Bed Bath & Beyond the Pale
“For greed, all nature is too little.” – Lucius Annaeus Seneca
For as long as there have been stock markets, there have been pump and dump schemes. While the development of technology has expanded the suite of tools available to market manipulators, the overall arc of pump and dumps has changed little over the centuries. It typically involves three phases: quietly accumulating stock, creating a frenzy based on false narratives, and selling into the resulting exit liquidity. Such schemes work because pumpers have two critical information advantages over bag holders: they know the real value of the underlying security and the false value of the story told to whip up the excitement. When it comes time to sell, they need not wonder whether the narrative “could” be true – holding out hope is the expensive hallmark of a sucker.
Intentionally manipulating the price of a security for personal gain is patently illegal, of course, but proving intent in a court of law can be difficult. This is especially true if you are wealthy enough to bluff Gary Gensler, the feckless and all-talk-and-no-action chair of the Securities and Exchange Commission (SEC). Evidence indicates that if you can afford to hire a white-shoe law firm to represent you, Gensler is unlikely to bother you very much. After all, there’s probably an accountant at a pizza chain somewhere making a few grand off insider information. For the sake of Gensler’s future political career, it’s much better to work tiny-to-small and leave big enough alone.
In the post-Covid stock market rally, pumpers realized they could create a frenzy, essentially at will, without leaving an incriminating trail of false statements. Through the weaponization of stock options and the harnessing of social media, determined manipulators have invented a proverbial printing press. Under Gensler’s watch, countless so-called “gamma squeezes” have unfolded, and the resulting transfer of wealth from desperate minnows to insatiable whales has been epic.
Assuming one is not bound by ethics or common decency, the mechanics of executing a gamma squeeze are simple enough. The first step is to accumulate a large position in a stock. Ideally, the target company has a well-developed options market and decent name recognition among retail investors. Once the position is established, a few “large and loud” purchases of deep out-of-the-money call options seed the frenzy. Many options-monitoring software packages continuously scan for such purchases and getting them amplified on social media is a relatively simple task – a couple hundred inexpensive-to-procure bots on Twitter and Reddit will do the trick. Egged on by the lure of free money, fear of missing out (FOMO), and the well-founded belief that options market-makers will be forced to buy stock in the open market to hedge the calls they’ve written short, retail investors are induced to join the party by piling into out-of-the-money calls themselves. The resulting upward move in the stock price and the huge spike in options volume becomes the story itself, creating a self-fulfilling squeeze. With ample liquidity to sell into, the original pumpers make off with huge profits, leaving retail investors to scramble for the exit at some point in the future.
With no associated underlying value created in the company, the stock squeeze ends when the net supply of fresh money dries up, and the resulting collapse in price is often more violent than the rise that preceded it. This is especially true for the value of call options, which can quickly fall to near zero as the stock breaks down and volatility dissipates.
Many suspect foul play behind some of the highest-profile gamma squeezes observed in this market cycle, although proving it is made difficult by the possible use of cut-out limited liability corporations (LLCs) and third-party social media consulting firms. Shell companies registered in Wyoming are rumored to be particularly popular among manipulators, as strict privacy laws make discovering who the real beneficial owners are nearly impossible absent a subpoena. This gives the appearance that the stock and options transactions arise from separate entities, even though they are often anything but arm’s length. With the SEC largely uninterested in discovering the truth, we are left to traffic in whispered rumors, the specifics of which are never quite fit to print in respectable news outlets or even on Doomberg.
Recently, Ryan Cohen – a billionaire entrepreneur and highly successful investor – executed what appears to be a quintessential gamma squeeze in Bed Bath & Beyond (BBBY), one of the original meme stonks from the 2021 Reddit mania. Brazenly, Cohen went for the “hide in plain sight” approach, properly detailing his every move in filings with the SEC. The fact set in this incident is staggering, and what – if anything – the SEC will do about it will undoubtedly set precedents. Regardless of how things play out, the affair provokes fascinating questions. Let’s dig in.