Shorting E*Trade Just to Keep the Price from Going Up?

On June 9th, 2009, short interest numbers were released for E*Trade Financial (ETFC). Surprisingly, E*Trade had almost a 25% increase in shorts during the period of May 16th to May 29th. This information is accessible here www.reuters.com/articl...

As per this data, at the end of trading day on May 15th, there were 73,136,352 shares of E*Trade that were shorted. This number had risen to 90,703,730 at the end of trading day on May 29th; an increase of 17,567,378&nbs... 24.02% in only 9 days.

While this increase in shorts is alarming by itself, it becomes even more interesting if one analyzes the price and volume during these 9 trading days. I summarize this data below. I am including May 15th closing price as a starting price reference. This price and volume data was collected from yahoo finance website.

Volume, Price and short action in ETFC between May 16th and May 29th, 2009

Date	Closing Price	Volume
May 15	$1.46
May 18	$1.58	18,085,700
May 19	$1.57	19,630,000
May 20	$1.53	17,934,200
May 21	$1.42	31,167,800
May 22	$1.38	10,087,800
May 26	$1.33	21,144,700
May 27	$1.41	32,331,400
May 28	$1.43	17,998,800
May 29	$1.44	15,571,200
Total		183,951,600
New Shorts		17,567,378

What is interesting to note here is during these 9 days, 9.55% of total volume was new short positions in E*Trade. This is a substantial amount of volume which, in normal circumstances, can create quite a serious price decline.

Surprisingly, during these 9 trading days, the price of E*Trade declined by only 2 cents (from $1.46 to $1.44). So, in spite of this heavy shorting, shorts only managed to push the price down by only 2 cents. One only has to wonder that in absence of such heavy shorting, E*Trade's stock price would have probably gone up along with the market. And indeed, it would have been a great news for E*Trade shareholders as E*Trade is in the middle of a secondary offering and higher price would have reduced the dilution due to the secondary offering.

This indicates that all this shorting was done with the objective of keeping E*Trade price from going up.

This further affirms the belief by many unfortunate E*Trade shareholders that E*Trade's stock price continues to be manipulated by wall-street professionals, hedge funds, analysts and even media reporters. Further, government agencies continue to do nothing to protect retail shareholders. Indeed, when the short-selling ban and disclosure requirements went into effect last year, Citadel was the most vocal opponent of that and managed to convince SEC and then Chairman Cox to exclude options market-makers from both short-selling and disclosure requirements.

Fortunately, things are really looking up for E*Trade on the operational side. Brokerage growth and revenues remain envy of the rest of the industry and loan performance has turned a corner. Citadel chief Ken Griffin has officially joined E*Trade Board of Directors and one hopes that this would mark and end of stock price manipulation and never-ending shorting and E*Trade can start on the long and arduous road to unmanipulated recovery.

Disclosure: Author is long E*Trade Financial.

Comments

[Plantinseeds:]

Why would Citadel be shorting E-Trade? They own a sizeable chunk of the shares. That would be kinda like cuttin your nose off despite your face.

Jun 10 12:43 PM

[Hirendu Vai...:]

Honestly - no one knows who is shorting E*Trade so heavily. Disclosure laws in our country are heavily geared towards being unfriendly to retail investor and regulators seem to be pretty much controlled by wall-street insiders.

The only point I was making was that Citadel was the most vehement opponent of short-sale disclosure requirements for options market-makers (as reported in news at that time). If options market makers are only shorting to cover put options that they wrote, why is there a need for non-disclosure of those positions? Open interest in put options is reported on a daily basis so disclosure of short positions from options market-makers should also be disclosed (and one would expect it to be close to a 1-1 match between put options written and stock shorted).

Jun 10 01:37 PM

[User 90380:]

So Hirendu, in short can you describe what your expectations are for this stock (price, buyout, otherwise) and timing? Thanks

Jun 10 05:01 PM

[cfkane:]

Just because I'm an ass, I have to point out that the phrase is "To cut off your nose, to spite your face.

Again, I apologize.


On Jun 10 12:43 PM Plantinseeds wrote:

> Why would Citadel be shorting E-Trade? They own a sizeable chunk
> of the shares. That would be kinda like cuttin your nose off despite
> your face.

Jun 10 05:03 PM

[helplessobs...:]

I was once a Etrade shareholder, sold out for a loss around 16, but am still a brokerage customer. Their online trading platform is excellent. If the short position is as large as reported there could be an explosive upside move with a concurrent wealth transfer. Looks dangerous to me with little to be gained, but a lot to be lost.

Jun 10 09:25 PM

[AAA:]

Etrade is the best trading platform out there, bar none. Even schwab wants to buy it and has said so. The gov doesn't want them to sell just the brokereage because that would leave a whole bunch of bad loans with no cashflow to cover them. Citadel owns both equity and debt of etrade and the want both to be worth something and would rather not dilute their shares. My guess is they will offer yet more debt to etrade in the absence of tarp money. Or maybe ken can convince the gov to give them tarp. Etrade is a buy, but it could be a while before the dark clouds recede. BD

Jun 11 09:42 AM

[22thoroughbred:]

I think Hirendu makes a good point, while the market was strong there were big short posns. taken, what probably happened was hedge funds sold short and used the shares they get from the secondary to cover, if the secondary is done below market price (as many have been) you have free profit. With the secondary done the pressure of the shorts dissipates and the stock can go up.

Jun 11 10:17 AM

[EROO:]

First a disclosure--I am long this stock. IMHO the two most likely sources of shorting activity would be either: (a) an investment bank that knows it is about to be engaged by E*Trade to place a block of equity, which would be consistent with public statements the Company has already made; or (b) funds who believe that the dilution created by such a placement make the current price higher than the post issuance fair value of the stock. In either case it is quite rational behavior and not aprt of some grand conspiracy.

Jun 11 10:21 AM

[Trane250:]

I was a customer of Brown & Co. (Brownco) for years. They had an excellent back office operation. If there was a problem, you could call the dividend or reorg department directly and they would resolve it on the spot. I never had to send them a formal complaint letter. Then Brownco was sold to Etrade. For the first 6 months that I was with Etrade, I had to send them 4 formal complaint letters. Instead of resolving problems, you get the runaround from a "correspondence specialist." When I had had enough and closed the account, they took 6 weeks to transfer securities. Etrade stinks in my opinion. Go shorts!

Jun 11 11:28 AM

[Advill:]

No, my way of seeing it is that main shareholders of ETFC (many of them wants to be release of that responsability) are caping the paper,they will have good enough money for themselves at values around 1.50 (in the case of offer ) and for them there is a risk of negotiation failure if stock goes up certain X price, so my guest is that shorting is done by actual shareholders (majority) who are dealing with Schawb or others and a price too high is bad for them.


On Jun 11 10:17 AM 22thoroughbred wrote:

> I think Hirendu makes a good point, while the market was strong there
> were big short posns. taken, what probably happened was hedge funds
> sold short and used the shares they get from the secondary to cover,
> if the secondary is done below market price (as many have been) you
> have free profit. With the secondary done the pressure of the shorts
> dissipates and the stock can go up.

Jun 11 12:04 PM

[22thoroughbred:]

Advill, what you say is not probable, majority shareholders must file 144 paperwork whenever they buy or sell, and the volume is too high to be avg. shareholders, so it can only be hedge funds who own less than 4.9% and want to hedge or minimize risk when convertible bond deal is done.

Jun 11 01:12 PM

[Rohan C. Pease:]

Great article and obsetrvations. I am long Etrade and I bought more on the back of Ken Griffen's anouncement to the board. I see a four bagger, easy!

Jun 11 01:40 PM

[Hirendu Vai...:]

I am super long (if there is such a word). I am hoping for NO BUYOUT. A buyout will cap our gains at 2-3x -- whereas an independent E*Trade can return us 10-15x over next 2 years (after the loan issues are behind us). This is a purely long term holding for me -- but in short term this stock may have a huge short-squeeze rise. In absense of manipulations, shorts and chokehold by Citadel -- I believe that a fair market value of E*Trade (even with loan issues) is 2x-3x right now. With loan issues behind -- it could easily be worth a lot more.

Anyway -- that is what I believe.

On Jun 10 05:01 PM User 90380 wrote:

> So Hirendu, in short can you describe what your expectations are
> for this stock (price, buyout, otherwise) and timing? Thanks

Jun 12 07:46 PM

[Hirendu Vai...:]

This was my point -- they shorted the stock mainly to keep the price low for the secondary offering. Since the SPO was for a fixed amount ($150M), lower prices would mean that greater amount of shares would have to be issued. Which would mean that current shareholders would be diluted more. They possibly did not care much about subsequent short-squeeze as their objective was greater dilution anyway (and maybe they were going to use shares obtained through SPO to cover those shorts).

This is what I was upset about -- they shorted E*Trade to dilute current shareholders more. If they shorted in absense of any SPO, I would not really care (as long as those were not naked-shorts with full intent of the company folding door when the time came to deliver).

Anyway -- gotta love todays price action :)

On Jun 11 10:17 AM 22thoroughbred wrote:

> I think Hirendu makes a good point, while the market was strong there
> were big short posns. taken, what probably happened was hedge funds
> sold short and used the shares they get from the secondary to cover,
> if the secondary is done below market price (as many have been) you
> have free profit. With the secondary done the pressure of the shorts
> dissipates and the stock can go up.

Jun 12 07:53 PM

[22thoroughbred:]

Last week I bought 250 of the ETFC Jan 2011 calls strike $5 (OYNAA) for .40 each, cost $10k plus comm. If the stock goes to $7.50 anytime in the next 18 months there worth $3-$4 each or $75k-$100k I did the same with GE and BAC in Jan. The Jan 2011 $10's for BAC and the $10's and $12.50 for GE...have already made 2-4 times the investment and I have 18 months left....think longer term with stocks like this. BTW, did ODP as well, and all these trades are posted here when I did them, so not past posting.

Jun 15 01:48 AM