AMC Entertainment Shares Keep Sliding Along With the Stock’s Short Interest, Yet the “Apes” Point Toward Dark Pool Trading as the Culprit

AMC Entertainment (NYSE: AMC), the distressed movie theater chain that has seen a dramatic reversal in fortunes amid a surge in the interest of retail investors, seems to be going nowhere these days, with the stock currently trading at levels last seen back in August.

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AMC Entertainment shares are now down over 29 percent during the past 30 days. Interestingly, this decline in the share price comes as the stock’s short interest is also on a downward trend. As per the latest exchange-derived figure as of the 30th of September, AMC’s short interest currently stands at 17.74 percent of its float. This corresponds to 91.065 million shares that are sold short. However, at the previous such tabulation on the 15th of September, AMC’s short interest was equivalent to around 97 million shares.

Now, under the classical understanding of a short squeeze, a stock should rally as short-sellers are forced to buy back shares at progressively higher prices. In the case of AMC Entertainment, however, the decline in the short interest is not pushing the stock higher.

AMC Entertainment (NYSE: AMC) Bulls Are Now Convinced That Hedge Funds Are Manipulating the Stock via Dark Pools

In order to address this dichotomy, AMC Entertainment investors are now increasingly pointing at the supposedly shady practices of hedge funds in dark pool trading as the key mechanism with which the stock is being suppressed.

As a refresher, a dark pool is simply a private exchange where stocks and other derivatives are traded. Such avenues are attractive to hedge funds as they conceal the trade price and volume, thereby minimizing the market-moving impact of large block trades. In the case of AMC Entertainment, however, investors allege a litany of abuses.

First, it is a fact that the fails-to-deliver for AMC shares are in a class of their own. For instance, according to one tabulation, the stock’s fails-to-delivers are a whopping 35,000 times that of Amazon (NASDAQ:AMZN)! For the uninitiated, a fail-to-deliver usually occurs when an investor is under a contractual obligation to buy and deliver specific shares but fails to do so due to a shortage of funds. However, the failure to deliver can also occur in the case of naked short selling – an illegal practice where a short trade is opened by selling shares that have not been affirmatively determined to exist.

Prima facie, naked short selling appears to be a very rare occurrence. After all, the practice is illegal for all intents and purposes. But as with a lot of things related to AMC, there are loopholes that are supposedly being exploited. Funds with an outstanding failure to deliver (FTDs) are mandated by the SEC to find and deliver the requisite shares to a buyer. These funds receive a grace window to do so. A clever way to resolve these FTDs is to purchase deep-in-the-money call options. These options are then exercised immediately to acquire and deliver the requisite shares. This resolves the FTDs without compelling such funds to close their naked shorts. Bear in mind that even this practice is illegal, and the SEC has published a paper against it.

Nonetheless, AMC bulls argue that hedge funds are using the anonymity afforded by dark pools to buy deep-in-the-money call options as well as resorting to other manipulative practices in order to prevent the stock from exploding higher. We would urge our readers to peruse this detailed Reddit thread.

As of the 13th of October 2021, the last date for which the data is available, dark pools accounted for a whopping 59 percent of the total trades in AMC Entertainment shares. When tallied with the soaring fail-to-delivers in the stock, clearly some level of abnormal trading activity is taking place. Nonetheless, we can’t conclusively determine whether dark pool manipulation of AMC’s stock price is indeed taking place. That is the SEC’s job.

In the meantime, AMC shares are likely to remain range-bound as the ongoing tussle between the bulls and the bears plays out in the open.

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