Adam Aron, the chief executive officer (CEO) of AMC Entertainment (NYSE:AMC), says his company has been officially named to the “threshold list” that is reserved for stocks that fail to deliver positions of 10,000 shares or more for five consecutive settlement days.
Regulators place stocks on threshold lists when they suspect market manipulation, including naked short selling. This has been an ongoing concern of retail investors who have held positions in AMC stock for some time, along with worries about toxic lenders related to the Leawood, Kansas-based movie theater chain.
Being placed on a threshold list is a strong sign that the stock is being manipulated and could be the target of naked short selling, which is when investors and traders sell a stock short without borrowing or arranging to borrow, the shares to sell short from a broker. While naked short selling is illegal in the U.S., it is a common practice elsewhere in the world, particularly in Asia.
While its stock remains volatile, shares of AMC Entertainment are up 53% this year and are trading at $6 each.
A New York Stock Exchange posting clearly shows that AMC stock has been added to its threshold list. The placement of AMC Entertainment on the threshold lost indicates that the stock continues to be heavily shorted on Wall Street and that much of it could be due to the illegal practice of naked short selling. This situation could set up AMC stock for what is popularly called the “Mother of All Short Squeezes,” or MOASS.
AMC is widely viewed as a meme stock, and it has been caught in short squeezes multiple times over the past two years, most recently last August when the share price was pushed above $25. AMC stock began this year trading for under $4 per share. Should the price rise again, traders and investors, including well-capitalized hedge funds, would be forced to buy the shares they sold short to prevent losses, pushing the price up even higher in what is known as a short squeeze.
Why It Matters
Naked short selling is illegal in the U.S. as it is considered a form of market manipulation. The proliferation of naked short selling in AMC stock shows there is still interest in betting against the world’s largest movie theater chain.
The company struggled mightily during the pandemic when its more than 10,000 theaters were forced to close or operate at reduced capacity. There continues to be speculation that the company could file for bankruptcy. This event would almost certainly send its stock lower.
However, the widespread shorting of AMC stock sets the shares up for a potentially huge short squeeze in the near term. Some retail investors have been waiting for this scenario, particularly those congregating on the WallStreetBets subreddit.
A big run-up in the price of AMC stock could benefit retail investors in the short term. However, short squeezes almost always end badly once the stock is sold, profits are taken, and the share price crashes back down to earth, often lower than where it started.
What’s Next for AMC Stock
While it is up to regulators such as the U.S. Securities and Exchange Commission (SEC) to crack down on the practice of naked short selling and market manipulation, evidence that AMC stock continues to be heavily shorted sets the shares up for a potentially big squeeze in coming days and weeks.
Whether the big short actually happens remains to be seen. But investors should continue to be cautious with AMC Entertainment’s stock.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.