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Screenshot of a breaking news alert e-mail from Q2 2017
In one of our more interesting yet offbeat posts here at LeapRate over the past few months, we reported on a retail trader named Joe Campbell who turned to crowdfunding site GoFundMe to help raise money to cover his more than $100,000 debt to online broker E*TRADE Financial Corp (NASDAQ:ETFC).
What did Campbell do wrong?
He shorted the shares of a company called KaloBios Pharmaceuticals Inc (NASDAQ:KBIO), an early stage cancer drug development company which looked to be in serious trouble and headed toward bankruptcy and/or shutdown. KaloBios then announced that more than half of its stock had been acquired by Martin Shkreli, a famed biotech investor and entrepreneur who planned to take over and keep the company operating. KaloBios shares soared, creating a huge hole for Joe and for all other KaloBios shorts.
One would have thought that traders would have looked at Joe Campbell’s case and learned a lesson about the dangers of shorting (i.e. unlimited downside), especially in highly speculative situations such as KaloBios.
But instead of scaring off all the shorts, the continuing KaloBios saga began attracting even more day traders, taking both long and short positions in increasingly larger portions.
Why the attraction to KaloBios?
If you ask a day trader (or many FX and CFD traders, for that matter) what they look for when trading a financial instrument or currency pair, the answers typically include: day-today volatility, intra-day volatility, and high volume.
And KaloBios has produced just that over the past two weeks:
Over the past six trading days since the news of Shkreli’s involvement broke, KaloBios shares closed at least 31% above or below the previous day’s close. Each day saw huge intraday swings in KaloBios’ share price. And volumes were in the millions (or tens of millions) of shares changing hands each day, following several weeks of just several thousand per day.
What is missing, of course, for those trading KaloBios is one of the most important inputs in trading a stock: information. With a lack of information, traders often turn to an ‘educated guess’ regarding a company’s next move, or prospects. However in KaloBios’ case, it can be said that it is near impossible to make an educated guess regarding what might happen to the company, at least in the near term.
For example? Shkreli didn’t take all of Thanksgiving Thursday off last week. He found time to tweet to his more than 20,000 followers (see below) that he was no longer going to lend out KBIO shares for shorting, making it technically more difficult to short the stock. That apparently created a ‘short squeeze’ on Friday, with KaloBios more than doubling during the day before settling to close up (just!) 31%.
The upshot? It looks like more traders have joined Joe Campbell in the lost-big-money-shorting line trading KaloBios, rather than learning from his very public lesson.
Until things settle down, it looks like KaloBios – which still earns no revenue – will likely continue to be a darling of day traders, attracted to its huge volatility and price swings.