Short Selling Ahead of an Offering. Secrets Revealed

Dont spread this link around; it will get you into trouble. (seriously) Securities and Exchange Commission v. Revelation Capital Management Ltd

defense was

Millenium concerns about rule 105

Rule 105 is prophylactic. Thus, its provisions apply irrespective of a short seller’s intent. Rule 105 is intended “to foster secondary and follow-on offering prices that are determined by independent market dynamics and not by potentially manipulative activity.” 45,094.

activity meant to obfuscate the prohibited covering

Click to access 34-76141.pdf

in the matter of Scott H Arenstein and SBA trading

This really helps put things into perspective. Before computers completely controlled most of the liquidity, floor traders played a much larger role on the exchange, and thus it was easier to differentiate when a market maker was and wasn’t engaged in “bona fide” (weird word) market making activities

Cboe Equity FLEX® Options

Have you ever tried holding a short position in a “hard-to-borrow” stock? If you are a small cap trader, you probably know them very well. Stocks like TLRY, OPTT, BYND, DRYS etc; those stocks that everybody knows are pieces of junk, but because they have such low floats, they attract demand from traders and algorithms.

TLRY in January of this year is the perfect example. Everybody knew the lock up expiry would significantly increase the available shares and thus eliminate all trading appeal, and a short position almost seemed like a no brainer at the time. It wasn’t that easy though. The borrow rate was also 900%, so holding for the long haul would cost you roughly 3% per day in interest. Just to put this into perspective, when S-3 partners, a Fintec company that provides short interest data, was interviewed by marketwatch, they said rates as high as 20% were “ridiculous”.

(Marketwatch) “On the whole, 20% is ridiculous,” said S3 managing director of predictive analytics Ihor Dusaniwsky. “It’s totally out of the ordinary, the normal fee for a general collateral stock — IBM IBM, -1.06% , General Electric GE, -0.24% for example — is 30 basis points.” Link

When you just sell stock without borrowing it..

Starting to make sense now?

Found this old article where the writer doesn’t understand how it works.

“CLASS ACTION. After the announcement, short-sellers knocked the agreement and unleashed a new burst of short-selling, which pushed Organogenesis stock down 25% in three days. It was accomplished with a technique called “married puts,” in which investors buy both the company’s shares and puts–options to sell stock at a specified price over a specified period of time–whose expiration would be a few weeks down the road in anticipation of a company announcement. When shorts want to stifle a rise in a stock price, they sell the shares they bought on the open market, which creates downward pressure on the stock price. This, in turn, forces all put investors, not just those involved in the ploy, to sell stock to limit their losses. If several investors use the technique at the same time, the market is flooded with selling, which can drive the price down even further. Sturza confirms that the married-put technique was partially responsible for the price drop after the Sandoz announcement”. (no link to the litigation release though) Link

New article I found on Oct.22nd, 2019


13 thoughts on “Short Selling Ahead of an Offering. Secrets Revealed

  • October 29, 2020 at 7:06 pm

    Hey! I’ve been a big fan of your blog since I stumbled upon it in February. It has helped me tremendously when seeking to improve my fundamental knowledge. Do you happen to have any articles that address ATMs and their role in pre-market fades? Would be very interesting to hear your take on it. From what I understand, selling into a gap from news is cheaper for funds because if there’s already a gap, then it costs less than having to manufacture the price all day. Assuming there’s enough volume pre-market to fully unload (or partial), that would drive the price down because the longer they wait, the less likely the pop is to fade anyway and then they’d be left with a worse price than before. And from what I’ve noticed, ATMs typically do not pop at the open.

    • October 30, 2020 at 11:33 am

      Oh, ATM offering. All I can say is great intel, because I did not know that. Cheaper for funds to attack the gap makes sense, though..
      But I’m not quite sure that I understand what you meant by “the longer they wait, the less likely the pop is to fade”.

      • October 30, 2020 at 12:33 pm

        Oops, I meant the longer they wait, the more likely the pop is to fade on its own, which means that they’d be missing out on an opportunity to get the best possible price created by the gap on news.

        • October 30, 2020 at 2:23 pm

          Wow, I’ve never heard that ATM offerings are less likely to follow through at the open

          ..Again great intel. Where did you hear that if you don’t mind me asking?

          • October 30, 2020 at 2:37 pm

            Website giving me issues with posting comments again. Hope you got my reply to this. If not, let me know and I’ll type it again.

            • October 30, 2020 at 2:44 pm

              Oh and also, sometimes reading financial lawsuits has helped me a lot when trying to find out the “agenda” of funds involved. That’s kind of where I got a bread crub trail looking into how funds handle these kinds of things.

              • October 31, 2020 at 4:38 pm

                Sorry about that! So I originally got hints from a mentor about this and then started tracking data myself to see whether it was appropriate to trade ATMs pre-market versus waiting until the open. Pretty good results so far and much better prices.

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