Trump Media Says Nasdaq Short Sellers Could Use 'Potential Market Manipulation' on DJT Stock

Trump Media & Technology Group is alerting the Nasdaq stock exchange that its shares – traded under the symbol DJT, after former President Donald Trump's initials – could be subject to “potential market manipulation” due to a short selling activity.

THE letter, which was sent to Nasdaq CEO Adena T. Friedman on Thursday, claims that some traders rely on so-called “naked” short selling, which is when an investor shorts a stock without first borrowing the shares. It's a practice that is effectively banned in the United States, regulators demanding of commercial companies to ensure that traders have the necessary securities to complete a short sale.

The complaint follows a wild ride for Trump Media shares since their IPO last month on the Nasdaq stock exchange. Stocks have lost two-thirds of their value from their initial peak, billions of value of the emerging media sector, whose main asset is the social media service Truth Social.

While Trump Media has regained some lost ground, up 28% this week, some investors had complained on Truth Social that they suspected short sellers were contributing to the decline.

“Reports indicate that as of April 3, 2024, DJT was 'by far' the 'most expensive U.S. stock to sell,' meaning brokers have a strong financial incentive to lend non-existent stocks,” said Devin Nunes , CEO of Trump Media. a former Republican congressman from California, wrote a letter on April 18 to the CEO of Nasdaq.

Nunes asked Nasdaq to “tell you what steps you can take to promote transparency and compliance by ensuring that market makers adhere” to regulations that block short selling.

Shares of Trump Media rose $3.19, or 9.6%, to $36.38 on Friday.

Agencies that would regulate naked short selling include the Securities and Exchange Commission and FINRA, the financial industry regulator that oversees broker-dealers, the latter companies being those that execute short sale transactions on behalf of customers .

Nasdaq is “committed to the principles of liquidity, transparency and integrity in all of our markets,” the exchange said in a statement to CBS MoneyWatch.

“We have long advocated for transparency in short selling and actively support the SEC's rules and enforcement efforts intended to monitor and prohibit naked short selling,” he adds.

Short selling versus “naked” short selling

Short selling, which is legal, occurs when a trader borrows shares of a stock that he or she believes will lose value, then immediately sells the shares in the market for cash proceeds. Later, if the stock price falls, the trader buys that stock at a lower price and then returns the shares to the trading company from which they were originally borrowed.

The short seller's goal is to buy the shares at a lower price than the borrowed shares, to pocket the difference in value.

But “naked” short selling, which is illegal in the United States, if done intentionally, it skips the step where the trader borrows shares, meaning the investor sells the shares he or she does not own. Naked Short sales can lead to sharp declines in a target company's stock price, while also undermining market confidence, according to at the law firm Kohn, Kohn & Colapinto.

There is currently a shortage of shares available to borrow to short against Trump Media stock, Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, wrote to CBS MoneyWatch. The stock has seen an increase in short selling this year, but also recently short covering, which is when a trader buys the stock to cover the trade, he added.

Yet it is impossible to determine from public data whether naked short selling has occurred, he added. Indeed, so-called “non-delivery” data, which makes it possible to track the moment when an investor in a commercial contract fails to honor its commitments, could be linked to long positions as well as short sales, he pointed out.