Is Institutional Short Sale On AMD Abusive? (NASDAQ:AMD)

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Summary

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.

Limitations

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.

This article was written by

Kwan-Chen Ma

11.94K Followers

K C Ma, Ph.D, CFA, is the Eminent Scholar and the Mary Ball Washington/Switzer Brothers Endowed Chair of Finance at University of West Florida. I am the Director of Argo Investments Institute which enables college students to manage real money stock, bond, and option funds. I manage market-neutral institutional hedge funds in KCM Asset Management. I write about stocks, bonds, and derivative strategies, long or short, based on our quantitative processes.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Dear AMD Fans we have a serious issue with Nvidia Marketing Plan. I pulled it out of the link for everyone to read easily.
http://bit.ly/2DaFzYM

Please read this article and send email to FTC for anti-competitive behavior.
antitrust@ftc.gov

GeForce Partner Program Impacts Consumer Choice

While we usually like to focus on all the wonderful and immersive worlds that video cards and their GPUs can open up to us, today we are tackling something a bit different. The GeForce Partner Program, known as GPP in the industry, is a "marketing" program that looks to HardOCP as being an anticompetitive tactic against AMD and Intel.

GeForce Partner Program Impacts Consumer Choice

To open up this bit of reporting, which will contain some editorial as well, I think our motives should be clear. In discussions with NVIDIA over the last few weeks, NVIDIA asked us exactly what our concerns were about the GPP program. This was our reply and should frame exactly why we are writing this.

Kyle Bennett: "I think it [GPP] is going to greatly, and negatively, impact consumer choice in the AIB and OEM computer market. Consumer choice is going to be decimated. Looking at the program guidelines, I truly think that is what will happen and is where my concern lies."

Before we go any further, in the effort to be as transparent as possible, we need to let you know that AMD came to us and presented us with "this story." AMD shopped this story with other websites as well. However, with the information that was presented to us by AMD, there was no story to be told, but it surely pointed to one that was worth looking into. There needed to be some legwork done in collecting facts and interviews.

At this point you're probably wondering, "What is NVIDIA GPP?" A couple of weeks after we began questioning NVIDIA on GPP, it put up an article on its blog.nvidia.com domain entitled, "GeForce Partner Program Helps Gamers Know What They're Buying." Here what John Teeple, Director - Partner Marketing at NVIDIA, has to say about GPP.

In our latest effort to better serve gamers, we're introducing our GeForce Partner Program.

The GPU and software of a gaming PC make all the difference in a gamer's experience. And together with our add-in card and system partners, we're dedicated to building the best PC gaming platform bar-none -- this is the GeForce promise.

The GeForce Partner Program is designed to ensure that gamers have full transparency into the GPU platform and software they're being sold, and can confidently select products that carry the NVIDIA GeForce promise.

This transparency is only possible when NVIDIA brands and partner brands are consistent. So the new program means that we'll be promoting our GPP partner brands across the web, on social media, at events and more. And GPP partners will get early access to our latest innovations, and work closely with our engineering team to bring the newest technologies to gamers.

Partners are signing up, fast. They see the benefit of keeping brands and communication consistent and transparent.

The program isn't exclusive. Partners continue to have the ability to sell and promote products from anyone. Partners choose to sign up for the program, and they can stop participating any time. There's no commitment to make any monetary payments or product discounts for being part of the program.

GPP ensures our engineering and marketing efforts support brands consumers associate with GeForce. That transparency will give gamers the confidence needed to make their purchase, whichever products they choose

Admittedly, GPP sounds like a good program on the surface, but after digging into documentation and interviews with OEMs and AIBs in the past weeks, the warm and fuzzies quickly subside. HardOCP has been in the computer hardware review business for over 20 years now, and we have made an abundance of contacts along the way. In order for our preparation to write this article, we have spent the last three weeks talking to OEMs and AIBs in the industry that do business with NVIDIA on a large scale. Given how GPP is all about "transparency," you might think that those OEMs and AIBs would be chomping at the bit to get some free press on how those companies are part of the GPP program.

We have contacted seven companies about their part in NVIDIA GPP and not one of the seven would talk to us on the record if they spoke to us about it at all. The ones that did speak to us have done so anonymously, in fear of losing their jobs, or having retribution placed upon them or their companies by NVIDIA. All of the people that I did interview at AIBs and at OEMs did however have the same thoughts on GPP. 1.) They think that it has terms that are likely illegal. 2.) GPP is likely going to tremendously hurt consumers' choices. 3.) It will disrupt business with the companies that they are currently doing business with, namely AMD and Intel.

The crux of the issue with NVIDIA GPP comes down to a single requirement in order to be part of GPP. In order to have access to the GPP program, its partners must have its "Gaming Brand Aligned Exclusively With GeForce." I have read documents with this requirement spelled out on it.

What would it mean to have your "Gaming Brand Aligned Exclusively With GeForce?" The example that will likely resonate best with HardOCP readers is the ASUS Republic of Gamers brand. I have no knowledge if ASUS is a GPP partner, I am simply using the ROG brand hypothetically. If ASUS is an NVIDIA GPP partner, and it wants to continue to use NVIDIA GPUs in its ROG branded video cards, computers, and laptops, it can no longer sell any other company's GPUs in ROG products. So if ASUS want to keep building NVIDIA-based ROG video cards, it can no longer sell AMD-based ROG video cards, and be a GPP partner.

NVIDIA will tell you that it is 100% up to its partner company to be part of GPP, and from the documents I have read, if it chooses not to be part of GPP, it will lose the benefits of GPP which include: high-effort engineering engagements -- early tech engagement -- launch partner status -- game bundling -- sales rebate programs -- social media and PR support -- marketing reports -- Marketing Development Funds (MDF). MDF is likely the standout in that list of lost benefits if the company is not a GPP partner.

As you might recall, we have seen onerous terms such as those contained in GPP to have many similarities to Intel's once monopolistic business practices (versus AMD) in withholding MDF to partners. The results of that situation were huge multi-billion dollar fines for Intel. GPP has some striking similarities.

What is disturbing is that we have been told that if a company does not participate in GPP, those companies feel as if NVIDIA would hold back allocation of GPUs from their inventories. From all we have talked to, the issue of not allocating GPU inventories to non-GPP partners have not been spelled out contractually, but is rather done on a wink and a nod.

The motivations behind this GPP move by NVIDIA is somewhat confusing at first blush. Why would a company that owns ~70% market share, and has no true high-end competition make a move like this? Many people that I have spoken to fully question the legality of the GeForce Partner Program. Interestingly enough, we think that the roots of GPP makes it way all the way back and somewhat dovetails with our From ATI to AMD back to ATI? A Journey in Futility article published in May of 2016. That was the first time that the world got wind of AMD getting into bed with Intel to do some GPU business. We believe at that time NVIDIA put another "exclusive" plan into place, however by a different name, and the GeForce Partner Program we are seeing now is somewhat an extension of that previous program.

One thing we know is that NVIDIA has made a lot of enemies over the years. You can easily put AMD, Apple, and Intel on that list. We think that GPP is somewhat the result of those "feuds" with NVIDIA attempting to gain more control over the market as it is seeing its competitors developing products (ie AMD and Intel partnerships on products) that will not be open to NVIDIA.

As mentioned above, NVIDIA questioned my concerns and I copied and posted those above. There was however a lot more in that email that I wrote to NVIDIA on February 22nd and I am going to quote that below. To date, NVIDIA has never responded to that email or the concerns put forth in it.

This is a big story, but it all goes much further than consumer choice, however it does not matter to me on a personal level beyond that. I am just being my tech journalistic self, which I have to do from time to time. And after the story I wrote about AMD in 2016 on the Intel/AMD deal and the politics attached to that, this story is going to get a LOT of exposure now that HardOCP's credibility has been returned, if not exalted since all the truth came out on that. I am making sure all my I's are dotted and T's crossed and have already prepared my lawyers with what I need to win any sort of lawsuit that might come out of this. They feel I am on solid ground and have signed off on moving forward.

There will certainly be follow up stories written by many websites though, that have a much better grasp of the financial side of this.

I would highly, actually, almost assuredly suggest that GPP is going to open NVIDIA to lawsuits from AMD and Intel. That alone is going to cause NVIDIA to shoulder financial burden. The OEMs and AIBs will not sue NVIDIA, but they will be deposed for years on this and the concerns about that are already being voiced in a very big way. Intel paying $1B+ for anticompetitive practices is one thing, but Jensen having to explain it to your shareholders is going to be a very big deal in terms of NVIDIA stock price. I have to guess that AMD and Intel's latest foray into business together has gotten Jensen worried enough to roll the bones though.

It is my opinion that GPP is not a good business plan for a company that is dominating in terms of both product performance and market share.

As for the timeline for my story, I am wrestling with timing on its publication currently. Publishing before GPP contracts are signed or after GPP contracts are signed? I still have not decided on that.

At publication time, NVIDIA has not returned our request for the list of companies that will be involved in its GeForce Partner Program.

There is no doubt that NVIDIA GPP has some striking similarities to what Intel has done in the past that has been deemed "anticompetitive conduct" by the Federal Trade Commision. We would not be surprised to see regulators in the US, Europe, and Asia want to take a closer look at GPP as well.

It was expressed to me that publishing this article "could damage the relationship" between HardOCP and NVIDIA. As noted previously, we have been reviewing computer hardware for quite a while. What "damaging the relationship" means to us is that HardOCP will very likely not be doing any NVIDIA GPU reviews at launch time. It is very likely that AIBs and OEMs will be instructed to not to sample HardOCP for reviews on any of their video card products as well. If you do see NVIDIA video card reviews on HardOCP in the future, those will likely be fully funded in-house, as we will be required to purchase all of the review hardware from retail sources. We feel however that this story surely needs to be told.

Discussion

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How soon I forget . . . There was the third, that is the original SEC 2007 complaint into 2015 concerns the Intel disintegrated story problem supply signal cipher transmission.

On Intel 1997 through 2015 transmissions financial community received Intel into future by product category bits of supply data through specific analysts, press, Intel executives when recompiled details revenue and margin up to nine quarters into future time for playing the stock price.

That signal transmission system was remedied including my federal discovery effort under some dangerous conditions by 2015 end.

Still, Investment banking and financial community rely on the 18 year data base, models and information that results from model use. Is same data and models I rely for Intel production economics begins 2001. Today incorporates all Intel processor runs 1993 through present.

What the general investor is not aware, is the data I've made available from FTC Docket 9341 as transparency pressing for remedies, and here to level market playing field, is still relied by Investment banks and financial houses.

http://bit.ly/2h5dfPi

So what do the investment banks and financial houses know that the general investor does not? They know there is a serious Intel surplus condition. They know Xeon total volumes are under represented which I describe subsidizing CCG is both a revenue and inventory recognition problem. They also know between product introductions, AMD virtually stands still in a cascade of Intel back in time product that not only places a drag on AMD but Intel current Core product line sales.

Here's some AMD data for the week;

AMD has a 13.7% week share of CL,KL,XSP that drops to 2,4% adding all Broadwell v4 in week. Adding all Core Skylake in week AMD in week unit share drops to 2.1% So AMD has a good 2% share of newer production values.

AMD Average Weighed Price = $366.85 / 3 = $122.28 is a new AMD gross per unit record.

Ryzen 8/6/4C AWP base at $250.30 gross margin.

TR adds $106.32 in gross margin.

Epyc adds $10.19 in gross margin currently.

APU takes away $1.46 in gross margin and from standpoint of refresh appears the only product line ramping although other grades build in volume.

I did no take the time to estimate the impact of dGPU, I estimate 1/5 to 1/3rd of revenue at $100 gross per unit of production..

Epyc primary sales remain hard to see through channel inventory holdings.

AMD % product mix on full runs to date -

Epyc at 0.54%

TR @ 12.13% .

R 8C @ 44.13%
R 6C @ 17.74%
R 4C @ 24.78%

R 27/25/24/22 APU @ 0.65%

What's selling I'll save for next comment where 1.8% of all AMD 14 nm channel inventories sell through week to week.

Now imagine yourself in one of those Matrix like animations of being caught in an array of vertical digital streams. This is what Jerry Sanders means when AMD stands still or ran in place. Effect is also seen in the wash of a river, or at the beach as waves flow in and out to sea In the patterns of pebbles and grains of sand washed around as every next wave is limited by the last.

In reality Intel is ripping the digital image of AMD apart on the result of bypassing surplus streams. The investment banking and financial community know this from their models.

This effect of being ripped apart like standing still is punctuated between AMD production ramps on Intel surplus cascades. Caught In these streams a financial vacuum occurs limiting movement and growth.

Since the beginning of December Broadwell 2600 v4 inventories grow roughly 181% speaks of the void left for XSP and Epyc. Week to week 8.5% of all those accumulating E5 2600 v4 clear. AMD in the overall product mix clears 1.8%.

XSP cleared week to week 12%. AMD in the overall product mix clears 1.8%.

Since the beginning of December Haswell 2600 v4 inventories grow roughly 120% speaks of the void left for XSP and Epyc. Week to week 9.5% of all those accumulating E5 2600 v4 clear.

In the Core desktop market any Xeon uni / 2P 3.5 GHz + large cache quad is now the overall volume seller. While KL and CL inventories continue to build, Xeon v2/v3/v4 quad outsell all KL and CL desktop week to week by 12x. Xeon v3/v4 hexa outsell all CL hexa by 25x.

The Intel Core market is also being ripped apart.

This is among what the investment banks and financial institutions know and aren't telling.

Mike Bruzzone, Camp Marketing