How the “Milk-the-Shorts” Setup Works (Step-by-Step)
Two kinds of shorts exist in DBMM:
A) Small-fry shorts – modest positions. They can still escape without detonating the price.
B) Big-time shorts – oversized positions. They cannot cover without triggering a squeeze and cannot let price drift above margin risk.
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Why big-time shorts are trapped
If they try to buy back their full position --> the bid explodes --> squeeze.
If price rises toward their margin call --> forced buy-ins.
So, to avoid both, they manufacture cheap supply (internal netting, routing games, derivatives, rehypothecation—functionally “paper shares”) to accommodate two groups:
1. Patient longs who quietly accumulate (the “milk the shorts” phase).
2. Small-fry shorts who still can exit without lighting the fuse.
Result: price stays muted, volume stays controlled, time gets stretched—but the liability grows on the big shorts’ books.
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Who they accommodate (and why)
1) Longs who “milk the shorts”
They buy enough to drain supply slowly…
…but not so much that it triggers a premature squeeze before the corporate backstop (preferred share dividend) is announced.
2) Small-fry shorts
Big shorts prefer these shorts to cover first (reduces near-term pressure).
That’s why you often see fails to break .0001 or stubborn floors—the market is being “managed” to buy time.
But this only kicks the can. The total liability does not disappear—it concentrates on the big shorts.
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The backstop (preferred share dividend) changes everything
A properly structured preferred share dividend sets an effective floor (no rational long sells beneath known value).
Once value is set, the only path for big shorts is to cover—and cover fast—because there’s no cheaper exit.
T+3 after the record/ex-date becomes the crucible: demand spikes, supply vanishes, and price is dictated by holders, not shorts.
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Timeline at a glance
1. Milk Phase
Longs accumulate calmly; small-fry shorts quietly exit; big shorts “accommodate” to avoid fires.
2. Backstop Event (preferred share dividend announced/boarded)
Floor established. Paper games stop working because holders won’t sell below known value.
3. T+3 Window
Settlement pressure + margin math = forced buying from the largest shorts at holder-set prices.
4. Resolution
The longer big shorts “kick the can,” the larger the bill when the backstop hits.
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Simple illustration (toy numbers)
Small-fry shorts total: 10M shares --> can buy back over days without panic.
Big-time shorts total: 200M shares --> any real buyback ignites price.
During Milk Phase, small-fry cover; longs quietly add.
Preferred share dividend announced --> effective floor (no sane selling below it). In our case, the preferred dividend has no real value, so best to accompany it with real value such as a million dollars in sales via their potential contract.
T+3: big shorts must find shares above the floor from holders who now control the tape.
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Why this setup favors patient longs
Big shorts must accommodate you now (cheap supply) to avoid an early squeeze.
The same accommodation magnifies their pain later—because you’ll still be holding when the floor arrives.
Every share sitting with informed longs is a future non-seller at sub-floor prices.
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Bottom line:
Big-time shorts are only delaying the inevitable—and concentrating risk on themselves. Small-fry are escaping, longs are “milking,” and the backstop is the moment the music stops. Do it right, and the preferred share dividend doesn’t just squeeze; it settles accounts.
—Krombacher
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