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AMC Preferred Equity (NYSE:APE) was launched to much fanfare in August amid expectations that security would serve as a watershed moment by exposing once and for all the manipulative practices that would maintain a cap on the stock price. AMC stock (NYSE:AMC). , according to the belief of bulls of the same stock. Alas, APE failed to live up to its hype, with preferred stock now underperforming AMC common stock by 56%.
As a reminder, AMC had announced a special dividend while revealing its results for the second quarter of 2022. This dividend took the form of preference shares, with 1 APE granted for 1 AMC ordinary share. Remember that each APE carries the same rights as those conferred by the ordinary shares of the company. In addition, these units may be convertible into common shares at some time in the future, subject to shareholder approval.
6. Frankly, I haven’t seen any evidence of supposedly fake or synthetic actions. But many of you disagree. This preferred stock dividend ONLY goes to shares issued by the company. So, it will have the impact of a “number of shares” or one-time dividend that many of you have been looking for. #TodayWePounce
— Adam Aron (@CEOAdam) August 4, 2022
AMC’s Adam Aron had explained some time ago that the purpose of issuing APE was to conduct a kind of “stock count” to provide an auditable accounting of the company’s outstanding shares, in accordance with the demand of many of AMC’s most ardent bulls. who believe the stock is manipulated by financial magic.
AMC stock is currently trading at $8.06 while its APE counterpart is hovering at $3.51, which is around a 56% discount.
Assuming an efficient market, such a large arbitrage between these two securities should not exist, even if we take into account their liquidity differential. For AMC bulls, the answer is obvious: Failed Delivery (FTD).
For the uninitiated, FTDs occur when an investor is under a contractual obligation to purchase and deliver specific stocks but fails to do so due to a lack of funds. FTDs can also occur in the case of a naked short sale – an illegal practice in which a short trade is initiated by selling stocks that have not been affirmatively determined to exist. AMC bulls argue vehemently that naked shorting helped contain the stock price explosion. Keep in mind that funds with outstanding FTDs are mandated by the SEC to find and deliver the required shares to a buyer within a grace period. Previously, there was a loophole that allowed institutional investors to resolve these FTDs by purchasing deep-in-the-money call options, which were then exercised immediately to acquire and deliver the required shares. This solved FTDs without forcing those funds to close their naked shorts. However, this practice has now been banned by the SEC. Nevertheless, there is yet another loophole – dark pools. A dark pool is a private exchange where transactions are settled between counterparties. The price at which these trades are settled is never reported, ensuring that these trades do not affect the stock price. Basically, the FTD closeout requirement only applies to regulated exchanges and not dark pools.
The table above details the FTDs relating to AMC Preferred Equity. As can be seen, security FTDs have fallen precipitously over the past few weeks, dropping from over 43 million on the 24the of August to only 5.6 million as of 31st of August – the latest date for which this data is available at this time.
Keep in mind that FTD reporting is done on a cumulative basis, with each day’s tabulation including all outstanding FTDs up to that day, plus new failures that occur during that day, minus any failures which settle on that day.
On 8/24, the first day he settled, there were 43mm misses, or about 8% of the shares. I’m guessing it’s a plumbing problem with the new issue. But these failures were quickly fixed and within days they were reduced by 87%. No conspiracy. No MOASS. Nope #checkmate. Just cultists. https://t.co/rAnVWay7wA
— Clifford Asness (@CliffordAsness) September 22, 2022
As for the astronomical nature of the initial FTDs in AMC Preferred Equity, Clifford Asness – a known AMC bear – seems to think that the “plumbing clutter” in the issuance phase was the boost. AMC bulls, however, disagree and continue to point the finger at naked short selling as well as dark pool activity.
Whatever the impetus, it is a fact that the price divergence between AMC common stock and preferred stock is highly outlier. To me, it’s even more striking that sophisticated investors aren’t stepping in en masse to take advantage of this massive arbitrage opportunity to earn risk-free profits, assuming the prices of these two stocks converge, as one might guess. expect it in an efficient environment. market.
Sure, Jim Chanos of Kynikos Associates made such a trade in early September, but the arbitrage opportunity persists. Therefore, given the price gap between the two instruments, an attractive proposition would be to go long APE while selling AMC, thereby betting on price convergence somewhere in the middle of the current price range of 3 $.51 to $8.06.
Update: Another downward force on APE emerges
In a new filing, AMC hinted that it could sell up to 425 million APE units at market prices. Given the limited liquidity profile of the APE shares, this offer will exert strong downward pressure on the price of the preferred share, thus further widening the gap with respect to ordinary AMC shares.