How hedge funds and brokers have manipulated the market
by Lucy Komisar
Part 6 - Other Scam Tactics
A married put is a legal options trading strategy where an investor in a stock buys a put (an option to sell) on the same stock, to protect against depreciation in the stock’s price. Crooked hedge funds will simultaneously purchase puts from a market maker and buy shares of an equal number. In this way, the hedge fund obtains “phantom” shares from the market maker, which can be used to cover old positions or to sell on the market to suppress the price.
The SEC in 2003 expressed concern that “[s]ome strategies may involve the manipulative sale of securities underlying a married put as part of a scheme to drive the market price down and later profit by purchasing the securities at a depressed price.” It called them “sham transactions” which might violate the SEC’s anti-fraud and anti-manipulation provisions.
This appears to have been at work in GME, according to the Superstonk users. A 13F form must be filed quarterly with the SEC by institutional investors with at least $100 million in shares. These filings for the biggest known GME short sellers showed a tremendous amount of puts. New put option contracts after the end of January represented more than 300 percent of shares outstanding, more than 200 million shares. “Melvin Capital, which lost 50 percent of its value, had 6 million shares in puts,” said u/broccaaa. This massive spike suggests that short positions have been hidden using “phantom shares” and “strategic fail-to-delivers.”
The SEC in 2003 expressed concern that “[s]ome strategies may involve the manipulative sale of securities underlying a married put as part of a scheme to drive the market price down and later profit by purchasing the securities at a depressed price.” It called them “sham transactions” which might violate the SEC’s anti-fraud and anti-manipulation provisions.
This appears to have been at work in GME, according to the Superstonk users. A 13F form must be filed quarterly with the SEC by institutional investors with at least $100 million in shares. These filings for the biggest known GME short sellers showed a tremendous amount of puts. New put option contracts after the end of January represented more than 300 percent of shares outstanding, more than 200 million shares. “Melvin Capital, which lost 50 percent of its value, had 6 million shares in puts,” said u/broccaaa. This massive spike suggests that short positions have been hidden using “phantom shares” and “strategic fail-to-delivers.”
As u/broccaaa says, “This spike coincides perfectly with the drop in reported short interest and FTDs.” He sees it as “the most damning evidence of massive manipulation.”
The options scam can also reset the clock on fails to deliver. Remember that short sellers have two days to locate a stock to prevent an FTD; market makers and other authorized participants may have up to six days. The SEC explained a trading strategy known as “buy-write” in a 2013 paper. As Investopedia explains, “A buy-write is an options trading strategy where an investor buys a security, usually a stock, with options available on it and simultaneously writes (sells) a call option on that security.” This recycling of positions shows as a new transaction, so the short sale timer is reset. And the trader may never deliver the shares, because he can roll over the trades and do the deal over and over.
GME short positions could also be hidden in exchange-traded funds (ETFs), a basket of stocks similar to a mutual fund. u/broccaaa’s research shows that fails to deliver migrated from GME to ETFs in January 2021. The total value of reported short interest (GME + ETFs) remained as high as ever, at over $27 billion owed.
The options scam can also reset the clock on fails to deliver. Remember that short sellers have two days to locate a stock to prevent an FTD; market makers and other authorized participants may have up to six days. The SEC explained a trading strategy known as “buy-write” in a 2013 paper. As Investopedia explains, “A buy-write is an options trading strategy where an investor buys a security, usually a stock, with options available on it and simultaneously writes (sells) a call option on that security.” This recycling of positions shows as a new transaction, so the short sale timer is reset. And the trader may never deliver the shares, because he can roll over the trades and do the deal over and over.
GME short positions could also be hidden in exchange-traded funds (ETFs), a basket of stocks similar to a mutual fund. u/broccaaa’s research shows that fails to deliver migrated from GME to ETFs in January 2021. The total value of reported short interest (GME + ETFs) remained as high as ever, at over $27 billion owed.
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