Shorts Slaughtered Trying To Front-Run Galleon

AERG

With Galleon disintegrating, many traders are targeting the firms suspected stock holdings as potential shorts.

The logic is, as Galleon unwinds its positions to meet redemptions, it will have to sell rather quickly out of some smaller names. These might have relatively limited liquidity, thus their prices could be easily pushed down as Galleon tries to exit.

Yet of course if markets were so simply, we’d all be rich and Galleon wouldn’t have to trade inside information. One tiny penny stock targeted by such Galleon-vultures, Applied Energetics (AERG), fell sharply initially, then as more shorts joined the party, whipsawed back upwards.

DealBreaker: “Because smarter money went short initially, the stock fell and they quickly took profits. Naive short sellers piled in late, and so market-makers and hedgies slipped in a few trades, force a short-covering rally and blow up the naive short-sellers,” says the author of Infectious Greed Paul Kedrosky.

The stock rose 20 per cent at its peak today.

“The best part, of course, is that no one has any idea if Galleon even still owns AERG given this speculative fun comes from the 6/30/09 13-F filing,” says Kedrosky.

As seen in the chart above, anyone who shorted AERG starting late Tuesday is deep in the red. Which must be nerve-wracking since shorting a penny stock is absurdly risky given how high they can pop. Hopefully these traders have their stops in place and stick to them.

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