The GameStop Shorting Conspiracy

Company Was Shorted Over 102%

Posted by Gary Smith on Feb 5 2021

Yahoo Finance shows that at the end of 2020 Gamestop was 102% shorted. There have been claims it was as high as 140%.

This from Yahoo Finance:

Yahoo finance - Gamestop short position table

How on earth can that happen?

All the shares in GameStop, plus 2%, had been sold in the market.

Theoretically, nobody owned any of it.

If you take the free float of the shares and use that in the calculation the number rises to 260% shorted. (The free float are the shares freely traded on the market and are not held by key investors who would, it is supposed, never sell them and would not allow the stock to be lent to shorter's.)

260% is a staggering figure.

Short sellers are required to match their shorts to existing shares in an attempt to stop a company being overwhelmed by massive bets against it from powerful interests, like hedge funds.

If that is true then a 102% shorted company can never happen. Something has gone wrong.

This heavily shorted position explains why GameStop was such an easy victim in waiting for the short attack that occurred in January 2021. It was reported at the time that a group on reddit, in the wallstreetbets group, led the charge. But this buying didn't even make it into the top 10 of private investor buying in the month, according to JP Morgan, as reported by The Guardian. It didn't need to be that big a surge in interest - the share price exploded from around $20 to $483 fueled by the complete lack of any stock for anyone to buy.

As we can see in this Bloomberg chart, below, GameStop was 100% shorted last year in January 2020 too, so this isn't an unusual occurrence for this particular share. A note on this chart - it says this is a percent of the free float, but it looks like it should read percent of total shares.

Bloomberg chart of short position in Gamestop 2019-21

The next most shorted stock on the US markets was AMC Entertainment, which was shorted 78%. AMC was another stock favourited by the reddit buying group. In the UK the most shorted stock had just under 11% of its stock shorted (Tullow Oil) according to Prices from 20th December 2020.

The GameStop issue raises an important question about shorting in the US markets.

Traders do have rules to follow when shorting a stock, albeit seemingly benevolently policed by the authorities. Market makers are not so constrained.

Let's look at the trading side first because the figures for what they are doing are published by the SEC, market makers enjoy more secrecy at least from the public's gaze.

According to SEC rules, when a trader shorts a stock he has to have located a share to sell, but that share does not have to be delivered until the end of the trading period T+4. So that means he has 3 days to deliver the stock. If the stock cannot be delivered that is a 'failure to deliver' but there are a number of reasons why this could legitimately happen, says the SEC website. It all seems very flexible, I'm guessing the assumption is the market participants are honorable professionals and aim for best practice, but sometimes things go wrong. But this isn't enough to explain the short position of GameStop.

Looking at the figures from the SEC there are billions of dollars worth of shares being registered as failure to deliver on a daily basis. On 4th January 2021, a random date taken for this story, just under $1.7bn of stock was marked as fail to deliver across the market. GameStop had around $3.4mn worth of failure to deliver shares outstanding on 4th January 2021, which was 182,000 shares at $18.84. At $18.84 GameStop is valued at under $1.4bn

Market makers are allowed to naked short sell (naked means you haven't borrowed a share to sell) when necessary because they are responsible for providing a market in a share which may be illiquid. (

How GameStop got to be so shorted will hopefully come out at some point in the future, but a tweeter has an interesting explanation of how this could have happened: Serial multiple lends and serial multiple shorts of the same physical share. An investor with the share lends it to an investor that shorts it and then whoever bought that share lends that same share to someone else who shorts it. If that is what happened the practice must surely be stopped.

Gary Smith, 5th February 2021

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