I don’t know anything about SEC regulation or the laws that govern Wall Street. Explain it like I’m a 5 year old.
This is obviously about the stock DJT, Truth Central and Donald Trump. Please remember this is FQ and keep the answers factual.
Below I have an article about DJT sending out information to retail investors as to how to combat short sales. At what point does it become market manipulation? Whether it’s Nunes or Trump what kind of public communication is allowed and what isn’t? Is Nunes allowed to tell people how he wants them to buy in order to better benefit the major stock holders? Is Trump able to tueeth out asking people to buy stock to support his campaign? Where is the line, if a line exists?
To short sell a stock, one needs to borrow it, and then sell it in the market. When you borrow stock, there are a couple things involved:
You need to borrow it from someone. Typically, these are investment funds that have bought the stock, and hold it long term. The investment funds lend the stock for short selling, and make some interest/fees during the time the stock is borrowed. For Trump Media, it’s a really hard stock to borrow since close to zero investment funds have purchased and plan to hold it long term.
short selling is not free. You have to pay interest to whomever you borrowed the stock from, and there can be a fee as well. typically short selling is a very short-term thing. Say a day or a week.
borrowers have to return the stock. So, if one borrows stock, sells it in the market, then at some poiint they need to re purchase the stock and return it to the seller
There is a thing called a “short squeeze”. If a lot of people have borrowed stock and sold it short in the market, and then a different group starts buying the stock and pushing up the share price. Then, the short sellers have a choice, either cross their fingers, borrow more shares to short (if that is possible), or buy back the stock even if the price is greater than what they sold it for (take a loss).
If you remember Game Stop? Short sellers kinda decided there was very little risk, and then Reddit community decided they wanted to make the the short sellers lose a lot of money. No one can stand up against the market indefinately. Ask the Bank of England. So, a gazillion redditers bought game stop, the price went up, short sellers “covered” or bought back their positions at higher prices to avoid even greater losses, the stock kept going up, more short sellers gave up and bought back, and so on.
It is illegal to naked short sell. That is, short sell without actually having stock to sell.
There are a ton of people out there wishing they could short DJT. Myself included, but there isn’t really any stock to borrow and short. So, whilst Nunes was probably correct there were a limited about of short sellers, and they probably got squeezed, the truth is that a lot of rubes are buying the stock to help trump. The company itself is worthless. It only has cash because of the backdoor listing. It burns money, brings in less than 10% of what it spends, won’t disclose any kind of usage data that is of any help to value the company, ad nauseum.
The stock price is going to nearly zero sometime in the next week, month or year. Timing is everything in the market, but the company and the stock is worthless. Now maybe trump wins the presidency and decides to play crony capitalism and inject DJT with assets stolen from the american people. Then, and only then, it might make business sense on paper to buy the stock.
Maybe I wasn’t clear. None of that answers my question which is relatively narrow. What kind of communications from either the company or from major stock holders would be considered stock manipulation and run afoul of SEC regulations?
In principle, it’s legitimate for a listed company to defend itself against short sellers, but that does not mean anything goes. A line exists, but it’s a messy line to draw. Market manipulation was defined in the Securities Exchange Act 1934, now 15 USC 78i, which is a complex provision with a lot of ways by which the offence can be committed. For the purposes of your question, you’d be looking at section 78i(a)(4):
So essentially, you’d need to meet the following elements to commit market manipulation undere this option:
You must be one of the persons liste (this is usually not a problem);
You make a statement regarding one of the listed securities or securities-based derivatives;
The statement was, at the time and in the light of the circumstances it was made, false and misleading, or you had reasonable grounds to believe it was falkse or misleading;
This falsehood or misleading character relates to a material fact:
You did so for the purpose of inducing a purchase or sale.
According to the article, TMTG has, so far, published information for shareholders telling them what they can do if they don’t wish their shares to be used for stock lending, which can, in turn, be a basis for short selling. This information is not inaccurate and would not constitute market manipulation by the test described above.
I would say even a direct appeal to Trump supporters to buy the stock to support the campaign would not be market manipulation; there’s no false or misleading statement in there. It might run afoul of campaign finance legislation, but that’s a different matter.
This confuses me too (since naked shorts did and perhaps still DO occur, legal or not). Don’t shares sold have to be “physically” delivered in 3 days or such?
Another question: When a retail investor opens a margin account, does the broker get the right to silently use his shares to cover shorts by another customer?
I thought that any kind of stock offering has to be made by prospectus, which is required to provide all the financial facts and lay out the potential risks, and that you can’t just advertise “buy this stock, it’s great!”.
That’s a separate legal obligation - the duty to publish a prospectus for a new issuance. If you don’t, you’re breaching the law, but you’re not committing market manipulation.
True, but I was questioning whether it would be legal to solicit purchases of DJT stock even if it’s not market manipulation. Companies do things to help boost their stock prices, but they have to be subtle about it. For instance I think it was BASF that once ran a series of ads with a tagline that was something like “We don’t make the things you buy. We make the products that help make the things you buy.” Dave Barry once wrote a frustrated column about ads like that, asking rhetorically “what do you want me to do?” Well, the answer is obvious but subtle: they’re raising brand awareness in the hope that you’ll invest in their stock. Often, helpfully in the fine print somewhere, will be a URL or some other indication of how to get their annual report.
My understanding of how this works, which may be wrong, is that even in a regular non-margin account, the vast majority of shareholders never take delivery of physical stock certificates, and their holdings are simply ledger entries in the brokerage account. I see a close analogy with the money supply as represented by bank accounts. All or the vast majority of your savings are just electronic ledger entries in your accounts, and the bank doesn’t need your permission to use that money to make loans – that is, in fact, their primary business. Their only obligation is to return that money to you on demand.
What Nunes and his cronies appear to be doing is effectively equivalent to asking people to withdraw all their money from the bank so it can’t make loans. They’re suggesting that DJT stock be withdrawn from brokerage accounts and kept in other accounts not subject to lending or with the transfer agent, or, presumably, held as certificates.
@Schnitte has explained how this is not market manipulation and likely perfectly legal, but I definitely see it as unethical for a couple of reasons. First because short selling is a routine part of the marketplace and has been for a long time, and they’re meddling with a legitimate financial instrument. Second, because if my assumptions here are correct, because they’re interfering in a broker’s normal business practice, that of making money by lending shares and charging interest.
[Moderating]
A reminder that this is about the legality of Trump’s actions with respect to this stock. It is not about any of Trump’s other actions, or about what he might do in the future, or about his political prospects, because none of those are factual questions.
When you sell a stock you (typically your broker) must deliver it within two business days. The other party must provide the money within the same business day. So if you don’t have the stock now, you can short sell it with the idea that within two days you could borrow it from someone who does own it.
This may be a an overstatement. I don’t recall for sure, but it may be they can only lend your shares if you actually have bought some shares on margin so that you have a loan outstanding.
I was under the impression that short-selling was a futures option… “I promise to buy/sell stoock X at price Y on date Z”. Futures options are listed in the business section of your loca newspaper, along with market open/close. (Oh wait, there’s no such thing as a local newspaper…?)
I don’t see the reason for an immediate (or “within 2 days”) short sell. Basically you’re promising to sell below market, so you have to expect the price to tank pretty much immediately.
Oficers of companies (IAIAAccountant or broker…) are restricted from acting on privileged information, or letting their friends in on the secret to also act when the general public does not know. I’m not sure how an email to all or some shareholders falls into this category. They are also forbidden from saying things not true, as mentioned above. But a warning about avoiding market manipulation is unlikely to be classified as market manipulation.
IIRC form the Gamestop episode, one of the issues was that many of the small payers were using a broker outside the regular markets (Robin Hood?) Effiectively a private stock market - who then pulled the plug on them. Robin Hood was supposedly taking teh shares and lending them out, and I presume regular brokers are known to do the same - which is why the advice to take your shares home to avoid this.
All these are simple pieces of advice that do not directly affect the current value of the stock. Whether this causes third-party brokers ot be unable to lend, and thus affect short-sell and price, is probably not relevant.
No. Derivative products such as exchange listed futures and options are sold with long or short positions. But, you don’t “short” (borrow a future to sell) futures. You would simply purchase a “short futures” position on the underlying stock.
Holy crap, I just looked up the implied volatility on calls/puts, and it’s in the hundreds (which is freakishly high). Hmm, might want to take a flyer. Or you can buy the warrants (long call options) trading at a huge discount to the underlying stock price, which demonstrates the risk factor “the market” is pricing in. Here’s an explanation and not a bad intro to the stock fundamentals: Trump Media stock is booming (for now). Here’s the way to play it on the cheap. | Morningstar
Caveat emptor, this is a meme stock with almost zero fundamental value.
That’s because a future is not a financial instrument that would be delivered. It’s a contract between two parties with mutual obligations. The terms of the contract are standardised, which makes it possible to list them on an exchange, but there’s no need for a delivery; as soon as the buyer’s and seller’s orders are matched, the contract between them is made.
Technically as I understood (never got beyond just learning a bit about these) the futures contract could be satisfied by a cash settlement between the buyer and seller for the difference between contract and market when the futures contract expires; but the receiver could be difficult and demand actual delivery of the shares in a futures contract - meaning the futures seller would have to actually go out and buy the sharess and turn them over. This would only be a problem if the market was really tight - i.e. that quantity of shares is not avaiable at the market rate.
No, you’re mixing up the meaning of “short”. It’s often used interchangeably but erroneously. An apples and oranges confusion.
To “short a stock”, one needs to borrow the shares and sell them. At some point, need to return the same number of shares. Eg, borrow 100 shares at x price + carrying costs (interest), then in the future return 100 shares (and pay the interest according to the terms of the contract). It’s slightly more complicated than that but let’s not go into dividend details and the such.
“Short options” or “short futures” do not involve borrowing and selling the underlying asset. Again, this is simplified. If I buy a short future, it is the obligation to sell you the underlying stock at a price by a certain date. Simultaneously, that short future is matched with the exact “long future” position with the contractual obligation to buy at that price. Ex. I buy 1 short futures contract that allows me to sell 100 Spacely Sprockets shares at $100 expiring on May 31, and simultaneously it is matched with you buying 1 long futures contract allowing you to purchase 100 Spacely Sprocket shares at $100. May 31st arrives and the stock is $90. My short futures profit is $100 - $90, and your long futures loss is $90 - $100.
Options come in long and short flavors. Kinda like futures but a long option is the right but NOT the obligation to buy at a price.
In a futures market (and the options market for that matter) a specific buyer and seller are not matched, Rather each trader is matched with the clearing corporation. When I sell to you, what really happens is I sell to the clearing corporation and you buy from them. If I want to close my position, I don’t deal with you. If I sold before, I just now buy the same contract and then both positions are canceled. Once I close the position, I no longer have to deliver and the vast majority of futures contracts are closed before delivery.
However, it does take someone on the other side to trade with so that the clearing corporation is still completely hedged. If whatever is being traded is in very short supply, those who are long often won’t trade again hoping the price will continue to rise as more and more shorts are required to go find the spot commodity to deliver. This is a short squeeze and can be very expensive.