas most investors purchase securities in hope they rise in value, contrarian hedge funds more often try to capture profit from securities as they decline.
What is a short position?
The funds assume a “short” position by borrowing shares of a specific security they believe is overvalued and then selling those shares into the market with an obligation to repurchase and return them (referred to as “covering”) at some point in the future.
Hedge funds sometimes work together to short exorbitant amounts of shares of a single company, driving the stock’s value so low they force the company into bankruptcy. If this proves successful the shares of the bankrupt company become worthless and the fund does not have to return them to the lender, thus booking 100% gains on the transaction.
While a short position could technically remain open indefinitely, borrowers pay fees and interest on the loaned shares that can erode profitability, so there remains incentive to cover even as a stock continues to decline.
If the shares are repurchased at a lower price the fund profits off the difference in the spread. Conversely, if the stock rises in value the trade can result in exponentially larger losses, as the value of a security can theoretically rise indefinitely.
These high-risk investment strategies are generally utilized by hedge fund managers and professional investors, the so called “smart money” as they like to call themselves. Contrarian hedge funds also profiteer off “distressed debt” investing, generating significant returns from restructuring the debt loads of bankrupt and financially struggling companies.
Intro to corporate bonds
The most straightforward form of distressed debt investing is to directly purchase corporate debt through the bond market often at steep discounts to face value due to the high probability of default.
This strategy presumes either the bonds will increase in value if the distressed company recovers, or the bond holders will receive preferential claims to the corporation’s equity in bankruptcy court and will be able to recover all or most of their investment.
Hedge funds can also gain exposure to distressed debt by extending credit directly to a floundering entity, or by purchasing convertible notes that can be redeemed for a specified number of shares of common stock at some point in the future.
What is a direct lending agreement?
Direct lending agreements may also grant hedge funds access to governance boards and corporate officers to help them navigate the recovery, bankruptcy, or restructuring process.
After receiving a graduate degree from Harvard Law School, Jason cut his teeth on Wall Street during the dot-com crisis. He started his career at Merrill Lynch in the Mergers and Acquisitions department and then joined the firm Contrarian Capital Management in 2001 the day that Enron filed for bankruptcy.
Mudrick Capital Management
Jason left Contrarian in 2008 after Lehman Bros. filed for bankruptcy, forming Mudrick Capital Management to capitalize off the explosion of distressed debt during the great financial crisis.
As shopping malls continued to lose market share to e-commerce giants, this proved be a highly profitable trade.
At the time opportunities in the distressed debt market were still limited as a recovering economy, low interest rates and a strong bull market had helped shore up corporate balance sheets. Corporations were also taking advantage of the cheap debt to grow their underlying businesses, and when COVID emerged during the beginning of 2020 many of these companies were severely overleveraged.
To a contrarian like Jason Mudrick, events like the COVID lockdowns present once in a lifetime investing opportunities. As pandemic fear spread across the globe, Mudrick wasted no time in scouting for potentially distressed targets as well as capitalizing off his existing investments, one of which happened to be a gold mine in northern Nevada.
Foreseeing a spike in gold prices brought on by pandemic driven panic, Mudrick decided it was an opportune time to take Hycroft public. To further this end, Mudrick Capital just so happened to have on the books a blank check SPAC (special purpose acquisition corporation) that had gone public in 2018 under the ticker symbol MUDS with a stipulation that it must merge with a debt distressed target within 24-months or return the funds to investors.
In January 2020 – with the MUDS merger deadline just three weeks away – Mudrick’s SPAC announced it would be taking it’s very own Hycroft Gold Mine public, instantly enhancing the liquidity and worth of the two dormant holdings.
In discussing Hycroft’s merger in the podcast, Jason astutely notes: “investors in SPACs tend to not care about the companies that are merging.”
The deal was finalized in May 2020 and Hycroft shares began trading in June at just under $10. Jason claimed to be bullish on the mine during the podcast, stating “if we traded close to comps, it would be a $20-$30 stock” yet admitted the security was “very illiquid.”
Shares briefly spiked up to $16 after the merger and were trading around $10 before Hycroft announced an additional 8.3 million share capital raise that diluted the price by 16%. Hycroft’s share price continued to bleed throughout 2021 and was last trading in the $3 range, down 80% from their peak, as investors begin to question when and if the mine will ever turn a profit.
Despite what came to be for early investors in MUDS, the shotgun marriage between two of Mudrick’s biggest duds was certainly a win for the firm at the time.
Owning companies through loans
With new liquidity available from that and the small short continuing to be a profitable trade, Mudrick began looking for pandemic-related distressed opportunities outside of his own firm.
Bloomberg’s reporter noted, “His playbook is the same as always: buy up debt in the hope of taking control as the business fails to make debt payments and is forced to restructure its balance sheet. Mudrick, whose distressed-credit hedge fund returned 22% in 2019, said he hopes to make as many as 10 new investments in the coming weeks. ‘We want to own these businesses through the loans,’ he said. ‘If the market recovers, we’ll make some money and move on.’”
Jason went into much greater detail about this playbook during his SALT interview, discussing at length how the highly complex process works.
Ultimately the funds seek to take a controlling share of the company through debtor in possession loans and by taking advantage of loose covenants in restructuring agreements. “It is a very resource intense investment strategy…it’s very advantageous to get to 51% in a lot of these documents, which are very covenant lite…there is an optimal size where you have the resources, you can own enough of this stuff to drive the boat.”
It’s part of the playbook
In other words, Mudrick’s aim is to acquire a controlling stake in the company through loans, as opposed to owning a majority stake of the company’s stock.
In fact, diluting and depreciating the value of the stock is part of the playbook. Then they lead the company though bankruptcy proceedings, which can take years, and flip the company at the end of the process for an enormous profit. Jason also discusses the usefulness of SPACs in the relisting process on account of the regulatory hurdles facing initial public offerings (IPOs) since the great financial crisis.
“It’s hard to just re-list that company, which is what we used to do in ’01, ’08. You would take the company through bankruptcy, and just re-list it on the New York Stock Exchange. And liquidity would come back to the name, and you would exit. Today, the holding period is much longer.”
Mudrick and AMC Entertainment
One of the top targets on Mudrick’s list was AMC Entertainment Holdings Inc., a 100-year old business that had recently expanded to become the largest theatre company in the world. At the time AMC was controlled by Wanda Group, a Chinese conglomerate that had assumed a majority stake in the company prior to taking it public through an IPO in 2013.
In the years preceding the COVID lockdowns AMC was one of those businesses taking advantage of low interest loans and was rapidly expanding its operations, acquiring theatres throughout the globe. When lockdowns shuttered the entire industry overnight, debt heavy AMC started bleeding cash at an unsustainable pace. From Mudrick’s perspective is was an ideal candidate for a loan-to-own acquisition.
The playbook hedge funds use to drive companies into bankruptcy is relatively uniform and it almost always begins with capital infusions through high interest loans. In bankruptcy court debt holders always get paid before equity holders, so while investors in the stock of a struggling company may assume a total loss in the event of bankruptcy, lenders will most often recover their losses in equity.
Hedge funds usually position themselves to gain from the deal either way (hence the term hedge) by adding convertibility features to their notes so the fund can convert the debt into common stock in the event the business recovers.
The death spiral
But convertibility features can also be used to leverage a company into bankruptcy through a phenomenon called “death spiral financing” whereby lenders exercising share conversions drive down the price of the security through the dilution, then sell their stake, further exacerbating the price decline.
This value depreciation attracts short sellers who add even more selling pressure, causing long-term investors to cut their losses, and even further compounding the problem.
“The only hope for the company to interrupt the death spiral is to improve its operational results. If it can effectively invest the proceeds of the convertible bond issue in its underlying business, it may be able to thwart the short sellers and even stick them with the losses.”
AMC Entertainment’s, Adam Aron
AMC’s CEO Adam Aron had taken the job in 2015 and enjoyed a few years of acquisitions and growth before the theatre business fell victim to the same slump as America’s shopping malls. Under Adam’s leadership AMC’s share price rose to a high of $35 in 2017 before taking a nosedive and closing the year down over 50%.
In January 2020 before COVID hit, AMC shares were trading in the $7 range and by the time the lockdowns took hold, shares had fallen to just $2, off 95% from previous highs. As the lockdowns stretched on Adam Aron was in a seemingly impossible bind: he was running out of cash and he was already leveraged to the gills, having already borrowed hundreds of millions of dollars from numerous stakeholders just to survive.
Adam meets Mudrick Capital
At the end of 2020 when Mudrick Capital approached Adam with a lifeline, he took it, borrowing $100 million in cash and entering into a complex debt restructuring agreement with the fund, ultimately refinancing $2.6 billion worth of AMC’s liabilities and providing enough liquidity for AMC to survive through 2021. Once the deal with Mudrick was made public, Adam Aron turned to AMC investors to assure them the bills would be paid and that a bankruptcy filing was, at least temporarily, off the table.
While presumably this all sounded good to shareholders, the unintended consequence of the debt restructuring was a credit downgrade by S&P Global and an onslaught of fear inducing headlines suggesting that AMC would never dig themselves out of the hole. As COVID spiked demand for in-home entertainment, the national narrative suggested that the 100-year old tradition of movie going may never be revived.
Mudrick backstabs AMC Entertainment
Adam did a share offering to raise capital, adding $125 million to the balance sheet in two months, but further diluting the share price. Then he was forced to borrow another $100 million from Mudrick, who exercised the conversion on the firm’s initial investment, granting the fund 13.7 million common shares of AMC that Mudrick turned around and sold.
At this point AMC’s finances were deeply entrenched in the gallows of the death spiral. Most CEO’s would have buckled under this kind of immense pressure, but Adam beat back. Certainly one motivating factor was to protect his own substantial investment in AMC stock that had been provided to him as part of his annual salary.
Until the theatres reopened and AMC could earn revenue there was nothing he could do but keep kicking the bankruptcy can down the road. Another 178 million AMC shares were sold off, this time raising $500 million as the share price crept lower and lower.
Share prices dipped below $2 as short sellers crowded into the trade and analysts continued to attack the company. And just when it looked like the hedge funds had won, an unforeseen group of investors showed up and disrupted the entire plan.
Short sellers have a major incentive to exit a trade early if it begins to go the wrong direction, as losses can be orders of magnitude larger than limited gains should the stock price suddenly go up. It is considered a very high risk investing strategy, and to limit loss exposure the brokerage firms handling these trades require traders to maintain cash collateral and lines of credit (more leverage) in a margin account, the amount varying depending on the fundamentals of the trade and the perceived risk to the brokerage.
When cash reserves fall short the accountholder receives a “margin call” requiring a deposit to meet the maintenance levels. If the accountholder cannot deliver the cash by the specified time the account can be subject to liquidation and realized losses can be significant.
Short trades in effect occur backwards – sell high, buy low being the winning strategy – and the shares must be purchased to close out the position. Should something unexpected cause a stock’s price to rise sharply, shorts will rush to exit the trade, further accelerating the price increase.
This triggers margin calls, which if left unmet trigger liquidations. Liquidations trigger more price volatility, as brokerages may close out both short and long positions to satisfy margin requirements, creating volatility throughout the whole market.
This effect is magnified considerably in securities with a high percentage of short interest and can culminate in a “short squeeze,” where a stock price soars to absurdly high levels for a matter of days before crashing back down again once short positions have all been covered.
Just as the potential demise of shopping malls and movie theatres presented opportunities to hedge funds, the possibility of initiating short squeezes presented opportunities to a very small group of investors participating in an online discussion forum on Reddit.
While screening struggling stocks for potential investments, the group noticed some unusual trading activity in a handful of heavily shorted holdings – most notably mall retailer GameStop – and also AMC Entertainment.
Reddit retail investors make a move
Speculation began to form around GameStop in particular, that large hedge funds had borrowed and sold short more shares than were available in the float (the sum of all shares in circulation) causing the price to be artificially depressed.
In theory this should not be possible as short sellers are not supposed to sell shares without legally borrowing them first, but every day unknown numbers of fraudulent shares, referred to as “naked shorts,” are sold into the markets in poorly regulated, illicit transactions between brokerage firms, market makers and clearing houses.
The beginning of the beginning
To Main Street traders GameStop had all the makings of a darling underdog, including relatively good fundamentals to support the underlying business. Plenty of Americans still enjoy the instant gratification of the brick-and-mortar shopping experience, and GameStop in particular had nurtured a generation of brand loyal gamers that (perhaps not coincidentally) have also embraced the emergence of online stock and cryptocurrency trading platforms.
They genuinely liked the company and saw potential for it to thrive in a post-pandemic the future. Many of these investors had been adversely impacted by the great financial crisis of 2008 and they despised the thought of greedy hedge funds leveraging their favorite businesses into bankruptcy.
As time passed a promising thesis formed around the GameStop trade and they started buying up the stock. Others joined in, and slowly GameStop’s share price began to rise.
A movement is sparked
AMC quickly got swept up in the excitement and as more and more people started buying the stock it started rising too, putting short sellers (who had been patiently waiting for the bankruptcy proceedings to commence) on high alert. But they did not cover their positions. Adam Aron meanwhile took advantage of the stock’s valuation by issuing even more shares and was able to restructure AMC’s debt with better terms.
In a press release to investors dated January 25, he announced: “Today, the sun is shining on AMC. After securing more than $1 billion of cash between April and November of 2020, through equity and debt raises along with a modest amount of asset sales, we are proud to announce today that over the past six weeks AMC has raised an additional $917 million capital infusion to bolster and solidify our liquidity and financial position. This means that any talk of an imminent bankruptcy for AMC is completely off the table.”
Robinhood sparks outrage
At the end of January GameStop investors finally succeeded in initiating a short squeeze, causing shares to jump from their yearly low below $4 to a peak of $483 – a whopping 12,811% gain – and AMC enjoyed a nice bump up into the $20 range at the same time.
Both stocks appeared positioned to rise even higher the next day when suddenly Robinhood and a number of other online brokerage firms halted the buy side of the trade in these securities because they lacked the liquidity (and possibly the desire) to settle the transactions.
Share prices plummeted on the news and many retail investors found themselves on the wrong side of the trade with significant losses, otherwise known as “holding the bag.” The move was perceived by retail traders and market observers to be a significant screwing by the brokerages, hedge funds, market makers, and regulatory agencies alike.
It was around this sense of injustice that a much larger community of investors began to form, along with hope that those holding shares with large paper losses could potentially recover them in time. They did a lot of research and due diligence, concluding that most of the shorts had not covered their positions, but had increased them instead.
They began to unearth a treasure trove of instances of market manipulation, collusion and illegal trading activity, all while they were being mocked by the press and frowned upon by Wall Street pundits.
It became clear that the institutionalization of hedge funds over the past two decades had allowed these entities to further their own self-interests at the expense of not just retail traders, but pension funds, corporations, communities, and working-class people throughout the country.
Out-of-the-money calls are risky bets where the buyer pays a premium for the right to purchase shares of a security on a future date at a set price (the strike) above where the stock is currently trading. If on that date the share price exceeds the strike price on the call, the purchaser can cash out and collect the shares or sell the contract and bank the profits.
The $40 calls that Mudrick was selling presumably seemed like a safe bet to capitalize off the volatility, as even in the best of times AMC stock had never reached such lofty valuations.
This also meant the options Mudrick sold were “naked calls,” meaning the seller does not own the shares of the underlying security and if they exercised he would have to repurchase those shares at significantly higher prices (unlike naked shorts, naked calls are perfectly legal, albeit extremely risky). Mudrick obviously did not think they would exercise, or he would never have sold $50 million worth of them.
Despite the reports that Mudrick had cashed out the fund’s AMC shares near all-time lows and placed a large bearish bet against the stock price rising in the future, financial news outlets were quick to admire his profits and quoted him as saying: “The market did not believe AMC would be able to get through the downturn – we did.”
A new force to be reckoned with
Ironically, Mudrick may very well have saved AMC from bankruptcy, but it was retail traders who would go on to save AMC from him. In the weeks and months that followed, enthusiasm for GameStop and AMC spread across social media and investors in these stocks became a force to be reckoned with.
They rebranded themselves as neither bulls nor bears, but “apes” and spammed the internet with video clips, charts, news and humorous memes regarding their two favorite holdings. By the end of May both stocks were on the move again, and AMC especially was on a tear.
Apes had spent the month renting billboards, flying banners behind airplanes and building connections that spanned the depths of race, politics, nationality and economic status to rally around a common goal. For some of the apes, sharing their love for AMC and GameStop while exposing the inner workings of a corrupt financial market had become a full-time job.
Mudrick continues to stab retail investors
And with this backdrop in mind, Mudrick was fixing to lose a lot of money on those $40 calls he had sold back in January. The last day of trading in May was the Friday before Memorial Day weekend, and AMC shares had climbed all the way to $36.72 during intraday trading and then fell dramatically to close at $26.12, still up over 200% for the week.
The apes were on fire, and while they were celebrating the holiday with their families, Mudrick spent the weekend negotiating the purchase of another 8.5 million AMC shares from Adam Aron, who was quietly arranging an additional 11.5 million share offering for the following week in his quest to shore up AMC’s finances.
Mudrick agreed to purchase the 8.5 million shares over the weekend for $27.12 each, a dollar premium above Friday’s closing price, adding another $230.5 million to AMC’s balance sheet. When the market opened on June 1 following the three-day weekend, Mudrick sold all 8.5 million shares before news of the deal even broke, instantly netting a few million dollars in cash for the firm and temporarily stalling the morning price rally.
“Raising cash through an equity sale to a single holder is relatively rare in U.S. markets. Having the holder flip the stock right after buying it is almost unheard of – usually the buyer is an existing stakeholder trying to send a message of stability to the market.”
About the only logical explanation is that Mudrick was desperately trying to keep AMC’s share price below the $40 strike on his outstanding calls (also known as market manipulation).
Market manipulation goes unnoticed
Nonetheless the message of instability was totally ignored. AMC’s share price dipped briefly on the news midday and then soared up another 23% to close at $32.04.
Given an 8.5 million share dilution was met by such a steep rise in price (when the exact opposite should have happened) this would have been the best time for Mudrick to exit the trade, albeit at a very significant loss.
Mudrick instead kept the calls overnight, perhaps hoping AMC’s upcoming share offering would drive the price down later in the week, but that did not happen. The following day the stock blew past $40 in a matter of hours, triggering a gamma squeeze that sent the share price soaring over 100% in one trading session.
Mudrick reportedly closed out the firm’s entire position in AMC that day of both debt and derivative holdings which further accelerated the upward price movement.
WSJ reporters described Mudrick Capital as “the latest hedge fund to fall victim to swarming day traders,” as though a contrarian who managed to lose that much money betting against a business he claimed to believe in was a victim of anything short of his own foolish agenda.
Over 4 million individual investors from around the globe now own shares in AMC, controlling more than 80% of the stock’s total float. There are still unknown numbers of naked and synthetic shares in circulation, unknown numbers of shares traded back and forth between high frequency algorithms, and massive amounts of shares trading hands in off-shore exchanges, literally called “dark pools.”
There remains a huge volume of open short interest in both AMC and GameStop, with short sellers down billions of dollars on their positions. For months now the media has been trying to foster a narrative to squash the momentum, and none of it seems to be working. The apes are still buying and holding, and the shorts are still digging their holes even deeper.
There are not a lot of rules in the game, and few people around to enforce them. But thankfully in dealing with people like Mudrick: there’s always karma.
Thank you Laura
From Frank Nez
Laura Stine is an off-the-grid retail investor who has been involved in numerous projects in efforts to fight corruption. She makes time to write when injustice demands it and has long been an advocate in Alaska against sled dog abuse and government corruption.
I want to personally thank Laura for this amazing publication. This article will be archived in what seems to be a historic moment in time.
Laura will be writing for Franknez.com from time to time. You will know if an article is written by Laura because the publication will say it was written by her and it will contain her image.
No, I am not letting my foot off the gas pedal. I figured this is a great way to provide even more value to the community. Be sure to share this article and welcome Laura in the comment section below! You can follow Laura on Twitter here. 🤝✨
Trey’s Trades just released an honest video interviewing Jordan Belfort, AKA The real Wolf of Wall Street.
The ape community holding AMC stock was actually looking forward to this video but found themselves perplexed and rather disappointed.
I’m going to breakdown key points from the video to provide some clarification. I’ve watched ‘listened’ to the video a few times to gain a different perspective on the interview.
Massive thanks to Trey’s Trades for the intention. I think we can all agree Trey held himself very well during the interview with Jordan Belfort. You’re the real goat brother.
Trey’s Trades vs. Wolf of Wall Street – Intro
This interview begins with Trey humbly expressing his gratitude, concern for Jordan’s health, and respect for the wolf’s time.
Trey sets the mood with by saying, “I think there’s a huge opportunity for some education”. He also mentions there’s been a lot of cool stuff going on in The Wolf of Wall Street’s Twitter as he expresses his excitement.
As most of you know, Jordan Belfort has been supporting the AMC movement via Twitter.
The AMC & GameStop situation
The Wolf of Wall Street goes on to discuss the dilution of shares in general. Jordan Belfort further explains that a dilution would mean short-term discomfort in the stock but could benefit a company immensely long-term.
I actually said this back on April 1st when AMC share price started to drop due to Adam Aron’s announcement seeking approval from its shareholders to issue 500 million more shares. You can check out the post here.
Jordan Belfort thinks an issue of shares will pass
Trey asks The Wolf if he thinks it’s likely that an issue of shares can pass where Jordan then responds with certainty that it will pass.
Apes, you have to take this with a grain of salt. This is only Jordan Belfort’s opinion. Remember, you the shareholder get to vote whether this passes or not.
If you hold AMC stock then you should have received an email from your brokerage account with the form to vote. Be sure to search it in your mailbox if you’re uncertain.
What happens if 500 million shares are approved?
If it passes:
AMC becomes more of a long-term investment with a lot of upside for the company. As a shareholder, you will still be profitable.
Will a squeeze still happen? More than likely. A dilution would bring the stock price down which would be a favorable position for shorts to cover.
Approving this does not mean all shares will be issued at once. This is only a ‘backup’ in case of another disaster that can be a detriment to AMC as a company.
If we vote no:
AMC will simply have to pay it’s dues as they continue to see profits
The share price will not dilute
AMC won’t have a backup in case a second pandemic occurred hypothetically speaking
All in all, The Wolf of Wall Street had nothing negative to say about AMC here. These are straight facts that really don’t affect AMC negatively in any way.
Jordan Belfort then begins to advise that both AMC and GameStop are wildly overvalued.
I personally think he’s mainly referring to GameStop here. GameStop is wildly overvalued and it’s certainly no surprise to hear so. Again, there’s no negative talk about the stock(s). The Wolf of Wall Street is presenting an opinion that is widely accepted through fundamentals.
GameStop was hyped to squeeze despite the drop in value and revenue in the company, so there’s no argument there. However, AMC is currently undervalued if you look at pre-pandemic records.
The Wolf is already thinking ahead. AMC is not overvalued yet, but it will be.
And as he mentions in the interview, once these stocks take off they are bound to come back down. Fundamentals will eventually correct the stock and trade on ‘normal’ levels.
At least they should.
“Whoever Buys The Stock Is Kinda Nutty”
The Wolf of Wall Street goes on to say that as a shareholder, it is our responsibility to take advantage of the inflated price.
Jordan Belfort is trying to get a lot out during this part of the interview. He mentions if people are going to buy the stock at 10 times the price that it’s trading at ‘fundamentally’ it’s not worth buying.
Again, I believe he’s referring to GameStop where it’s currently sitting at. What I get from this message is that it doesn’t make sense to buy at the top of a stock that can potentially correct itself back to fundamentals.
He then goes to say whoever buys the stock (at the inflated price) is ‘kinda nutty’.
“This doesn’t mean you can’t make a lot of money trading at these higher prices”. This quote is why I believe he’s referring to GameStop. AMC isn’t there yet.
This is how I’m perceiving this part of the video. Let me know in the comments section below your personal opinion.
Trey agrees with this
Trey agrees that GME is overvalued and that a dilution would help AMC in the long-term with cash should they ever need it.
Most people didn’t catch the Bitcoin bit
Most apes didn’t catch this but the reason The Wolf mentioned Bitcoin is because he was using it as an example to compare it vs. how stocks work.
He basically states that Bitcoin unlike stocks can go up and stay up for a while, come back relatively low, and continue this cycle. Jordan states that stocks don’t move this way and he wanted to clarify this for the viewers, mainly new retail investors.
GameStop second squeeze?
Trey asks The Wolf of Wall Street if he thinks GameStop will have a second squeeze. Jordan responds saying he predicted the second squeeze meaning it’s already happened and that a third one isn’t likely. Although, he does make a reference that it was most likely a ‘gamma squeeze’ the second time around.
Again, this is only Jordan Belfort’s opinion and solely based on GameStop, not AMC.
“I love the average person is making money”
The Wolf of Wall Street expresses he thinks it’s great the average person is making money and doesn’t want us to think he’s against what’s going on. Jordan then goes to say he just doesn’t think any high price action will be sustainable.
Which makes sense apes. When GameStop’s squeeze peaked at $500 it did not sustain. It became volatile and dropped all the way back down to $40 before gamma squeezing up to $200.
The bear market discussion
The Wolf of Wall Street explains that a rising tide lifts ships and a falling tide sinks all ships.
He’s referring to a bear market vs. a bull market. Jordan further explains that during a bear market all stocks tend to go down no matter what hype surrounds it.
We’ve seen a little bit of this occur with AMC mainly on the days that the S&P 500 has been down. It’s simply how the market works.
Here, The Wolf is simply having a discussion with a younger investor as he portrays Trey after asking him his age.
You see this sentiment carry over when discussing how his former colleagues lost a lot of money day-trading. This conversation can be looked as personal insight from The Wolf’s experience and possible ‘advice’ to new retail investors.
We get off track a bit
A lot of the interview from here on out is simply a conversation between Jordan and Trey.
The Wolf seems to get off track from the AMC phenomena and starts talking about other investments and fundamentals. The rest of the video from here on out is a rant from Jordan that Trey entertains out of respect.
The video is concluded with The Wolf of Wall Street advising to make as much of money as you can while the times are good, and to play it more conservatively when they’re not.
Trey did an amazing job at respecting Jordan Belfort’s time which is why we didn’t see much deeper conversations regarding manipulation in the market, etc.
I hope you guys enjoyed this breakdown from the video. I too was a little puzzled after watching it the first time. With a lot of uncertainty going on, I figured I’d listen to it a few times over and provide some perspective to provide some form of value to the community.