- In 2017, both institutional and retail traders have shorted most shares at $10 and $13 AMD market price points.
- Before August 2017, institution short sellers generally shorted the stock according to AMD street fair price targets.
- After August, AMD short sellers shorted the shares at levels 25% lower than the street price targets. The evidence is consistent with abusive short sale practice.
- If you believe that the short sellers cannot keep the AMD prices artificially low indefinitely, there should be at least a 25% upside for AMD stock prices.
I may say something too obvious in this article.
On January 31st, 2018, CNBC's Jim Cramer said that there's a concerted effort to keep shares of Advanced Micro Devices (NASDAQ:AMD) lower. "Bearish lies knocked the stock down from $13.25 to $12.10. It couldn't be more duplicitous. It was pure manipulation and I would like to see it investigated," said Cramer.
After AMD reported positive Q3 and Q4 earnings and the stock saw deep price swings, many have long suspected that there is "big" money keeping the stock down. In this article, I conduct a "near-forensic" analysis on the short behavior of large short sellers, i.e., likely institutions. It is important to note that since the names of each short seller in the transactions are not disclosed on the public record, I can only surmise that the large size transactions are associated with institutions (not retail traders).
"Abusive" Short Sale
Although the vast majority of short sales are legal, "abusive" short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading of a security. It is also abusive and illegal to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales that seek to manipulate stock prices are prohibited.
In 2010, the Commission adopted Rule 201 of Regulation SHO. Rule 201 restricts the price at which short sales may be affected when a stock has experienced significant downward price pressure. Rule 201 is designed to prevent the short selling which is potentially manipulative or abusive in nature from driving the price of a security down further when it has already experienced a significant intra-day price decline, and to facilitate the ability of long sellers to sell first upon such a decline.
Thanks to the Regulation SHO implemented on January 3, 2005, data for all filled short sale transactions is available to the public to increase the transparency surrounding short sale transactions. Several self-regulatory organizations (SROs) are providing on their websites daily aggregate short selling volume information for individual equity securities.
Intent of the Trades
The use of short sale volume is particularly valuable in terms of gathering investors' intent. Bearish investors tend to sell stocks which are always matched by buy orders from bullish investors. Therefore, the investors' intent cannot be identified by the final transaction records. In contrast, sell shorts have to be initiated by the extremely bearish investors in order to locate (borrow) the shares to be sold. Thus, the size of the short shares is a direct indication of the bearish intent of the short sellers. For the purposes of this article, I gathered all AMD short-sale transactions for the period of January 3rd, 2017, to January 30th, 2018. There were 5.7 million actual short transactions which spanned over 272 trading days. All short sale shares are aggregated for each day, and the short sale transaction prices are volume-weighted averaged for that day. During this period, the largest one-day short volume (not short interest) was 78 million shares on January 17th, 2017. The average daily short volume traded is 14 million shares with more than 240 days that 28 million shares were shorted on a daily basis.
Institutional vs. Retail Short Sale
Since the SEC database does not disclose the identity of the trade, it is difficult to identify the status of the trading parties. To the best approximation, I used the order size as a criterion to decide if the principal is institution or not. For any order of 10,000 shares or more, it is assumed submitted by an institution, or else from retail investors. While the limitations of this assumption are fully acknowledged, the resulting biases will be discussed in the last section. Based on this classification, the distribution of short volume between institutional and retailer short sellers is presented in Figure 4.
Why (Institutions) Selling Short?
The intent of institutional trades can be observed by the circumstance of the trades being placed. First, "normal" short trades are initiated by bearish investors who receive the negative company information.
In this regard, I have demonstrated some evidence in a previous post that AMD short sellers did increase their short shares to respond to fundamental news, such as revenue misses.
Also, rational short sellers take advantage of mispricing. That is, if a stock is considered overvalued, short sellers should increase their short trades and hope for future stock prices to correct to the lower price targets. However, if short shares surge while the stock is undervalued. The intent of the short trades cannot be for valuation, but against valuation, which suggests potential sign of abuse or manipulation to keep the stock price down.
If the short trades are anything to do, or not to do, with the target prices, we can easily observe by examining the short trade volume at different transaction prices of the short trades. For that purpose, I averaged the short trade volume transacted at each round price point for both institutional and retail trades. In Figures A, the short volumes associated with each short price point are presented. For 11 months of 2017, both institutions and retail have sold largest shares short around $10 and around $13. The fact that the institutional short sellers sold short at the same price points as the retail short sellers by itself provides an interesting clue to the timing of their trades.
If investors are selling short for valuation, it stands to reason that the sell short prices will vary with time as target prices change over time. As a result, I tracked the most shorted transaction prices from month to month (Figure 1). For 2017, the institutions sold short the most shares as high as $14.5 in July and as low as $10.6 in November. The largest monthly short volume was in May at 68 million around the price point of $11.4.
Abusive Short Sale Evidence
Probably, the most illuminating question is how these heavily shorted trade prices have aligned with the Street target prices (Figure 2). As the historical sell short prices were largely above the fair value or target prices before August 2017, it is consistent with the non-abusive hypothesis that investors will sell short to take advantage on the overvaluation in the stock. However, starting August, or after Q2 earnings report, institutions have been aggressively sold short AMD shares as low as $10.6, a level significantly lower than its presumed then target prices around $14. As this cannot be explained by economic intuition, the 28% discount suggests the possibility of abusive short selling.
Before we point fingers to large short sellers, we may want to how retail short sellers did under the same circumstances. One way to look at this is to compare the short trade prices and short volume between large and small short sellers at the same point time. At the trade price level, Figure 3 suggests that both parties virtually execute their short orders at very similar levels with a brief time in July that retail short sellers traded at $15.45 (vs. $14.5). Similarly, while institutional short sellers short more shares than retail shorts, both parties exhibit the same trading activities from one month to another (Figure 4 at top). In short, for whatever the conclusion we can draw from institutional short sellers, it applies to retail short sellers as well.
Very Cautious Interpretations
Being subject to many limitations from the unavailability of the true identity of the trading parties, we need to be extra careful in deriving conclusions from the results. At this point, things that we know are:
1. In 2017, both large and small short sellers, as proxies for institutional and retail traders, have shorted most shares at $10 and $13 AMD market price points.
2. Before August 2017, institution short sellers generally shorted the stock according to AMD price targets, as provided by Street analysts (Bloomberg).
3. There is evidence, though, after August, AMD short sellers shorted the shares at levels 25% lower than the Street price targets. The evidence is consistent with the practice of abusive short selling.
4. The retail short sellers virtually exhibited the same trading pattern as the institutional short sellers.
5. If you believe that the short sellers cannot keep the AMD prices artificially low indefinitely, there should be at least a 25% upside for AMD stock prices.
Most of the limitations of the results come from the limitations of the data. Besides being subject to "uptick rules," the daily total short sale volume includes market makers' hedging trades. Typically, investors who have bearish outlook on a stock will elect to sell long or sell short on the stock. Market makers often sell short the same stock a fraction of a second before executing a customer's long trade in order to hedge against the uncertainty of the execution prices. These short positions are immediately covered after customer's long trade. Although market makers' shorts are covered at the end of the day, the total short shares include both types of short trades. As a result, the daily short volume more likely overstates the extent of investors' bearish sentiment, especially in a fast market. Given the built-in limitations in the data, the analysis and comparison of short shares over time should not pose a serious bias, since it is reasonable to assume that the portion attributed by market makers' offsetting shorts is stable over time.
The impact of institutional short sale may be underestimated due to the arbitrary nature of the way how trades were classified. Most institutions' large orders are often broken into smaller orders so traders can "work" on the trades to minimize the market impact. I might have been overly conservative to use the order size of 10,000 shares as a cutoff point to classify institutional trades. That is, probably, most of the "retail trades" with sizes around 1,000-3,000 shares should have been considered part of an institutional sell short program.
For the first time, empirical evidence has been provided to suggest that AMD investors, mainly led by institutions, may have engaged abusive short sale practices by keeping stock prices lower than its fair value. While the identity of the large short sale trades is not identifiable at this level, the finding is more than anecdotal to warrant a further look on the more detailed data. Finally, due to the serious nature of the findings, I need to make further disclaimers:
- I am not compensated by any investment banks, financial institutions, or hedge funds.
- I am compensated by my own hedge fund which does not have any type of position on AMD.
- I am compensated by Seeking Alpha with $0.0128 per page view, per IP address.
- The databases I used will be provided upon request for verification of the results of this article.
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