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Tesla (TSLA) Short Selling Temporarily Restricted by SEC

by Claribelle Deveza February 06, 2020

Tesla (TSLA) Short Selling Temporarily Restricted by SEC

Tesla (NASDAQ:TSLA) short selling was temporarily restricted by the Securities and Exchange Commission (SEC) until markets close on February 6 . The decision was made in accordance with the SEC's Rule 201, also known as the Uptick Rule. 

As noted by Tesla investor Jessica Meckmann, the uptick rule is a trading restriction which states that short selling a stock is only allowed on an uptick. So under the rule, short selling is only allowed when the price is above the last traded price, or when the recent movement between traded prices was upward. The SEC 201 uptick rule is applied if a stock falls over 10% during one trading day. 

Rule 201 appears to have been invoked for TSLA only. The specific reasons behind this have not been outlined by the SEC as of this writing. That said, the recent movement of TSLA stock this week alone may explain why regulators turned their eyes on short-sellers of the electric car maker.   

TSLA shared skyrocketed as high $968.99 per share from Monday to Tuesday, February 3 and 4, respectively. The celebration was cut short, however, after TSLA stock fell at an alarmingly rapid pace back down to $734.70 by Wednesday's close. By Thursday's opening bell, TSLA stock had dipped as low as $687 per share.

While the swing is reminiscent of Tesla's characteristic volatility, the drop in Tesla's shares from $968 to $687 within a mere number of days is drastic, almost to an alarming degree. 

Members of the Tesla Motors Club forum have noticed something quite strange with TSLA stock over the previous days. As TSLA dropped on Wednesday, forum member FrankSG observed that the company was down by almost 10% in Frankfurt, which is reminiscent of what happens when a bear raid is ongoing in Europe--whose market happens to open before the United States. This is a perfect setup if a Tesla short seller is looking to cover their position.

Fellow TMC member Fact Checking supported these observations, noting that someone appeared to be selling in large volumes on XETRA to keep TSLA prices down. The forum member noted that this was all happening right as NASDAQ was about to open in the United States. 

Tesla is no stranger to wild swings in its stock, but large dips are usually affected, if not caused, by negative news coming out about the company. Fact Checking observed that there was no significant negative news about Tesla on Wednesday. There were reports of Giga Shanghai being delayed by the novel coronavirus outbreak, but the company had already discussed this during its earnings call a week before. VP Grace Tao also mentioned that Giga Shanghai may be operational again by February 10, which negates the negative news about the factory shutdown. 

Fact Checking provided his hypothesis about what seemed to have happened on Wednesday as follows. 

  • The short attacker, shortly before Nasdaq trading opened, started closing the short position (the bounce-back), and volume died down.
  • There was no genuine, legitimate selling pressure on Xetra - the whole point was to depress the TSLA price in Nasdaq open through the use of a single low liquidity European exchanges, using just around 70,000 shares of volume.
  • On Nasdaq volume is now lower than the European one - I suspect the bear attacker is using limit orders to keep the price fixed at significantly lower prices than yesterday's close, to establish a negative sentiment going into the open.

By using this strategy, the suspected short seller has practically created a drop in Tesla stock. Even more interestingly, Fact Checking noted TSLA's volume in XETRA effectively dried up after the apparent manipulation event. This suggests that the short seller did not really have legitimate investment purposes. 

H/T: @ValueAnalyst1/Twitter

Featured Image Credit: Tesla




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