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From: https://www.reddit.com/r/wallstreetbets/comments/leorks/evidence_points_to_gme_shorts_not_having_covered/
Long post ahead, but I encourage you to read the whole thing. (This is a re-post and an updated version of a GME DD that reached the front page of WSB and many requested it to be pinned. I am re-posting for visibility and because I believe the message should be shared, particularly at this junction in time. If you've seen this post before, I would appreciate an upvote for visibility)
TLDR: Data points strongly point to Hedge Funds using tricks to appear as if they covered their shorts when they haven't truly covered, specifically an illegal method/loophole to "cover" their shorts with synthetic long shares generated from the use of options. Full details below.
There’s an insightful piece on TradeSmithDaily that identifies two ways for both short interest and price to fall quickly.
The first scenario is from retail investors not holding the line and panic selling, driving the price down further, releasing into the market more of the float and enabling shorts to cover/buy back shares at progressively lower levels.
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From TradeSmithDaily:
Plummeting short interest along with a plummeting GME share price, in other words, could indicate that the Reddit army is headed for the hills, and the longs were selling early, giving the shorts a means to cover, as the longs got out… Important to note that if the long holders of GME shares did not break ranks and sell en masse, it would have been impossible for the share price to fall and hedge fund short interest to fall at the same time. because, without a critical mass of long-side holders selling into the market, the hedge funds covering their shorts would have nobody to buy from as they covered (bought back) their short positions.
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The second scenario is where hedge fund short interest in GME didn’t really dissipate but instead they played a trick to make it seem like it did, demoralizing the retail side and further “breaking the squeeze.”
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From TradeSmithDaily:
The way the hedge funds could have done this — made it appear as if they covered their shorts, even when they really didn’t — involves trickery in the options market.
The tactics involved are not a secret. In fact, the Securities and Exchange Commission (SEC) knows all about such tactics, and published a “risk alert” memo on the topic in August 2013.
The SEC memo is titled “Strengthening Practices for Preventing and Detecting Illegal Options Trading Used to Reset Reg SHO Close-out Obligations.” You can read it here via the SEC website.
The memo contains a dozen pages of highly technical language, but here’s a quick rundown:
- If short sellers are facing a squeeze because shares are hard to buy, or scrutiny for holding an illegal short position, they can create an appearance of having closed their short position through the use of deceptive options trades.
- A hedge fund that is short a stock can write call options on a stock — meaning they are now “short” the call options, having sold the call options to someone else (typically a market maker) — and simultaneously buy shares against the call options.
- The shares bought against the call options could be “synthetic” longs — meaning they are not part of the original share float of the stock — as sold to the hedge fund by the market maker that takes the other side of the options trade.
- This works because, if a market maker buys options from an options writer, the market maker has legal privileges to do a version of “naked shorting” as part of their hedging function. This is necessary, under the current rules and the current system, for market makers to protect themselves when facilitating options trades.
- As a result of the above transaction, the hedge fund that sold short calls was able to buy synthetic long shares against the calls. (A synthetic share is one that has a long on one side and a short on the other but wasn’t part of the original float.) The synthetic long shares are the other side of the naked shorts, legally initiated by the market maker, so the market maker can hedge.
- The hedge fund that bought the shares can now report that they have “bought back” their short position via buying long shares — except they actually haven’t! The synthetic shares they bought are canceled out against the short call positions they initiated, a necessity of the maneuver by way of the market maker’s hedging of the call position they bought from the hedge fund.
- "Deceiving and confusing the enemy is a more effective path to victory than openly fighting with them." I personally believe the press release from Melvin Capital on 1/27 about closing their short positions was an example of this, they wanted us to believe their short positions were closed thus ending justification for the short squeeze.
- "If you know your enemies and know yourself, you will not be imperiled in a hundred battles." Hedge funds knew the weakness of the retail side was the lack of cohesion and leadership (by nature the lack of leadership was a disadvantage for any leader to the movement may be accused of manipulating retail buyers and scapegoated) and they knew that if price drops low enough many retail buyers will panic sell, so all they needed to do was attempt to drive the price down via whatever methods at their disposal whether thats through misinformation or Short Ladder Attacks which are and potentially other methods (there's arguments on whether Short Ladder Attacks really exist and I won't get into it here but I encourage you to do your own research)
- "If his forces are united, separate them" aka divide and conquer. Upon driving "weak-hands" to sell-off this divides the retail buying group and creates bears out of some of those who held, who then spread their views and further the divide. Another example is the silver fake news/manipulation and the very real possibility or reality of bots sent into this sub to push a message and sow division.