The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze
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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/nydus_erdos](https://www.reddit.com/user/nydus_erdos/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/ogi75b/the_chronicles_of_short_shorter_ep_1_before_the/) | 

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[DD 👨‍🔬](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22DD%20%F0%9F%91%A8%E2%80%8D%F0%9F%94%AC%22&restrict_sr=1)

Disclaimer: Not financial advice. I've put a disproportionate amount of time into this for free, I clearly do not make good decisions, except for GME of course. This is at best, fancier napkin math.

ALL POSTS BUILD ON EACH OTHER. IF THERE'S SOMETHING THAT SEEMS LIKE I GLOSS OVER HERE, YOU'LL LIKELY FIND IT (IN DETAIL) IN MY PREVIOUS POSTS: [Vol. 1](https://www.reddit.com/r/Superstonk/comments/nw8281/math_black_magic_vol_1_why_it_is_mathematically/), [Vol. 2](https://www.reddit.com/r/Superstonk/comments/nwy0oz/math_black_magic_vol_2_the_limit_does_not_exist/), [Vol. 3](https://www.reddit.com/r/Superstonk/comments/nya5ps/math_black_magic_vol_3_trillion_short_share_seance/), [Epilogue](https://www.reddit.com/r/Superstonk/comments/odrnbv/math_black_magic_final_vol_epilogue/), [Microeconomic Primer](https://www.reddit.com/r/Superstonk/comments/of1lz2/malleus_oeconomica_a_compressed_primer/)

Main Sources: [Finnerty Paper](https://www.sec.gov/comments/s7-08-08/s70808-318.pdf), [Microeconomics 7th Edition by Jeffrey M. Perloff](http://dl.rasabourse.com/MIT.Mircroeconomics.Jeffrey%20M.%20Perloff%20-%20Microeconomics%20(2014,%20Pearson).pdf)

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A. Intro

I thought for a long time for a concise way to describe this series. Unfortunately for you, I am ape-tarded and no matter how hard I tried, this kept repeating in my head. I apologize in advance.

([Begin drum loop](https://www.youtube.com/watch?v=JgLcJFad90I))

Nobody: Hey Nydus, can you tell us a bedtime story?

Ok, heeerrre we go:

Once upon a time not long ago

When people went long and invested slow

When laws were stern and justice stood

And people were investin' like they ought to: good

There was little Gabe who his broke bread

With another Kenny boy and this is what he said:

"Me, you and Steve are gonna make some G's

Shorting inelastic curves and makin' FTDs"

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/h3pm3f5yu1a71.png?width=960&format=png&auto=webp&s=38b8a860a22c6e65827337655485cbe3e2e299c8)](https://preview.redd.it/h3pm3f5yu1a71.png?width=960&format=png&auto=webp&s=38b8a860a22c6e65827337655485cbe3e2e299c8)

I DID NOT MAKE THIS! IT WAS ORIGINALLY POSTED BY u/MisterFinishLine.! https://www.reddit.com/r/Superstonk/comments/nii1s6/short_shorter/

I DID NOT MAKE THIS MEME! CREDIT IN THE CAPTION!

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B. Assumptions

*SHORTS HAVE NOT COVERED*

Before I get into this one, read these excerpts from Finnerty's paper:

> "Naked short selling and manipulating the price downward provide cash returns to the manipulator, who can withdraw cash from his clearing firm account as the shorted shares are marked to market at progressively lower prices. Through naked shorting, the manipulator realizes these returns without investing any cash (provided the market price never rises above the sale price)." (Pg. 34, par. 1)

> "The clearing firm retains the cash proceeds from the short sale to secure the selling broker's delivery obligation. The clearing firm releases cash equal to the reduction in value of the shorted shares as the price of the shares declines (or demands additional cash margin if the share price rises)." (Pg. 34, footnote 51)

Yes, you read that correctly. Naked short selling is pretty much FREE MONEY. On top of this, finance is OBSESSED with maximization. Finnerty mentions it frequently, and the calculus behind all this stuff is pretty maximization problems.

What I'm saying is, we're familiar with Citadel and Co.'s natural inclination towards all consuming greed has been further sharpened by mathematical indoctrination. Ultimately, Kenny and Co. maximize their profit by never closing their FTDs. Why would they? Who was gonna check?

There is also a mathematical basis:

> "The manipulator maximizes his profit by...naked shorting *P(3)* close to zero. The manipulator should sell short *A/(3B)* shares at time 1 resulting in *P(1) = 2A/3*...He should sell short an additional *A/(3B)* shares at time 2...The manipulator drives *P(3)* close to zero by adjusting the short position to *L/B* shares. If *L > 2A/3*, the manipulator will increase his short position; otherwise, he will decrease it."(Pg. 55, par. 1)

The only scenario where they could've reduced their position would conflict with our known Janurary SI. This also makes the calculations much more simple, as I don't have to worry about subtracting shares covered.

Along with this, Finnerty also describes a situation that might sound familiar:

> "...suppose the manipulator realizes at time 2 that the firm's share price the next period will be H, rather than L as originally expected, say, due to favorable developments in the firm's business. Suppose further that the securities regulators or the clearing house require all securities dealers to clear up all fails to deliver. The manipulator would face potentially large losses on his short sales. By short selling an additional 2A/(3B) shares at time 2, he can drive the share price close to zero" (Pg. 56, par. 3)

The quantity *2A/3B* is double the amount the manipulator usually sells at time 2, which indicates to me that they have to increase the magnitude of their attack to compensate. Past the Sneeze, I don't see how they would keep up such aggressive price suppression without increasing their position, especially when it was undeniable that this was a high value company.

*MONOPOLY MARKET*

Citadel and Co.'s market marking privileges have allowed them to form a monopoly on GME shares. They are the only suppliers. They have full direct control of quantity of output and indirect control over price. Assuming monopoly market simplifies calculations in that we do not have to consider actions from other players.

*INELASTIC DEMAND CURVE*

Basically, this means that the quantity demanded does not change much in response to a change in price and demand will at least stay constant. Throughout my calculations, only the inelastic value consistently provided reasonable answers. This also makes sense as we know even before the Sneeze there were diamond hands who knew the ~~value~~ deep fucking value of the company. From what I got, it appears that the only time apes had an elastic demand curve was when they turned off the buy button.

*NO SUPPLY CURVE, ONLY DEMAND*

Biggest thing I discovered is that short selling in general is that it defies the very law of supply. Instead of a producer supplying less as the price gets lower, naked short sellers supply more as the price gets lower. They can afford to since, until recently, naked short selling had zero cost.

On top of this, monopolies do not have supply curves. This lack of a supply curve makes a monopoly's output decision dependent on the shapes of its marginal cost curve and the market demand curve.

Because those reasons, I assume that price behavior over time is highly related to market demand, in that the elasticity (normalized/unitless) from the Price vs.Time charts is analogous to the elasticity on the market demand curve (Price vs. Quantity)

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/dhddnm6a32a71.png?width=612&format=png&auto=webp&s=0cea57adf59d86cc879d0a35d92b687439e97174)](https://preview.redd.it/dhddnm6a32a71.png?width=612&format=png&auto=webp&s=0cea57adf59d86cc879d0a35d92b687439e97174)

Elasticity Assumption

*DOUBLE-HALF CONJECTURE*

The paper lays out the general strategy of a manipulator who is aggressively naked shorting a stock. Basically, the manipulator naked shorts a certain amount of shares based on a formula taking into account current market price, various probabilities, etc, etc. By the end of the paper, Finnerty proves mathematically that the manipulator must naked short at least as many shares as the firm has outstanding in order to short a companies price close to zero, not zero!. Side note, the reason its not zero is because:

> "The manipulated price could be less than a penny if market convention allows quotations in a fraction of a cent, as for example the OTCBB market does" (Pg. 11, footnote 21)

Anyway, the point is this strategy of shorting usually leaves a pattern. The first attack drops the price by about one-third (~33%), the second cuts that price in half (~50%) and the third kicks it down close to zero. Around the time the price is cut in half the manipulator has naked shorted the same amount of shares outstanding.

> "If *L > A/3*, the manipulator will naked short more shares than the firm has outstanding. The share price is *P(2) = A/3*, which is half what it was at time 1."

> "...if *L = A/3*, then the manipulator would naked short the same number of shares the firm has outstanding, doubling the float. He would halve the short position at time 3 to *A/(3B)*, restoring it to what it was at time 1. The strategic fail substantially decreases at the same time the share price declines because the intrinsic value of the shares decreases."

Going on this I assume that every time the price is approximately cut in half, the naked short seller has doubled the shares in existence.

*PROFIT STRATEGY*

They started short selling on the inelastic part of the demand curve. Normally, a monopoly wants to work on the elastic part of the demand curve. However, if you naked short sell an elastic curve the price will drop quicker with less shares shorted. I think its possible that Short, Shorter & Co. figured they could maximize profit by naked short selling on an inelastic demand curve, as they could short more shares over time since it takes more short shares to affect an inelastic demand curve.

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C. Duration & Timeline

Einstein said the only infinite things are the universe and human stupidity. Were he alive today I'd ask him if he could human greed as well. To truly grasp how greedy, I'll run you through my estimation of the total duration of their short postion until the Sneeze.

From the price action, it looks Short, Shorter & Co. opened their short position approximately December 2015, going until December 2020 is:

-   5 calendar years

-   3.45 trading years

-   868 trading days

(Note: there about 252 trading days in a year. Almost exactly 69 percent (lol) of a calendar year)

I wanted to start with general data, so I eyeballed the Google chart of GME and these immediately stood out to me. We will be looking at the following dates (all approximate!):

-   Time 0, October 30 2015. Initial conditions, price was approximately $46.14

-   Time 1, July 29, 2016. Price dropped approximately 33% from about $46.14 and leveled out around $30.76

-   Time 2, April 6, 2018. Price dropped by approximately 50 percent from $30.76 and leveled out around $15.38

-   Time 3, Aug. 9 2019. Price dropped 75 percent from approximately $15.38 and leveled out around $3.85

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/jenb5en592a71.png?width=896&format=png&auto=webp&s=da1d4898f8ee2c771d437d167bc12ad954e362ff)](https://preview.redd.it/jenb5en592a71.png?width=896&format=png&auto=webp&s=da1d4898f8ee2c771d437d167bc12ad954e362ff)

Price Chart

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D. Equations and Variables

*FINNERTY FORMULAS*

These were closely examined in previous posts.

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/w3fbaf2962a71.png?width=875&format=png&auto=webp&s=836d4bf51d27178da145dbcd418774628918a6b6)](https://preview.redd.it/w3fbaf2962a71.png?width=875&format=png&auto=webp&s=836d4bf51d27178da145dbcd418774628918a6b6)

Quantity Shorted

*HOW IS B DETERMINED?*

Also examined in previous posts.

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/p5a216lr62a71.png?width=863&format=png&auto=webp&s=bf11d3228ae16f8e4f8e34bcc3fedf78c471b5e1)](https://preview.redd.it/p5a216lr62a71.png?width=863&format=png&auto=webp&s=bf11d3228ae16f8e4f8e34bcc3fedf78c471b5e1)

Elasticity

*HOW IS A DETERMINED*

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/74xghtf972a71.png?width=877&format=png&auto=webp&s=d9a72646f9e7b0d7800d73cc584f52b9aa2dec5e)](https://preview.redd.it/74xghtf972a71.png?width=877&format=png&auto=webp&s=d9a72646f9e7b0d7800d73cc584f52b9aa2dec5e)

Variable A

*HOW IS L DETERMINED*

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/66ockp4n72a71.png?width=885&format=png&auto=webp&s=dc91a802870b1c531ae45c65e78061f1c782edfe)](https://preview.redd.it/66ockp4n72a71.png?width=885&format=png&auto=webp&s=dc91a802870b1c531ae45c65e78061f1c782edfe)

Variable L

*HOW H IS DETERMINED*

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/wg1yccku72a71.png?width=899&format=png&auto=webp&s=f51208f3bcb63d6c3093677ebedf4d6c6b3c9218)](https://preview.redd.it/wg1yccku72a71.png?width=899&format=png&auto=webp&s=f51208f3bcb63d6c3093677ebedf4d6c6b3c9218)

Variable H

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E. Results

*LOW ESTIMATE*

(In millions of shares; negative numbers imply that they decreased their position)

Chart 1.

| Time | Quantity Shorted (Q) |
| --- | --- |
| 1 | 51.788 |
| 2 | 51.793 |
| 3 | -18.912 |

Chart 2.

| Total Q at Time 2 | 103.58 |
| --- | --- |
| SI at Time 2 | 147% |
| Total Q at Time 3 | 84.67 |
| SI at Time 3 | 120% |

*HIGH ESTIMATE*

Chart 3.

| Time | Quantity Shorted (Q) |
| --- | --- |
| 1 | 51.788 |
| 2 | 51.793 |
| 3 | 122.49 |

Chart 4.

| Total Q at Time 2 | 103.58 |
| --- | --- |
| SI at Time 2 | 147% |
| Total Q at Time 3 | 226.07 |
| SI at Time 3 | 320% |

*AVERAGE OF H AND L*

Chart 5.

| Time | Quantity Shorted (Q) |
| --- | --- |
| 1 | 51.788 |
| 2 | 51.793 |
| 3 | 51.788 |

Chart 6.

| Total Q at Time 2 | 103.58 |
| --- | --- |
| SI at Time 2 | 147% |
| Total Q at Time 3 | 155.37 |
| SI at Time 3 | 220% |

F. Conclusion

Notice how that by time 2, when the price halves they had shorted more shares than shares outstanding.

Additionally, the best estimate we have of pre-Sneeze SI is from the Robinhood filing that lists ~225%. The average value was consistent with that.

I used this timeframe of estimates as a calibration of sorts and the model seems to hold here.

G. Next Post

I'll use the method described here to estimate how many shares were shorted during the Sneeze. The following post will cover after the Sneeze up to mid April 2021

H. TL;DR

[![r/Superstonk - The Chronicles of Short & Shorter, Ep. 1: Before the January Sneeze](https://preview.redd.it/kzvj5fxzd2a71.png?width=942&format=png&auto=webp&s=919c30110dbfbc4d746b16c59ed5ae95f5e0d4a4)](https://preview.redd.it/kzvj5fxzd2a71.png?width=942&format=png&auto=webp&s=919c30110dbfbc4d746b16c59ed5ae95f5e0d4a4)

I DID NOT MAKE THIS! ORIGINAL MEME POSTED BY u/Archisaurus, https://www.reddit.com/r/Superstonk/comments/oev08e/this_is_my_brain_going_through_the_due_diligence/

I DID NOT MAKE THIS MEME TEMPLATE! CREDIT IN THE CAPTION!
