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Wallstreetbets Conspiracy Theorists Claim a ‘Short Ladder Attack’ Brought Down GameStop. Short Sellers Have No Idea What They’re Talking About.

“Put it up there with California wildfires are started by space lasers,” said Muddy Waters founder Carson Block.

When GameStop’s share price began to tank following late January’s heady highs, a conspiracy theory began to emerge online.  

Retail investors posting on Reddit and elsewhere claimed they had been the victims of a “short ladder attack,” in which hedge funds made a concerted effort to bid down shorts between themselves to make it appear that stock prices are plummeting. Their theory is that the appearance of falling share prices prompts actual stockholders to sell, thus driving down the actual share prices.  

But here’s the thing: short sellers have never heard of the strategy.

On Tuesday, Jim Chanos, founder of Kynikos Associates, tweeted, “Can anyone explain to me what a ‘short ladder attack’ is? I have seriously never heard the term before this week.” Chanos did not return an email seeking comment Wednesday.  

Likewise, when Institutional Investor asked Citron Research’s Andrew Left about the topic via email Wednesday, his response was: “Don’t know what a short ladder attack is?” After receiving an explanation on the subject, he called the theory “stupid.”   

According to one Redditor, a short ladder attack goes like this: a neighbor plans to sell his car. You want to buy it, but at a lower price. They start loudly making fake offers on other cars that don’t exist in earshot of the neighbor who actually wants to sell his vehicle.  

This way, by the time you approach the guy selling the car, he believes it’s worth less than he initially thought. “He heard the other sales numbers and thinks, ‘Maybe this isn’t worth what I thought it was.’ And boom! You convinced that dumb neighbor his tendies were stale.” Tendies, in WallStreetBets parlance, are gains or profits made on a stock. 

According to Muddy Waters founder and chief investment officer Carson Block, the theory is bunk.  

“The concept of a ‘short ladder attack’ is just another iteration of the false conspiracy theories about how the few billions of dollars of capital focused on short selling somehow controls markets containing trillions of dollars of capital focused on long buying,” he said via email Wednesday. “Put it up there with California wildfires are started by space lasers.”   

[II Deep Dive: The Triumph of Dumb Money]

The theory appears to originate from two sources: a 2014 Seeking Alpha article and a 2006 interview between Jim Cramer and a reporter from financial publication TheStreet

The Seeking Alpha article — penned by Gerald Klein, whose bio on the site says he had a 40-year career in finance and executive management — says that a short down ladder attack is when shorts “manipulate the laws of supply and demand by flooding the offer side with counterfeit shares.” 

The post catalogs a series of other so-called short-selling tactics, which include frivolous Securities and Exchange Commission investigations and “media assault.” 

Klein’s article also references the Cramer video, in which the Mad Money host explained a similar strategy he used at his hedge fund. “A lot of times when I was short at my hedge fund... I would create a level of activity beforehand that could drive the futures,” Cramer said in the video. “It doesn’t take much money.” He added that it is a “very quick way to make money, and it’s very satisfying.”  

Still, Redditors and short-sellers alike remain confused about how a supposed short ladder attack would work. Many of the posts on the WallStreetBets subreddit on the subject are from folks who say they don’t understand the theory.

On Wednesday Chanos tweeted again: “Now I know why I had never heard of a ‘short ladder attack’...Because it is complete gibberish.” 

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