What Is a Short Ladder Attack?

During viral interest in the GameStop short squeeze, claims that a “short ladder attack” was driving drops in the price of “meme stocks” like $GME and $AMC became popular on Reddit, Facebook, and Twitter — which in turn prompted requests for further information on a “short ladder attack” or “ladder attack” in the context of trading:

The question stems from the strange story of Reddit, Robinhood, and GameStop and what it means for the future of day trading, as the Wall Street Journal vividly reported:

Amateur investors have always had advantages over professionals: They can invest for the long run and ignore the short term, since they can’t get fired for underperformance and don’t have clients who give them money (or take it away) at the worst time.

Now, however, amateur traders are asserting their advantages, too. They can communicate instantaneously, band together by the thousands—millions, perhaps—and buy or sell commission-free.

Thousands of members of WallStreetBets, a forum at the online community reddit.com, have been leading the swarm of amateur individual traders buying stocks that hedge funds and other institutional investors were betting against.

It’s as if a bunch of couch potatoes watching a Lakers game on TV barged onto the court and dunked on LeBron.

Moving in sync and en masse, such traders can drive a stock way up or down even if each trader commits only a few dollars. Professionals, on the other hand, are legally restricted from colluding and incur much higher brokerage costs.

These new mobs of amateur traders resemble swarms of animals that often coalesce in the wild. You may have seen videos of an immense school of fish flashing in unison through the sea or a murmuration of starlings forming a vast swirling vortex in the sky.

These swarms shift direction in swift, coordinated bursts to find prey and evade predators.

As the situation developed, disinformation predictably circulated. Robinhood eventually halted buying of the affected tickers (primarily $GME and $AMC), leading to rumors that Citadel LLC “owned” Robinhood:

In light of current market volatility, we are restricting transactions for certain securities to position closing only, including $AMC and $GME. Read more here.https://t.co/CdJMjGAeFH
— Robinhood (@RobinhoodApp) January 28, 2021

Other rumors swirled that Robinhood was liquidating users’ positions in $GME and $AMC without their knowledge or consent:

When Did Users Start Calling Activity a ‘Short Ladder Attack’?

On January 28 2021, the day Robinhood halted purchasing of $GME, $AMC, and other volatile stocks, posts about a “short ladder attack” began appearing on discourse hubs like r/wallstreetbets:

Could anyone explain what a short ladder attack means or could they link me to a resource where I could read about it? Thanks! edit: GME ????????????????

The first two comments visible on that thread attempted to provide definitions for a “short ladder attack”:

“The big hedge funds are just putting in lower and lower bid prices between themselves. There is little to no volume on those trades, and since no one can buy it “looks” like the stock is plummeting.”

“The neighbor puts a For Sale sign on his Camaro. Imagine you and a couple buddies wanted to buy it. He says he wants $6,000. Your buddy says to you loudly, “How about $4K and I just sell you mine?” You say sure! (But you don’t actually buy). Next day, you approach your other buddy and say loud enough for the neighbor to hear, “Aww man, Camaros are shit.. can you take this off my hands for $3K?” He grudgingly agrees, but no cars change hands. Two days later you approach your neighbor and say, “$6K.. man, that’s crazy. One just sold for $3K. How about $2500?” 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.”

But a February 2 2021 post on r/stocks, purportedly from someone who “used to work in finance,” maintained that the phrase “short ladder attack” was something new, pointing out a dearth of  Google entries on the topic as proof:

In response, u/Kwikstep commented:

The term laddering usually applies to bond portfolio structuring. Here it is just a meaningless hype phrase designed to stir up hysteria.

It’s intended to be quasi-financial sounding in a way that is too complicated to understand.

A Brief History of ‘Short Ladder Attacks’

As noted by Reddit posters and commenters, the phrase “short ladder attack” did not appear to be in widespread or limited usage before the GameStop short squeeze.

Commenters on separate forums debated whether the phrase actually existed and was used before it became popular on Reddit threads, on Twitter, and in Facebook groups. And as some users noted, date-restricted Google searches for instances of “short ladder attack” before the GameStop short squeeze returned either misdated or unrelated results.

In particular, a search for “short ladder” and “stock” on or before December 27 2020 led primarily to stock images of literal short ladders. That said, users correctly stated the term was used at least once in 2014 (archived), on a SeekingAlpha.com blog post:

The shorts manipulate the laws of supply and demand by flooding the offer side with counterfeit shares. They will do what has been called a short down ladder. It works as follows: Short A will sell a counterfeit share at $10. Short B will purchase that counterfeit share covering a previously open position. Short B will then offer a short (counterfeit) share at $9. Short A will hit that offer, or short B will come down and hit Short A’s $9 bid. Short A buys the share for $9, covering his open $10 short and booking a $1 profit.

By repeating this process the shorts can put the stock price in a downward spiral. If there happens to be significant long buying, then the shorts draw from their reserve of “strategic fails-to-deliver” and flood the market with an avalanche of counterfeit shares that overwhelm the buy side demand. Attack days routinely see eighty percent or more of the shares offered for sale as counterfeit. Company news days are frequently attack days since the news will “mask” the extraordinary high volume. It doesn’t matter whether it is good news or bad news.

Flooding the market with shares requires foot soldiers to swamp the market with counterfeit shares. An off-shore hedge fund devised a remarkably effective incentive program to motivate the traders at certain broker dealers. Each trader was given a debit card to a bank account that only he could access. The trader’s performance was tallied, and, based upon the number of shares moved and the other “success” parameters; the hedge fund would wire money into the bank account daily. At the end of each day, the traders went to an ATM and drew out their bribe. Instant gratification.

It was not unlikely that Redditors located the post in their searches for information on short selling, and brought the term into widespread usage that way.

If a ‘Short Ladder Attack’ Didn’t Destroy Momentum on GameStop and AMC Stock, What Did?

In discussions about the legitimacy of “short ladder attack” posts, commenters tended to either agree with the theories or theorize that $GME and $AMC buyers were falling victim to confirmation bias in general.

However, as we noted above, Robinhood implemented restrictions on the purchase of $GME, $AMC, and other securities on January 28 2020; other brokers followed suit, making it difficult or impossible for anyone to purchase shares of those particular stocks:

As of February 2 2021, Robinhood continued restricting purchasing of $GME. After its initial decision on January 28 2021 to halt trading of $GME and other tickers, users migrated to CashApp, and on February 2 2021, CashApp tweeted and blogged that purchases of $AMC and $NOK were halted by outside forces:

CashApp emphasized that the move “was not Cash App’s decision,” “we disagree with this move wholeheartedly,” and it hoped to make those “stocks available for purchase again as soon as possible.” Rumors that purchases of $GME were halted on February 2 2021 also circulated:

So What Really Happened with $GME?

As of February 2 2021, the GameStop short squeeze market event remained ongoing amidst what Robinhood deemed “extraordinary” market conditions. Retail traders on social media maintained that a “short ladder attack” artificially suppressed the price of $GME shares — but we found little evidence the term “short ladder attack” was common before the $GME frenzy. Nevertheless, $GME and other tickers remained heavily restricted across myriad brokerages beginning January 28 2021 and continuing through February 2 2021 — meaning the majority of retail brokerage users could buy very little or not at all. At the same time, selling was unrestricted, meaning that most activity on the affected tickers would involve only selling (and thus a drop in price). Ongoing trading restrictions were such that stocks like $GME and $AMC were quite obviously adversely affected by limits or restrictions only on buying (and not selling), regardless of the nomenclature involved.