AMC is Now Designated by NYSE as a ‘Threshold Security’

The more one zooms into the stock market’s underpinnings, the more surreal it gets. Today, the NYSE has designated AMC as a ‘threshold security’, shining further light onto the situation with AMC shares that fail to deliver.

MOASS Revisited

Yesterday, the Tokenist reported on another tie-in to the great short squeeze saga. Both TD Ameritrade and Schwab brokers announced their increased margin trading requirements to reduce the risk for themselves and for traders who wish to engage in the trading of the two mega-shorted stocks – GME and AMC. As these stocks already drained $12 billion from hedge funds, all market players are fortifying their financial walls.

From multiple House hearings addressing short selling and faster settlement times, to DTCC, OCC, and NSCC changing their rules, these moves serve as bricks to wall off what is popularly dubbed as MOASS (Mother of All Short Squeezes). While (covered) short selling is part and parcel of the US stock market, the MOASS relies on a couple of key ingredients to represent an anomaly:

• Purported naked short selling: Short selling stock shares that haven’t been registered as borrowed. Instead, they puff into existence as derivatives. In turn, this increases the volume of tradable shares visible to brokerage app users as regular stocks.
• Scale of the naked short selling.

Both of these ingredients are strongly believed to have manifested themselves acutely in the form of phantom shares, resulting in $359 million worth of GME shares failing to deliver (FTD). They accounted for over one million GME shares that got lost in transit.

Outside of creating an illusion of owning these phantom or synthetic shares, they have major real-world consequences. In covered short selling, hedge funds like Citadel are already in trouble because they may have to repurchase borrowed shares whenever the stock price goes up. In turn, this scenario would create significant buying pressure, keeping the stock price higher than that which the fundamental analysis of the company would suggest.

As mentioned, hedge funds have already bled at least $12 billion because of this. However, on top of this covered shorted layer, synthetic shares come into play as they mature into “realness” when the shorts are either margin called or closed. Consequently, this is when their losses become drastically amplified, hence the term ‘MOASS’ accompanied by the tweaking of rules across the board to soften the market blow.

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NYSE Adds AMC to Threshold Securities

One of the regulatory mechanisms to mitigate the risk generated by naked shorting and its predictable failure-to-deliver (FTD) is to place the asset under “threshold securities”. Under the SEC’s ruleset regulating short selling, Regulation SHO established in 2005, threshold securities under Rule 203(c)(6) are defined as:

“Threshold securities are equity securities that have an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency (e.g., National Securities Clearing Corporation (NSCC)); totaling 10,000 shares or more; and equal to at least 0.5% of the issuer’s total shares outstanding.”

In other words, it’s what many believe to be a proxy for detecting naked shorts – phantom shares – that fail to deliver. In accordance with Regulation SHO’s Rule 203(b)(3), members of clearing houses are obligated to “immediately purchase shares to close out failures to deliver”.

As of last Friday on June 25th, NYSE – a designated market maker (DMM) – listed AMC as threshold security.

Previously, AMC stock had been listed on NYSE’s threshold securities from December 17^th to December 28^h of 2020. Likewise, GME stock had been listed on and off throughout December of 2020 and January of 2021.  

From the already documented $359 million FTD for GME shares alone during that period, it is understandable why they got onto the list. As AMC is on it now, it strongly suggests that many trades have already failed. Currently, AMC has 513.33 million outstanding shares. Under the criteria set by the Rule 203(c)(6), 0.5% of that number would qualify for a threshold security, meaning 2.56 million shares.

Adding the five consecutive days part of the criteria, this would yield an astonishing 12.8 million FTD shares as the maximum, which would represent 12x higher volume than GME’s FTDs during January. However, another way to look at it is interpreting the “totaling 10,000 shares” part as the minimum. Depending on your level of trust in the financial system that has “regulatory capture” issues, the NYSE listing itself could be used as a sell-off signal.

For instance, if NYSE later delists AMC, it would imply that invested short-selling parties cleared up their FTD shares. This would then signal to meme stockholders that MOASS is dead on arrival, triggering a sell-off before the margin call. While this would require a coordinated level of collusion, with billions at stake, it is anyone’s guess where the red line is drawn.

Do you think “regulatory capture” of high finance is over-reported or under-reported? Let us know in the comments below.