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February 7, 2021 09:34 am

Was GameStop's Rise Actually Orchestrated By Hedge Funds?

Robert J. Shapiro advised senior members of the Obama administration on economic policy, and served as an Under Secretary of Commerce under Bill Clinton. Now a senior fellow at the McDonough School of Business at Georgetown, he's suspicious of the surge in GameStop's stock price:Allegedly, this is the tale of scrappy, small online day traders buying shares of a beleaguered company to thwart a hedge fund scheme to take it down... Yet, certain facts are publicly available, including GameStop's daily trading volume, its daily prices, the number of short sales of its stock, and how many shares are held by big institutional players. Those facts suggest that the Reddit online traders have been on the sidelines of a trading war among a handful of big institutional investors. The SEC should subpoena the records because the hard data also suggest that some big players may be using trading strategies used in the past to manipulate stock prices... Unless most of the Reddit bunch have assets in the top one-tenth of one percent of Americans, they were mere bystanders to last week's trading of 682 million shares at an average price of $218.20 — purchases totaling nearly $150 billion in a wildly volatile market. Only institutional investors have such resources to trade stocks, not self-styled populists with Robinhood on their iPhones. Since most big players are regulated public corporations with fiduciary responsibilities to avoid the enormous risks involved in this high-stakes game of chicken, the GameStop players almost certainly are all lightly regulated hedge funds. The trading volume and price gyrations also suggest that those hedge funds may be manipulating the market... [S]ome 20 million or more of the GameStop shorts were never borrowed and never delivered to their buyers. They were what the SEC calls "naked shorts." The SEC has banned naked shorting as abusive market manipulation because large-scale naked shorting artificially drives down a stock's price. Given the volume of short sales and overall trading in GameStop, large-scale naked short-selling was clearly involved when GameStop's share price fell $153 last Wednesday (from $347 to $194) and again this Monday when the price plummeted from $325 to $225... The data also suggest a bigger story of possible manipulation involving the huge increases in GameStop's share price. 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. When the price rose, one fund got out and took huge profits while another bought in, expecting the price to rise further, and yet another sold short, expecting the price to fall... In effect, hedge funds may have manipulated GameStop in opposite directions, wringing out profits daily or even two or three times a day. If this is correct, the GameStop saga is not some populist uprising but a rolling version of "pump and dump," a classic form of manipulation and naked shorting.

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