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The Securities and Exchange Commission has accused two traders of engaging in illegal transactions in memes, including GameStop Inc., in an alleged scheme that earned them hundreds of thousands of dollars in badly rebates. acquired from a number of securities dealers.
Wash trading is a type of market manipulation where a trader attempts to provide the market with false information about the supply and demand of a particular security, usually by placing buy and sell orders for the same security. simultaneously, which leaves its real economic interest in the trade a “washout.”
The SEC said in a complaint Monday that investors Suyun Gu and Yong Lee had taken advantage of the maker-taker model in options markets that market makers use to attract orders and increase market liquidity. Market makers will pay brokers a “start-up” fee for placing non-tradable limit orders or orders that would not be profitable to place at the time of trade due to the current price of the security under. -jacent.
They pay these fees to ensure that there will be someone on the other side of the trade for those placing tradable orders, who in turn pay a “take” fee. The start-up costs are generally lower than the catch costs, with market makers pocketing the difference.
According to the SEC complaint, some brokers will pass the manufacturing and support costs on to their clients, while others will not. The agency alleges that Gu and Lee were “able to generate illicit profits by using broker accounts that return discounts to their clients to place initial orders on one side of the market, and then by using broker accounts from the other side of the market. Marlet.”
From February to April of this year, the prices of meme stocks that have become favorites with active retail traders on social media, including GameStop GME,
AMC Entertainment Holdings Inc. AMC,
and Nokia Corp. QUITE,
were increasing rapidly. Gu and Lee used this market momentum to their advantage, correctly assuming they could earn higher-than-normal fees by ordering out-of-the-money puts on these and other stocks, the SEC said. .
“After some brokers closed Gu and Lee’s accounts in early March 2021, Gu was able to continue the program until mid-April 2021 by lying to brokers about his trading strategy, using accounts at other people’s names and accessing those accounts through virtual private networks to hide his activity, ”according to an SEC press release announcing the charges.
“This case demonstrates the SEC’s ability to quickly investigate and expose complex trading patterns, including those conducted during times of high market volatility,” said Joseph Sansone, head of the SEC’s Market Abuse Unit. , in a press release.
The SEC has been investigating a number of issues with the meme stocks phenomenon after some brokers restricted trading in GameStop and other stocks because the intense interest of individuals in those stocks triggered massive collateral obligations from investors. brokers to a central clearing house.
SEC Chairman Gary Gensler said in a hearing before the Senate Banking Committee earlier this month that the agency was “close enough” to release a full report on the incident, which could include recommendations for new regulations.
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