A Prevalent Examination of Naked Shorts, Cellarboxing, and GameStop

Abstract

A Prevalent Examination of Naked Shorts, Cellarboxing, and GameStop seeks to explain a relatively new market phenomena known as cellarboxing. Etymologically, cellar refers to the minimum available price range of $0.0001, reserved for extremely micro-cap companies and bankrupt stocks. The existence of this range means positions on companies can be held even after bankruptcy, removing all tax penalties as gains go unrealized. Boxing refers to the act of forcing a company into bankruptcy with a massively overleveraged naked short position. Naked shorting is essentially selling nothing for real money, market actors can attain a short position without ever securing the shares necessary for the position due some lax computer programs, settlement structure, and regulators. GameStop stock saw unprecedented volatility in pricing and volume in late January, 2021 which was strange enough on its own, but a bunch of sub-penny stocks saw similar behavior during that period. This paper explains how the similarities do not end there, but have carried on in the time since. The similarities see peak similarity in conjunction with Futures Market quarterly roll dates, a collateral obligation for open short positions. The existence of these similarities in the time period since January, 2021 suggests that market actors see GameStop as being in common with bankrupt stocks like Blockbuster and Sears. The cellarboxing theory would believe that is because the market actors responsible were in the process of bankrupting GameStop, until the events of January, 2021 happened and the float was unable to be effectively diluted any further. Using a set of correlation matrices, we analyze these peculiar dates and find a large degree of similarity stemming from these collateral obligations, supporting the theory that the same market actors who hold short positions against the sub-penny stocks, have a similar position in GameStop, and maintain that position through the next 16 months at least.