21.08.2023 09:07
Losses of trading speculators may exceed $20 million due to attack on FRHC by “the bears”
The trading volume of the Freedom Holding Corp. (FRHC) stocks during the trading session on NASDAQ yesterday amounted to $111 million.
The closing price of the stock was $87.48 per share. The price grew by 25.24% ($17.63) that day. FRHC securities were traded at $90.40 at its peak, which has been the highest value of the company’s shares since its IPO on NASDAQ in 2019.
The volatility of FRHC shares was driven by the report by Hindenburg Research, well-known for their speculation with stocks, and those who followed their advice in an attempt to profit from the short selling of Freedom’s securities. However, the attack on FRHC shares led to a short squeeze when stock prices grow rapidly due to a significant number of short sellers rushing to cover their positions by buying the stock. Earlier this week experts told the Kursiv edition that this situation was very likely.
The bear operation, dealing for a fall or short selling, is a multistep speculation. First of all, a short seller borrows a security and immediately sells it on the open market, almost with the purpose to profit from the share price fall later. Meantime, a speculator launches a massive information campaign to persuade the market that the victim company is in trouble. Usually, the market starts unloading shares, causing agiotage and a decline in the share value. As soon as the share price drops, a speculator buys the shares for a lower price, pays back its debt with the help of cheaper security and makes a profit from the difference in prices.
However, speculators are not always lucky. Because FRHC shares are spread thinly across the market and distributed among a wide range of people, many of whom are clients of Freedom, it is not an easy task to borrow shares for short selling. According to experts from Kursiv Research, it’s very difficult to borrow more than a million shares in one day to make a delivery.
«This is pure adventurism of Hindenburg Research. They were so confident after several successful attacks in the past that they ignored not only the fact-checking of the information they prepared but also didn’t check where they could borrow shares they sold to provoke a panic. If their plan succeeded, they would have been able to carefully buy the entire volume of shares from the market. However, they simply fell into a classic bear trap, according to analysts from Kursiv Research.
As a result, even though speculators sold shares worth roughly $100 million, the securities didn’t collapse over three days. Moreover, few people were willing to lend securities to the initiators of the attack for this amount. On Thursday and Friday, many market participants whose clients bought FRHC shares on U.S. exchanges on Tuesday and Wednesday were notified by their brokers that transactions were not settled because of the failure to deliver securities.
If a transaction is not settled, brokers are required to force their clients who opened short positions to immediately buy all these securities from the market. It doesn’t matter if these clients have enough account collateral to make a delivery to a bona fide purchaser. Brokers are required to do this to meet the standards of the U.S. Securities and Exchange Commission (Rule 204 Reg SHO).
According to Kursiv Research, yesterday there were more than 800,000 undelivered shares (about 400,000 shares sold on the first day of the attack and 500,000 shares sold on the second day). The average selling price of short positions was $68 to $69 over the first two days of the attack, while the total amount of shares being sold was about 1.3 million.
“Yesterday the short was covered for less than 500,000 shares, as many new players, who realized that the architect of the attack had problems, joined the game. The average purchase price of the shares yesterday was $82 to $84, which means a realized loss of $8 million over four full days and an unrealized loss of about $13.5 million. The story is not over yet, and we are likely to see intense trading over the next several days. This is preliminary data, as we consider short only what was not delivered. It is not clear yet how many people will lose on securities they managed to borrow and deliver. In addition, there is no data about the number of shares that were sold before Hindenburg released its report. In any case, even failures to deliver were covered by less than 50%,» Kursiv Research analysts said.
The attacks of speculators from Hindenburg weren’t effective due to well-timed actions by Freedom. The company has managed to preserve the trust of its clients thanks to quick communication with them. As a result, many Freedom Finance customers interviewed by Kursiv said that they didn’t sell securities on the day of the attack, while some even bought more of the company’s shares.
In addition, the holding widely publicized the report it filed with the SEC a few weeks ago (early August). The report was prepared by lawyers from Morgan Lewis and Deloitte, one of the Big Four of auditors. In this document, third-party experts carefully analyzed accusations by the attacker, possibly because Hindenburg or their sources tried to put pressure on the auditors while the research company was working on the report. However, Hindenburg overreached itself: FRHC has proven that it has extensive compliance procedures for anti-money laundering, counter-terrorism financing and economic sanctions.
The closing price of the stock was $87.48 per share. The price grew by 25.24% ($17.63) that day. FRHC securities were traded at $90.40 at its peak, which has been the highest value of the company’s shares since its IPO on NASDAQ in 2019.
The volatility of FRHC shares was driven by the report by Hindenburg Research, well-known for their speculation with stocks, and those who followed their advice in an attempt to profit from the short selling of Freedom’s securities. However, the attack on FRHC shares led to a short squeeze when stock prices grow rapidly due to a significant number of short sellers rushing to cover their positions by buying the stock. Earlier this week experts told the Kursiv edition that this situation was very likely.
The bear operation, dealing for a fall or short selling, is a multistep speculation. First of all, a short seller borrows a security and immediately sells it on the open market, almost with the purpose to profit from the share price fall later. Meantime, a speculator launches a massive information campaign to persuade the market that the victim company is in trouble. Usually, the market starts unloading shares, causing agiotage and a decline in the share value. As soon as the share price drops, a speculator buys the shares for a lower price, pays back its debt with the help of cheaper security and makes a profit from the difference in prices.
However, speculators are not always lucky. Because FRHC shares are spread thinly across the market and distributed among a wide range of people, many of whom are clients of Freedom, it is not an easy task to borrow shares for short selling. According to experts from Kursiv Research, it’s very difficult to borrow more than a million shares in one day to make a delivery.
«This is pure adventurism of Hindenburg Research. They were so confident after several successful attacks in the past that they ignored not only the fact-checking of the information they prepared but also didn’t check where they could borrow shares they sold to provoke a panic. If their plan succeeded, they would have been able to carefully buy the entire volume of shares from the market. However, they simply fell into a classic bear trap, according to analysts from Kursiv Research.
As a result, even though speculators sold shares worth roughly $100 million, the securities didn’t collapse over three days. Moreover, few people were willing to lend securities to the initiators of the attack for this amount. On Thursday and Friday, many market participants whose clients bought FRHC shares on U.S. exchanges on Tuesday and Wednesday were notified by their brokers that transactions were not settled because of the failure to deliver securities.
If a transaction is not settled, brokers are required to force their clients who opened short positions to immediately buy all these securities from the market. It doesn’t matter if these clients have enough account collateral to make a delivery to a bona fide purchaser. Brokers are required to do this to meet the standards of the U.S. Securities and Exchange Commission (Rule 204 Reg SHO).
According to Kursiv Research, yesterday there were more than 800,000 undelivered shares (about 400,000 shares sold on the first day of the attack and 500,000 shares sold on the second day). The average selling price of short positions was $68 to $69 over the first two days of the attack, while the total amount of shares being sold was about 1.3 million.
“Yesterday the short was covered for less than 500,000 shares, as many new players, who realized that the architect of the attack had problems, joined the game. The average purchase price of the shares yesterday was $82 to $84, which means a realized loss of $8 million over four full days and an unrealized loss of about $13.5 million. The story is not over yet, and we are likely to see intense trading over the next several days. This is preliminary data, as we consider short only what was not delivered. It is not clear yet how many people will lose on securities they managed to borrow and deliver. In addition, there is no data about the number of shares that were sold before Hindenburg released its report. In any case, even failures to deliver were covered by less than 50%,» Kursiv Research analysts said.
The attacks of speculators from Hindenburg weren’t effective due to well-timed actions by Freedom. The company has managed to preserve the trust of its clients thanks to quick communication with them. As a result, many Freedom Finance customers interviewed by Kursiv said that they didn’t sell securities on the day of the attack, while some even bought more of the company’s shares.
In addition, the holding widely publicized the report it filed with the SEC a few weeks ago (early August). The report was prepared by lawyers from Morgan Lewis and Deloitte, one of the Big Four of auditors. In this document, third-party experts carefully analyzed accusations by the attacker, possibly because Hindenburg or their sources tried to put pressure on the auditors while the research company was working on the report. However, Hindenburg overreached itself: FRHC has proven that it has extensive compliance procedures for anti-money laundering, counter-terrorism financing and economic sanctions.