How hedge funds and brokers have manipulated the market
by Lucy Komisar
Part 7 - An SEC Loophole Allows FTDs to Continue
In spite of knowing how fails to deliver represent sham trades, the SEC has facilitated big brokers and hedge funds continuing the con, using a system where FTDs go to die: dark pools, which began in the 1980s and now handle more than 40 percent of trades.
Dark pools are opaque private exchanges run by the major banks and prime dealers, and they are inaccessible to other investors. They were created to settle large trades by hedge funds and institutional investors without moving the markets.
As the SEC said in 2015: “The close-out requirement applies only to fail to deliver positions in an equity security at a registered clearing agency.” So unsettled trades could migrate to dark pools, out of the sunlight where investors can’t see what is going on, and never be closed out. It is called “ex-clearing,” off exchange. It is naked shorters’ “get out of jail free” card.
The SEC has described transactions outside the clearing agencies as “rare.” Forty percent of all transactions is nowhere near rare!
Market makers like Citadel Securities facilitate dark pool transactions, without the market being aware of the transaction price. That prevents the transaction from impacting the share price on the public exchanges. In this fashion, GameStop manipulators could buy in a dark pool and sell on an open exchange, making money on the transaction.
Dark pools are opaque private exchanges run by the major banks and prime dealers, and they are inaccessible to other investors. They were created to settle large trades by hedge funds and institutional investors without moving the markets.
As the SEC said in 2015: “The close-out requirement applies only to fail to deliver positions in an equity security at a registered clearing agency.” So unsettled trades could migrate to dark pools, out of the sunlight where investors can’t see what is going on, and never be closed out. It is called “ex-clearing,” off exchange. It is naked shorters’ “get out of jail free” card.
The SEC has described transactions outside the clearing agencies as “rare.” Forty percent of all transactions is nowhere near rare!
Market makers like Citadel Securities facilitate dark pool transactions, without the market being aware of the transaction price. That prevents the transaction from impacting the share price on the public exchanges. In this fashion, GameStop manipulators could buy in a dark pool and sell on an open exchange, making money on the transaction.
Citadel’s market-making division has a history of being caught manipulating markets. The New York Stock Exchange (NYSE) said Citadel Securities “erroneously sold short, on a proprietary basis, 2.75 million shares of an entity causing the share price of the entity to fall by 77 percent during an eleven-minute period. In another instance, according to the NYSE, Citadel’s trading resulted in “an immediate increase in the price of the security of 132 percent.”
A Citadel spokesperson responds: “Citadel and Citadel Securities have always operated with the highest standards of integrity. Neither firm has ever been accused of or fined for market manipulation, and the claim that there is a ‘history of being caught manipulating markets’ is completely false.”
And NYSE president Stacey Cunningham said last week that so-called “meme stocks” like GME are prime targets for this manipulation. “The vast majority of order flow can trade off of exchanges, which is problematic,” Cunningham said at a CNBC conference. “That price formation is not really reflective of what supply and demand is.”
u/broccaaa compared his historical options data, which showed patterns consistent with naked shorting tricks, with dark pool trading volumes by known short funds. FINRA data since November 2020 showed GME activity ramped up massively at the start of January. Data shows that 25 percent of the GME float is traded OTC (over the counter in a dark pool), compared to less than 1 percent for major stocks.
A Citadel spokesperson responds: “Citadel and Citadel Securities have always operated with the highest standards of integrity. Neither firm has ever been accused of or fined for market manipulation, and the claim that there is a ‘history of being caught manipulating markets’ is completely false.”
And NYSE president Stacey Cunningham said last week that so-called “meme stocks” like GME are prime targets for this manipulation. “The vast majority of order flow can trade off of exchanges, which is problematic,” Cunningham said at a CNBC conference. “That price formation is not really reflective of what supply and demand is.”
u/broccaaa compared his historical options data, which showed patterns consistent with naked shorting tricks, with dark pool trading volumes by known short funds. FINRA data since November 2020 showed GME activity ramped up massively at the start of January. Data shows that 25 percent of the GME float is traded OTC (over the counter in a dark pool), compared to less than 1 percent for major stocks.
Note the spike in GME dark pool trades at the end of January 2021, especially the week of January 25, when the short squeeze was shut down. The big investors who trade in dark pools increased their volume till just that week when the price dropped.
u/broccaaa said, “When prices really started to move from January 25-29, more than 100 million shares were created with Deep ITM call and married-put naked shorting and used to hammer down price and hide short interest.”
He postulated that a coordinated blocking of buy orders at key retail brokers helped the shorters knock down the price. Over 525 million shares traded in January, and over 300 million in February. To put that in perspective, the GME float is somewhere between 26.7 and 50 million. Much of the trading took place in dark pools where the hedge funds operate. Since then, the average trade size has decreased to less than 50 shares per trade, per FINRA.
u/broccaaa said, “When prices really started to move from January 25-29, more than 100 million shares were created with Deep ITM call and married-put naked shorting and used to hammer down price and hide short interest.”
He postulated that a coordinated blocking of buy orders at key retail brokers helped the shorters knock down the price. Over 525 million shares traded in January, and over 300 million in February. To put that in perspective, the GME float is somewhere between 26.7 and 50 million. Much of the trading took place in dark pools where the hedge funds operate. Since then, the average trade size has decreased to less than 50 shares per trade, per FINRA.
Data retrieved by Superstonk users all points to massive dark pool trades of GME. In February, 2021 volume traded as a percentage of float was 234 times higher than what it was for blue-chip Dow Jones stocks. Dating back to September 2020, between 40 and 69 percent of weekly volume was being routed off exchange.
Who was trading? u/nayboyer2 explains: “Based on their SEC 13F filing, Citadel owned only 217,132 shares. Prior to January, its previous high for number of trades was 75,652. But in January, Citadel traded over 252 million GME shares in the OTC market. In January, it traded over 1,161 GME shares for every one share that it owned.” Citadel is a high-frequency trading market maker, which means it can access more shares than it owns. But this level of trading activity is notable.
Who was trading? u/nayboyer2 explains: “Based on their SEC 13F filing, Citadel owned only 217,132 shares. Prior to January, its previous high for number of trades was 75,652. But in January, Citadel traded over 252 million GME shares in the OTC market. In January, it traded over 1,161 GME shares for every one share that it owned.” Citadel is a high-frequency trading market maker, which means it can access more shares than it owns. But this level of trading activity is notable.
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