Short Interest (SI)

• An indicator of bearish sentiment: A high short interest suggests that many investors in the market believe that the stock's price will decline.
• In general, short interest above 20% is considered high
• For a period of time leading up to the sneeze, GME short interest was notably in excess of 100%

In 2019 the short interest of GME started to climb significantly. Through 2020 the GME short interest was extraordinarily high, in excess of 100%. This means that there were more shares sold short than the number of shares that were actually issued by the company.

How is such a situation even possible?

Shares of a stock in the stock market are fungible and can be lent to / borrowed by other market participants, and the same shares can be lent and re-lent multiple times.

For example, an investor could own 100 shares of a stock, then earn a fee by lending those shares out to some other market participant that wants to borrow them. The borrower then puts those borrowed shares up for sale (i.e. shorting the stock), where they are bought by some other buyer. Repeating this cycle creates multiple long and short positions tied to the same original shares. In this way, the supply of shares in the market has been synthetically increased beyond the actual number of shares that were issued by the company.

Due to inconsistencies across data providers, it is unclear exactly how high the GME short interest ever reached. According to various sources, the GME short interest was reported to be as high as 141% , 226% , and even 319% .

Following the peak of the sneeze, the reported GME short interest went from over 100% in January 2021 down to below 20% in February 2021. This reported value would indicate that a significant amount of the existing short positions were closed out and no longer existed, thus contradicting a commonly belief held by some GME shareholders that "shorts never closed."

In the face of this reported value dropping significantly, why would GME shareholders therefore continue to believe that significant obligations continued to exist?

Generally, it is based on the idea that the drop in GME short interest is deceptive market manipulation, and not reflective of the true reality.

There are numerous methods that market participants can utilize to be functionally short on a stock without that position showing up in the reported short interest.

• Total Return Swaps / Contracts for Difference: A market participant enters into a swap agreement that mirrors the economic exposure of shorting a stock without reporting a short position
• Synthetic short position via options: A market participant can buy a put option and sell a call option with the same strike price, creating similar exposure as selling shares short, but by using options this method does not involve short sales and thus does not appear as short interest.
• Naked short selling: A market participant can illegally naked short sell stocks and not report this information.
• Short selling an ETF that contains GME: An ETF (for example XRT, GMEU, GMEY, IGME ) might contain within it a variety of stocks including GME. A market participant interested in betting against GME could short sell shares of such an ETF, positioning themselves against all of the stocks in that ETF, without impacting the reported short interest of GME itself. If the participant wanted to use this strategy while intending on specifically targeting GME, they could buy shares of the other non-GME stocks that the ETF contains, while shorting the ETF, thus creating a position that is functionally short GME.
• Use of offshore entities: A market participant could route trades through offshore entities that are not subject to U.S. reporting requirements. Doing this is potentially illegal and risky but this does not preclude it from happening.
• Fail to report real short positions: Reporting rules require broker-dealers to report the number of shares they have sold short across all customer and proprietary accounts. It is entirely possible that a broker-dealer could simply deliberately fail to properly report short sales, in contravention to the reporting requirements. While this could be risky and illegal, it does not preclude it from being a possibility.
  For example:
  • In 2020, Morgan Stanley was censured and fined for improperly marking certain sell orders in violation of Reg SHO.
  • In 2021, Canadian investment firm Murchinson Ltd was charged for marking trades as long that should have been marked as short sales, in violation of Reg SHO.
  • In 2023, Goldman Sachs was fined by FINRA for "mistakenly" marking 60 million short sales as long.
  • In 2023, Citadel Securies was charged for inaccurately denoting that certain short sales were long sales and vice versa, across millions of orders over a five year period.

Using a combination of methods such as these, sophisticated market participants with an interest in doing so could theoretically reduce the reported short interest of GME even while the true effective GME short exposure remained very high.