Short Seller Carson Block Says Muddy Waters Watches This Metric Closely In Wake Of Historic GameStop Short Squeeze

Muddy Waters Research founder Carson Block pays more attention to float size when considering a new short position after GameStop Corp GME burned those betting against the name in a massive short squeeze in early 2021.

What Happened: Block was asked about the changes Muddy Waters has made to its process as a result of increased retail trading Monday (Oct. 24) during a Twitter Spaces conversation.

"I'm not so worried about that in general for the stuff that we're looking at," Block said.

The short seller said he believes retail traders' ability to "send stocks to the moon" is greatly diminished. Still, he highlighted what sparked the short squeeze at the beginning of 2021 and how it has changed his firm's approach.

"What drove GameStop and what this really did focus us on was when you look at the short interest relative to what the nominal float was, it wasn't that egregious, but ... there were active holders who were part of the nominal float," Block said.

Why It Matters: When looking at float size, Muddy Waters lops off the passive holders because they're not going to sell, Block said.

In the case of GameStop, there were a bunch of holders who were unwilling to sell, including Ryan Cohen, who was pushing for changes, and a Korean family office who followed Cohen into the name, he said.

The supply of actual stock that was available to be sold was tiny and the short position was "massive," he said: "That's trouble."

When Muddy Waters considers publishing a short report on a particular name, the firm now looks at the float size minus the passive holders much more closely.

"What's the real float here? Like who are the guys who are going to look at this and you know maybe care about what we're saying and make decisions ultimately to sell," Block said.

The real or actual float size metric wasn't as prominent in Block's mind in 2020, he said.

"But Q4 '20, Q1 '21 really did make us say these are huge considerations, watch them," Block said.

GME Price Action: GameStop has a 52-week high of $63.92 and a 52-week low of $19.39.

The stock was down 2.49% at $24.67 Monday afternoon, according to Benzinga Pro.

Originally published on Oct. 24, 2022

Photo: sergeitokmakov from Pixabay.