Written in 2019

At the beginning of March of 2019, some extraordinary trading events sparked one of the biggest short squeezes of all-time. This is the story of a rogue trader, a brutally timed short position, and the remarkable trading pattern that unfolded in Bio-Path Holdings Inc. (NASDAQ: BPTH).

Background: Reverse Splits Dramatically Drops BPTH Share Count

January 18^th, 2019 marked the second time in eleven months that Houston-based biotechnology company Bio-Path Holdings Inc. (BPTH) underwent a reverse stock split. This was a 1-for-20 stock split and came on the heels of the February 2018 1-for-10 split. The result of these two splits combined was a massive reduction of the share “float”, or available number of shares on the public market. The more recent reverse split decreased the outstanding share count from approximately 22.2 million to 1.1 million. Bio-Path Investor Relations

Following the back-to-back splits, a thinly traded stock became a very thinly traded stock. When the split became effective on the morning of January 18^th, Bio-Path shares opened at $2.77, 20-times higher than the roughly $0.14 per share pre-split price. For the rest of January and entire month of February, BPTH shares flatlined trading in a tight pattern that culminated in a $2.60 closing price on February 28^th. During this time 27-day timeframe ending 2/28/19, the average daily trading volume was approximately 333,000 shares. There was very little BPTH share supply, but also not much investor demand for the ailing biotech. This would set the stage for a short squeeze of epic proportions.

Catalyst I: Announcement Puts BPTH Back on the Map

On March 1^st Bio-Path announced that it planned to present data at the 2019 Association for Cancer Research annual meeting on April 30^th. This announcement generated renewed investor interest in BPTH. The stock was suddenly back on the radar after nearly tripling in a single day from a February 28^th close of $2.60 to a March 1^st close of $7.72. The stock peaked as high as $8.84 on this day and volume spiked to 58.3 million shares. This was by far the highest trading volume ever seen in a stock that often saw daily trading volumes of less than 10 thousand shares for years. It also made Bio-Path the most heavily traded stock on the NASDAQ that afternoon. MarketWatch

The announcement breathed some much-needed life into the stock. Bio-Path was suddenly the darling of the micro-cap world as it dominated the news headlines. Demand had very quickly shot ahead of supply.

Catalyst II: Positive Trial News Sparks Jump in BPTH

Following the March 1^st spike, Bio-Path had a gradual profit-taking pullback on March 2^nd and 3^rd that saw the stock concede roughly half of its March 1^st gains closing at $4.62 on March 5^th. Then an aftershock once again sent BPTH soaring to new heights. On March 6^th Bio-Path announced positive news regarding its BP1001 acute myeloid leukemia drug. The study showed that 11 of 17 patients responded to the company’s prexigebersen drug with 5 of the 11 witnessing a complete response. Bio-Path Investor Relations

As a result of the favorable clinical trial, the oncology specialist had a major gap up. The stock opened at $7.45 and was off to the races. BPTH hit an intraday high of $14.60 and before closing at $12.02. This was a second astounding gain in four trading days as the stock was 160% higher on the day. Trading volume was even higher than on March 1^st with 72.2 million shares trading hands.

Bio-Path was basking in the light of an encouraging drug trial. The buzz centered around the drug’s meaningful implications for the massive leukemia market. Seemingly everyone wanted a piece of the action. That is, except for one very skeptical contrarian trader.

The Protagonist: Aggressive BPTH Short-Seller Goes Against the Grain

Bullish investors were seeing an opportunity to buy into an innovative biotech at its historic bottom.

Enter a ‘shoot-from-the-hip’ trader named Scott Reynolds, principal trader at Spartan Securities Group Ltd. Reynolds was many miles away from the bull camp. He looked at the volatile Bio-Path and concluded that the sudden euphoria would be short-lived. After all, in this sector all it took was one bad trial to send the shares in the other direction. He was convinced the stock would see a continuation of the March 4-5 decline and plummet back to the basement levels of earlier in the year.

Reynolds proceeded to enter a series of aggressive sell orders on March 6^th that culminated in a short position of 824,436 shares of BPTH. (Recall the float at this time was just above 1 million shares.) However rather than drop, BPTH continue to run higher as buyers were clearly in control. Reynolds was stuck in short position that was instantly incurring huge losses.

Mystery: Continued Climb in BPTH Leaves Traders Perplexed

When investors woke up on March 7^th, the day after the positive Phase 2 trial results, BPTH continued its atmospheric climb gapping up for the second straight day. The stock opened at $18.20 per share after closing the prior day’s close of $12.02. The ascension had reached ridiculous levels by mid-morning. Traders were dumbfounded. Before it was even noon, the stock was trading in the $30’s and $40’s. It marked the third time in the last five trading sessions that the stock had more than doubled. Trading was very choppy in wide multi-point ranges on the 1-minute chart. Volume was again well beyond normal levels for the second straight day. This triggered nine separate volatility trading halts.

The stock had now surged 3000% over the past 6 sessions. The positive trial news was one thing, but absent any additional news, what was driving the surge? Something was afoot. It was a mystery of Scooby Doo proportions that prompted Bloomberg to release a brief story. As the Bloomberg article astutely pointed out, short interest on BPTH had ballooned from 1% in January to 15% of available shares according to analytics firm S3 Partners.

The Squeeze: Short Covering Sends BPTH to the Stratosphere

When Spartan found out about the BPTH trades on March 6^th, it began to close out its short positions. However only 259,687 of the 824,436 shares were covered that day at an average price of $10.06. It still had over a half million shares to close out when trading opened on March 7^th. Things went from bad to worse when BPTH opened at $18.20.

Investors were gobbling up shares of BPTH planting the seeds for a massive short squeeze. At the same time Reynolds and Spartan Securities were scrambling to cover their massive short position causing a significant surge in buy volume on a very thinly traded stock. The combination of limited share supply and excessive demand ignited a rapid increase in the price of BPTH. A major short squeeze was underway. The squeeze was now sending the stock into the $50’s and $60’s and it ultimately peaked at a high of $73.52. And remember, this was a stock that opened the day at $18.20. The extraordinary short squeeze caused BPTH to more than quadruple before it was even 3 hours into the trading day on March 7^th!

Spartan’s remaining shares were closed out at an average price of $34.55. The total position loss was a whopping $16.6 million.

Return to Earth: BPTH Short Squeeze Crash Ensues

By mid-day on March 7^th, the party was over for the extremely skilled (or extremely fortunate) BPTH longs. The short position had been covered. Absent the buy demand from the short seller, BPTH quickly came crashing back down to earth. Bio-Path’s wild ride ended with a close of $38.86, 47% off the intraday peak. By the time the trading week had concluded on March 8^th BPTH shares were down to $21. It was an unforgettable week that saw BPTH trade as low as $4.38 and as high as $73.52. If they are Most stocks that achieve that type of gain do so over a period of several years. Bio-Path shares experienced that roller coaster in a span of 5 days.

The Dust Settles: More Details Learned on BPTH Short Seller

The ill-fated BPTH short position resulted in a $16.6 net loss for Spartan’s clearing company Axos Clearing. It was later learned from a lawsuit amended on May 5^th against Reynolds by Axos Clearing (OTC Market Research) that the short seller’s trades were not only very poorly timed but also unauthorized. According to the Complaint, Reynolds is alleged to have surpassed his daily trading limit of $500,000 per security and $3 million total. The BPTH short trade by itself caused the fall of an entire brokerage firm as Spartan Securities was forced to cease operations and declare bankruptcy. According to court documents, the case appears to be ongoing with a jury trial set for early next year. Court Listener

The Squeeze Lesson

There are several lessons to learn from this Bio-Path short squeeze most notably:

1. There is an inherent risk in shorting that is generally understood by market participants. However, shorting a highly volatile biotech stock to a magnitude of 800 thousand-plus shares given a float near 1 million shares can turn ugly in a hurry if the stock receives some positive news.
2. One man’s folly is another man’s opportunity. The massive fluctuation and choppiness over short time intervals created an opportunity for a trader to bank some serious profits.
3. The Bio-Path example highlights the importance of developing a disciplined, consistent trading strategy. Putting in the time along with perhaps a touch of luck created the potential for a big trade in this ‘instant classic’ short squeeze case.