As many of you know by this stage, the XRT ETF has been heavily involved in the GameStop saga. In the research I’ve done over the years, this specific ETF appears to be heavily abused, with high stock turnover and abundant cash and liquidity — until, well, it isn’t.
Most recently, we’ve observed XRT shares outstanding and overall assets under management (AUM) near all-time lows, back to levels seen during the early days of the fund and the Great Financial Crisis. In addition, borrow rates have increased while shares available to short have dropped to zero.
One of the most interesting aspects of the bid for eBay, which differs from Cohen’s other investments or the stocks/baskets that have historically tracked with GME, is that eBay is also included in XRT. Since Cohen’s announcement and CNBC interview, eBay has become XRT’s top holding.
What I think may have inadvertently happened is that GME is becoming untangled from the basket or pairs trading associated with many of the other well-known retail stocks that developed their own investor communities.
XRT has acted as the honey pot for hedge funds to gain synthetic short exposure to Gamestop. Now there are two beehives in the same tree: GME and EBAY
Understanding the role of cash, authorized participants (APs), and ETF creation/redemption mechanics helps explain why ETFs like XRT can become central to institutional trading strategies. In a traditional “in-kind” ETF creation:
The AP buys the basket of underlying stocks.
The AP delivers that basket to the ETF issuer.
The issuer provides newly created ETF shares.
The AP can then sell those ETF shares in the open market.
The reverse occurs during redemption.
However, ETFs can also use cash creations and redemptions instead of purely in-kind transfers. This distinction matters significantly.

Why Cash Matters

Cash-based ETF creations provide flexibility.
Instead of delivering every underlying stock directly, an AP can deliver cash to the ETF issuer, which then acquires the securities internally.
For highly liquid ETFs, this may seem insignificant. But for ETFs containing:
hard-to-borrow stocks,
volatile meme stocks,
heavily shorted equities,
or thinly traded components,
cash creation mechanisms can become strategically valuable. A hedge fund may want to short a particular stock inside XRT — especially a stock with limited share availability.
Instead of directly borrowing shares of that stock, traders can:
short the ETF,
hedge out unwanted components,
and isolate exposure to the target company.
This strategy is sometimes referred to as “ETF arbitrage” or “component stripping.”
For example, if a hedge fund is bearish on GameStop Corp. but neutral on the broader retail sector, it may:
short XRT,
go long the other retail stocks inside XRT,
and effectively create a synthetic short on GameStop.
This can reduce borrowing costs or bypass scarcity in directly borrowable shares.

Liquidity Transformation

ETFs can transform illiquid exposure into more liquid instruments.
A stock may have:
low float,
high borrow fees,
or limited share availability,
while the ETF itself trades with significantly more liquidity.
APs and market makers help bridge this gap by continuously creating and redeeming ETF shares.
This is one reason ETFs can sometimes exhibit short interest levels exceeding 100% of shares outstanding. Because ETF shares can be continuously created and redeemed, the supply is more elastic than ordinary corporate shares.

Settlement Flexibility

Cash creations may also help institutions manage settlement and inventory constraints.
In stressed market environments:
locating underlying shares may be difficult,
borrowing costs can spike,
and settlement obligations become more complex.
Cash-based creation/redemption processes can provide operational flexibility for APs and hedge funds navigating these conditions.
Critics argue this flexibility can obscure true supply-demand dynamics in underlying stocks. Defenders argue it improves market liquidity and efficiency. With XRT we know the goal isn’t market efficiency but rather skirting direct borrow rates to obtain synthetic short exposure.

https://www.sciencedirect.com/science/article/pii/S2214845021000880
 
 
https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=5038584  
 
https://www.youtube.com/watch?v=6VJH-hRlXN0 

This commentary is from Matt Levine, a former M&A lawyer/banker who now works for Bloomberg.

I am not endorsing his view … but I suggest that this probably highlights the view of the Ebay board.

https://www.bloomberg.com/opinion/newsletters/2026-05-12/ebay-won-t-play-with-gamestop

12 May 2026

The problem with GameStop’s bid to buy eBay is that it’s half cash, half stock. GameStop, a company with $9 billion of cash and a stock market capitalization of about $10 billion, wants to pay $28 billion of cash and $28 billion of stock for eBay, a company with a stock market capitalization of about $48 billion.[1] The cash is more or less fine; GameStop’s Canadian bank is “highly confident” that it could raise the money. And the problem with the stock is not that a $10 billion company can’t issue $28 billion of stock: Technically GameStop can’t (it doesn’t have enough authorized shares), but that is a solvable problem, and there is no general rule that a company can’t issue more shares than its current market value. If the stock market says you are worth $10 billion, but you want to issue stock to acquire a $28 billion asset, then your stock market value after the acquisition should be $38 billion, fine.

The problem is that, in issuing $28 billion of stock to buy eBay, GameStop would essentially be issuing $28 billion of eBay stock. Current eBay shareholders would get shares of a combined GameStop/eBay that is almost all eBay. The enterprise value of eBay is something like $51 billion, including debt. The enterprise value of GameStop, meanwhile, is less than $10 billion, because it has $9 billion of cash. (It has about $4.4 billion of debt, for an enterprise value of about $5.7 billion.) You can think of GameStop’s $10 billion market capitalization as being made up of (1) $5 billion of net cash plus (2) $5 billion of GameStop. GameStop successfully converted its meme-stock status, over time, into actual cash, which is good. But if it gives eBay that cash in the acquisition, then you are combining a $5 billion video game retailer with a $51 billion internet company. Virtually all of the value in that company is eBay’s business, not GameStop’s.[2]

And so if you are an eBay shareholder, the proposition being offered to you is something like “you can continue to be an eBay shareholder, but in a weird way.” Specifically:

1. You’ll get a levered recap of eBay: eBay will borrow $20 billion and pay it out to shareholders. 
2. You’ll keep your shares of eBay: Roughly half of your investment will be cashed out in the levered recap, but the rest of it will stay in the company. “The company” here is almost entirely eBay, but technically GameStop will be folded into it too.
3. The new eBay-with-a-little-GameStop will have a slightly different business model than the old eBay. Still mostly eBay, but now you’ll be able to … go to GameStop stores to get your collectibles graded to sell on eBay? “A national network for authentication, intake, fulfillment, and live commerce,” GameStop has proposed. Sure!
4. It will also have very different management: Ryan Cohen, GameStop’s chief executive officer, would take over as CEO of the combined company. 
5. It will also have, perhaps, somewhat different stock price trading dynamics. In that GameStop has historically been a meme stock and eBay has not.

In other words, the appeal of this deal to shareholders is not its stated dollar value, not what they would get in a deal. The appeal of this deal to shareholders is (1) Ryan Cohen’s management and (2) meme-stockery.[3] Is that appealing? I dunno. In its offer letter, GameStop made the case that its managers would cut costs and run eBay more efficiently than current management, and that they have some track record of doing that at GameStop. The meme-stock stuff is more implicit. We talked last week about Cohen listing his socks for sale on eBay to help finance the deal. You won’t get that sort of creative … financing? publicity stunt? … from a standalone eBay. 

GameStop is really offering eBay shareholders nothing except Cohen. They would not be bought out at a premium; they would just get a leveraged recap (which eBay could do on its own if it wanted to, and probably more easily than GameStop could) and shares of their own company run in a somewhat zanier way. A lot of people would take that deal! GameStop shareholders, for instance! I spend a lot of time around here writing about meme stocks, and I am not going to discount the value of zaniness in corporate finance.

Other people, though, would not take that deal. EBay’s board, for instance:

>EBay Inc. rejected a $56 billion takeover offer from GameStop Corp. Chief Executive Officer Ryan Cohen, describing the unsolicited bid as “neither credible nor attractive.”

>EBay’s board turned down the offer after taking into account “uncertainty” around the financing plan, the operational risks involved and GameStop’s governance, Chairman Paul Pressler said in a letter addressed to Cohen. Pressler also cited GameStop’s executive incentives and a takeover’s potential impact on eBay’s long-term growth.

EBay’s board turned down the offer after taking into account “uncertainty” around the financing plan, the operational risks involved and GameStop’s governance, Chairman Paul Pressler said in a letter addressed to Cohen. Pressler also cited GameStop’s executive incentives and a takeover’s potential impact on eBay’s long-term growth.

EBay’s board turned down the offer after taking into account “uncertainty” around the financing plan, the operational risks involved and GameStop’s governance, Chairman Paul Pressler said in a letter addressed to Cohen. Pressler also cited GameStop’s executive incentives and a takeover’s potential impact on eBay’s long-term growth.

Here is eBay’s press release, which contains Pressler's rather curt letter to Cohen. The proposal is not “credible” because of “the uncertainty regarding your financing proposal,” and it is not “attractive” because of “the impact of your proposal on eBay's long-term growth and profitability,” “the leverage, operational risks, and leadership structure of a combined entity,” and “the resulting implications of these factors on valuation.” Cohen’s proposal involves giving eBay shareholders (1) $28 billion of cash, which he doesn’t have, and (2) $28 billion of stock in their own company, which — eBay says — would be worth less under his plan.

Also for some reason eBay published Cohen’s “highly confident letter” from TD Securities (USA) LLC, in which TD asserts its confidence that, if GameStop did acquire eBay, TD could raise $20 billion of investment-grade (?) debt to finance the transaction.[4] Lots of hostile takeovers used to get done on highly confident letters, but they’re somewhat out of fashion these days and I’m not sure I’ve ever read one. Now targets tend to expect commitment letters from banks. In the cold light of 2026, I am not sure that this letter should make you highly confident that the deal could actually be financed. It did not have that effect on eBay’s board.

What next? One possibility is “lol never mind”: Nobody seemed to be all that serious about this takeover, we all had a good laugh, and now eBay has rejected it. GameStop bought almost 5% of eBay’s stock before announcing its proposal, and is probably sitting on a nine-figure profit at this point. (Its purchase price is not disclosed, and almost all of its 22.2 million shares are owned synthetically using derivatives, but it entered into at least half of those derivatives on March 4, when eBay was trading at around $91.03; the stock closed at $108.13 yesterday. Even if you assume an average purchase price of $100, you get a paper profit of about $180 million.) It could sell those shares[5] at a nice profit and go home. In general, it is frowned upon to buy stock in a public company, announce a fake takeover, and then sell the stock at a profit, but I think the facts here are benign enough — the takeover proposal has a veneer of reality, and the stock is mostly not up because of it — that it’s fine.

The other, much funnier possibility is:

>The rejection leaves Cohen with the option to try to pursue a proxy fight to replace eBay board members, a move that could take more than a year. He had previously said he’s prepared to take his plan straight to shareholders should the board turn down his offer.

No? I mean, I hope he’ll do this, but I doubt it. If you are looking for zaniness, then GameStop running a proxy fight to take over a company 10 times its size is pretty much what you want. As a financial columnist I am always looking for zaniness, and I gather that GameStop shareholders are too. EBay shareholders, maybe not.

Oh, elsewhere, yesterday GameStop disclosed that it will ask its shareholders to authorize issuing up to another 1.5 billion shares, which would maybe (?) cover the eBay transaction.[6] “The Board is requesting the Authorized Shares Amendment to enable the Board to issue additional shares of common stock for general corporate purposes,” GameStop says, so I suppose eBay is not exactly top of mind.

Footnotes

[1] Those numbers are current as of this morning but you shouldn’t take them too seriously; when we first talked about this proposed deal last week, GameStop’s market cap was about $12 billion and eBay’s was about $46 billion.

[2] I have heard GameStop’s quasi-hostile bid for eBay referred to as a “hostile sale”: That is, rather than attempting a hostile takeover of eBay, GameStop is attempting to make eBay buy GameStop, but in a hostile way. That’s not quite right — GameStop wants its management to be in charge — but is a useful way of thinking about it.

[3] This is all a little reminiscent of Bill Ackman’s bid for Universal Music Group N.V. last month, which is also phrased as an “acquisition” but is really more of a proposed leveraged recap, a minority stake purchase, and some activist kibbitzing about how the company is run.

[4] EBay is rated Baa1/BBB at Moody’s and S&P, now, but the proposed deal would add a lot more debt. Here’s a Moody’s report saying that the deal “would be credit negative to eBay because of the substantial increase in financial leverage,” and at least hinting that it might lead to a downgrade below investment grade (and thus put rights on some of eBay’s bonds). The TD highly confident letter “assumes, amongst other things, as determined in TD Securities’ sole discretion: (i) expected investment grade corporate credit ratings or investment grade unsecured public debt ratings from at least two of S&P, Moody’s or Fitch pro forma for the Transaction.”

[5] Technically “cash settle those put/call option combos over some averaging period,” but that’s economically equivalent to selling the stock.

[6] My casual math last week was that GameStop has about 450 million shares outstanding and would represent about a third of the combined company, so would need another 1 billion shares or so. But that’s a bit generous: On an enterprise value basis, GameStop would represent something like one-tenth of the combined company, and it would be paying a lot of its cash to eBay. Plausibly GameStop would need to issue, like, 4 billion shares to make the math work, so it might not be authorizing enough.