How Hedge Funds Manipulate Stock Prices Without Owning Shares: The AMC and GME Playbook
Retail investors often marvel at the inexplicable price movements of popular stocks like AMC Entertainment (AMC) and GameStop (GME). How is it that despite strong retail interest, prices can languish or even decline? The answer lies in sophisticated tactics employed by hedge funds, where manipulation does not require the direct trading of stocks. Here’s a detailed breakdown of how it works, with real-world examples to illustrate the process.
Tokenized Assets: The Foundation of the Strategy
Hedge funds don’t need to directly own or trade AMC or GME stock to influence its price. Instead, they leverage tokenized assets. These are digital representations of the stock, created by custodians or brokers, often without one-to-one backing by actual shares.
Example:
Imagine a custodian tokenizes 1 million AMC shares but only holds 100,000 real shares in reserve. The remaining 900,000 are synthetic. These tokenized assets are introduced into the market, creating an artificial oversupply that dilutes the perceived scarcity of the stock.
The result? Market participants believe there are more shares available, reducing demand pressure and naturally suppressing the price.
Phantom Sell Orders and Market Psychology
Another tactic involves the use of phantom sell orders. These are large sell orders placed in the market to signal significant selling pressure. These orders are often canceled before execution but serve their purpose by creating fear among retail investors.
Example:
A hedge fund might place a sell order for 500,000 AMC shares at $10, a price slightly above the current trading level. Retail traders see this and assume heavy selling is about to occur, prompting them to sell their holdings prematurely. The hedge fund cancels the sell order before execution but reaps the psychological benefit.
The Role of OTC Derivatives
Over-the-counter (OTC) derivatives, such as Total Return Swaps (TRS), allow hedge funds to bet on the price movement of a stock without owning it. In these contracts, the fund agrees with a counterparty (often a bank) to exchange the return of a stock—positive or negative—over a set period.
Example:
The hedge fund enters a TRS with a bank, using tokenized AMC shares as collateral. The fund then uses phantom sell orders and media manipulation to suppress AMC’s price. As the stock’s price falls, the hedge fund profits from the negative return, all without ever trading a single AMC share.
Sentiment Manipulation Through Media
The hedge fund’s strategy often includes disseminating negative sentiment about AMC or GME via mainstream media or social platforms. This creates doubt and fear among retail investors, leading to panic selling.
Example:
Headlines like “AMC Faces Bankruptcy Concerns” or “GameStop’s Business Model is Unsustainable”, even when unfounded, can cause significant sell-offs. The timing of these articles often coincides with the placement of phantom sell orders or the introduction of synthetic shares.
Real-World Parallel: The Fall of FTX
The collapse of FTX revealed the dangers of synthetic asset creation and mismanagement. FTX’s balance sheet included vast quantities of tokenized assets, often without sufficient backing. While not directly tied to AMC or GME, the principle is the same: synthetic assets can distort the real supply and demand dynamics, creating a fertile ground for manipulation.
Gradual Price Decline and Hedge Fund Profit
Combining these tactics results in a gradual decline in the stock price. The hedge fund profits by shorting the stock, benefiting from derivative contracts, or both.
Key Outcome:
- Retail investors lose confidence and sell their shares.
- Hedge funds profit from declining stock prices through their derivative positions.
- The price suppression perpetuates, creating a cycle that disadvantages retail participants.
The Banking System’s Role in Enabling Manipulation
Major banks often play a silent but crucial role in this scheme. By acting as counterparties in derivative contracts or custodians of tokenized shares, they provide the infrastructure that enables hedge funds to execute these strategies.
Example:
JPMorgan was fined $920 million in 2020 for manipulating precious metals and Treasury markets. While this was unrelated to AMC or GME, it highlights how financial institutions can facilitate and profit from market manipulation.
Why This Matters
This manipulation is not a victimless game. Retail investors—the backbone of AMC and GME’s rise to prominence—suffer as their investments lose value. Meanwhile, hedge funds exploit loopholes in the system to generate massive profits. This cycle undermines trust in the financial markets.
The Path Forward: Regulation and Blockchain Transparency
The solution lies in increased regulation of tokenized assets and stricter oversight of OTC derivatives. Only compliant cryptocurrencies and transparent blockchain systems will survive, making it easier to expose fraudulent activities. Retail investors must also remain vigilant, recognizing these tactics and demanding accountability from regulators, hedge funds, and custodians.
Conclusion
Hedge funds have developed an arsenal of tools to manipulate stock prices without ever owning the underlying asset. From tokenized oversupply to psychological manipulation via phantom orders and media narratives, the game is stacked against retail investors. But with awareness, education, and regulatory changes, this fraudulent system can be exposed and dismantled. The fight for fair markets isn’t over—it’s just beginning.