*This post is for my reference & assurance to buy and hold GME, and not as financial advice.
Investing in GME Gamestop Value Buy
- Investing in GME Gamestop Value Buy
- GME Gamestop Short Squeeze
- Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 1 (Dr. Susanne Trimbath)
- Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 2 (Dave Lauer)
- Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 3 (Carl Hagberg)
DFV who is not a cat went all-in on Apr 16, 2021.
- $GME No debt, flush with cash, and a new team from Chewy and Amazon leading the transformation.
Quotes from Warren Buffett;
- Only buy something that you’d be perfectly happy to hold
if the market shut down for 10 years.
- Nobody buys a farm based on whether they think it’s going to rain next year, They buy it because they think it’s a good investment over 10 or 20 years.
- If a business does well, the stock eventually follows.
- Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.
- Time is the friend of the wonderful company, the enemy of the mediocre.
- Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.
- Our favorite holding period is forever.
Warren Buffett: Why you Shouldn’t Short Sell? (GME)
GME Gamestop Short Squeeze
Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 1 (Dr. Susanne Trimbath)
|Naked, Short and Greedy: Wall Street's Failure to Deliver||83 Reviews||Price & Reviews|
TL: DR 🦍 Summary:
CEDE & CO
Cede & Co is a nominee name, banks and brokers have custodians they use for securities registration, any shares registered with a nominee signals the stocks are being held for someone else.
Cede & co came about owing to a paper crisis as trades increased, and they became the nominee to hold a majority of securities.
THE BIG ISSUES
In a perfect world, there’d be no naked short selling.
In underwriting agreements, MM or agents can sell more shares than they have to meet market demand. When a share is borrowed, the rights of the share borrowed are also distributed with it
Brokers can know whether something purchased is borrowed if it is marked, but often direct buyers (retail) don’t know that they are buying short, borrowed shares.
There have been many cases of violations of brokers ‘forgetting’ to mark shares as short just so they can open the short position, even if this later has a high likelihood of becoming FTD because shares without this designation are more likely to be bought by brokers.
BYRNE AND OVERSTOCK
This problem of naked shorting, and by extension, overvoting is not restricted to GME at all, in fact, it appears to be a major issue industry-wide.
Even the CEO of the company Overstock, purchasing their own stock, couldn’t have their broker find the actual shares purchased, it took 2 months before they did.
The fact GME traded nearly 4x its float in 1 day is insane.
ETG LAWSUIT AND NAKED SHORTS
ETG filed a lawsuit that was settled outside of Court to keep things hush-hush, but it was based on their shares outstanding vastly exceeding their float.
You will likely never hear publicly about successful cases if settled.
Penalties have only recently been introduced for FTDs.
What’s the incentive for them? Money. It’s always money.
Before, they would take someone’s cash via FTDs, to then make more cash and only get a slap on the wrist for doing so.
DTC COMPLAINT PROCESS
DTC has a list of issues to rectify sorted by value alone.
By driving the price down, the short seller not only drives the price to the ground and makes money, but because investigations are dealt with on a value basis by the DTC, the further the price goes down, so does the priority level of the issue, in the DTC’s books.
NAKED SHORT ENDGAME
Driving a stock price down restricts the availability of capital, which in turn assists in running the company out of existence as they can’t issue to generate capital.
The ultimate goal of naked short sellers is to make the company worthless, at that point, every action they’ve taken to manipulate the stock price and hinder the DTC investigating disappears into shredders and archives.
FTD’S, BANKS, SEC EXAMINERS
Evidence and history have shown that the SEC will step in to help the FTDs of the banks, but they historically will not help other stocks such as GME.
The evidence is that the SEC prevented naked short selling of the bank stocks and no one else’s; whereas in Europe and Asia they protected all stocks from naked short selling.
Historically SEC examiners would approach the DTC and just ask, what do you do? (these are supposed to be professional examiners keeping brokers in check)
Dr. T then clarifies a lot of these people (brokers) ‘learn on the fly’ and the qualifications they hold are less difficult to obtain than a barber’s license in most states
The fundamental understanding of brokers is therefore suspect
Actionable steps that could be taken include, visiting https://www.nasaa.org/ and contacting their local securities administrator as they will pay attention, as her friend Patrick did. These are the people that want to know about this stuff.
Dr. T’s position is that overvoting is a huge problem, and it is not solely confined to stocks such as GME. In fact, even now 85% of stocks are over-voted and that’s because of the influence of a company who deals in trying to fix it, before, 100% of stocks in 200+ test cases were regularly overvoted.
Where stock is over-voted, this provides proof the stock is naked short sold and/or has a high number of FTDs. A problem prevalent throughout the industry.
The direct evidence of naked shorting exists and remains today in that over ⅓ of companies receive more votes than are actually outstanding.
FTDs have been classified in a new way, ‘open positions for which a trade guarantee is applied’ and on Atobitt pulling the same report Dr. T did at the time of her book, the problem has risen from a $4bn problem to a $183bn issue.
Dr. T explains she is not surprised the problem has grown to this extent, owing to the advent of ETFs, Mutual Funds, and increased trading, etc…
Dr. T warns all apes that you need context, like a denominator (her example, the Clearing Fund) in order to contextualize and understand your DD and appreciate the bigger picture.
GET OUT OF JAIL FREE
In 2005, FTDs and naked short selling resulted in a (relatively if you read on) small $4bn problem. Now, the problem sits at $183bn, with a jump of over $40bn from just 2019-2020 alone.
Whilst stocks traded from 1999 to today’s date have increased by 23%, failures to deliver have grown by 95%.
Dr.T is not surprised owing to the increase in trades, ETFs, and mutual funds, and notwithstanding this, the number of trades and the Clearing Fund didn’t rise at the same rate as the FTDs as the potential loss.
Atobitt’s theory is they just want to have more cash on account to cover the fails, and Dr. T clarifies that the Clearing Fund just is not enough as it wasn’t in the 2008 financial crisis.
Overall, Dr.T and Atobitt agree the players think they have ‘too big to fail’ status to obtain a get-out-of-jail-free card.
Dr.T also states the Clearing Fund used to be based on your activity in the market, but the recent changes do not reflect that.
PUTTING THE FAIL IN FAILURE TO DELIVER
- Fails to deliver were not properly calculated until after the 2008 crisis. Dr. T expected the Clearing Fund to rise when failures were introduced, but she still feels it is too short (ironic no?).
The DTCC and its subsidiaries are self-regulated and are therefore only beholden to the SEC and public review (hence rule changes anyone?)
When the rule changes occur, the cockroaches appear.
If fails and naked shorts were called out in the open, Dr. T predicts the numbers of both would drastically decrease.
NEW RULES, AND HOW WE MAKE A DIFFERENCE
Dr. T thinks that the difference apes are making is clear when you look at the DTCC and its subsidiaries.
We actually have them taking action, to combat the issues we are talking about.
Making rules changes acknowledges the problem, and acknowledgment is the first step to solving it.
HOW THE EURO-APES SAVE THE DAY
Dr.T also speculated that legislation in the EU has the potential to be a driving force for further systemic change.
The reason the EU legislation may be a driving force is that they seek to pass legislation to force buy-ins for failures to deliver.
If it takes effect in Europe, it could ripple across the pond.
Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 2 (Dave Lauer)
TL: DR 🦍 Summary:
OPENED MY EYES
Concerns over naked shorting are not just isolated to GME, there are concerns of this across many stocks.
Lending credence to our theories over the manipulation of the Short Interest Data through the options market.
Dave subtly mentions that through his research of public data he has seen significant manipulation in different stocks. Could not elaborate further though.
Government regulators move at a snail’s pace. This isn’t because they are corrupt necessarily, but rather this is the way of things with regards to the bureaucracy of government.
Gary Gensler coming in as chair is promising, as he seems to be regulation-minded which is exactly what we need right now.
The way to make this stuff move quicker is to keep the spotlight on it. Keep doing what we are doing.
RACE TO ZERO LATENCY
The markets still employ archaic principles that made sense years ago, but now simply hold us back from having the best outcomes that we could achieve.
high-frequency trading in many ways can exacerbate extreme moves.
Latency requirements and competition over latency have increased over the last fifteen years – we are talking microseconds for transactions.
NATIONAL BEST BID/ OFFER (NBBO)
Markets are designed to help us figure out what something is worth monetarily, and the NBBO helps with that price discovery.
Lit exchanges (NASDAQ, NYSE, IEX) are where you get price discovery (what is the stock worth)
Dark pools / off-exchange trading (NBBO) just ride off the lit quote but don’t affect it
In Canada, in the UK, in Australia, this kind of setup where trades go to someone like Citadel or Virtu is illegal because it can DAMAGE THE MARKET
The market is an incredibly complicated, interconnected web of different exchanges.
it’s more expensive to actually go direct to the exchange, relative to going to a dark pool. Labeling exchanges “Toxic Venues”.
This is due to access fees:
A fee cap of 30 cents per 100 shares was implemented in 2007.
This has led to exchanges competing over rebates.
However IEX does not charge this, they charge only 8 cents per 100 shares on either side. (buy and sell)
Access fee cap hasn’t changed is forever, leading to exchanges fighting over ‘rebates’.
SHOCKING, RAMPANT MANIPULATION
Price manipulation through ‘short ladder attacks’ or wash-trading is still being actively used and it is RAMPANT.
The sheer volume of data on a daily basis helps hide these tactics.
SPOOFING AND LAYERING
An ‘order book’ is essentially a collection of the highest prices someone will pay to buy, and the lowest prices someone will sell for security.
Depending on volume, if the price rises, more will sell and if it lowers, more will buy.
‘Spoofing’ starts when an HFT speculates the price will rise above the current ‘lit’ price.
The speculation is that this price rise will happen very quickly, and HFT trading systems rarely hold onto inventory even for minutes, but more commonly milliseconds.
To sum up, where an HFT strategy determines the price will increase, ‘spoofing’ is the act of creating artificial ‘demand’ to essentially trick these HFT systems into thinking there is demand and they will then buy a stock en masse.
This in turn drives up the price as the other HFT take the artificial demand as a buy signal, to the point the spoofers sell price is reached, which allows them to sell at a favorable price for a profit. (Writer’s edit: Even the bots can be manipulated)
THE BROKEN PART FALLACY
Non-linear systems are not easily explained. Just because 1+1 = 2 is simple for apes to understand does not mean that this is the case for HFT systems.
Complex, Non-linear systems as designed and described by Dave, ultimately are incredibly sensitive, and any number of factors can lead to flash crashes, not just manipulation, but this too isn’t out of the question.
Boiled down, not even regulators can predict the impact that changes on these systems may have, and history shows that it can be extreme.
Jack mentions to Dave that GME has seen many events that could be considered a ‘flash crash, such as the March fall in price from $345 to $173**.**
Dave clarifies that crashes such as this may not be inherently manipulative, in that algos are just trading as designed. When 90-99% of the liquidity of a stock is provided by HFT systems; in the event of an increase in liquidity occurs or when HFT’s determine they hold too much inventory, they may be programmed to ‘pull out’ which can cause a snowball effect on other systems and crash the price.
Notwithstanding the above, Dave does not discount that manipulation is an impossibility at all, but thinks it is important to recognize HFT systems can act on a positive feedback loop as described.
ORDER TYPES, NOT SO SIMPLE
The markets are becoming so over-complicated with all these different types of orders, that not even the exchanges can keep up.
NASDAQ has been fined in the past for not being able to keep up and understand the orders on their exchange.
PAYMENT FOR ORDER FLOW
PFOF is more trouble than it’s worth.
It has been shown that PFOF can be affecting the spread at much at 25%.
It is very profitable for a large firm to trade against/ ahead retail orders. I am speculating here, but this is likely why this is such an important fight for Citadel. We, the customer, are actually the product, just like with social media.
DARK POOLS, INTERNALIZERS
So every time Citadel internalizes a trade, it gets printed publicly, every time, Goldman Sachs or Morgan Stanley, or JP Morgan executes a trade in their dark pool, it still gets printed publicly.
I’m always interested in learning more, I mean if there’s a mechanism by which someone thinks they’ve figured out how they can suppress the price through dark pools, I’d be really interested in that, because it would directly impact some of the analysis that I do.
IEX has a lot of functionality that can make for a better retail trading experience.
If IEX is something that you are interested in trading on, then contact your broker and let them know
WHAT CAN WE DO?
- Reach out to the SEC, members of Congress, FINRA
Naked, Short and Greedy: Wall Street’s Failure to Deliver – Part 3 (Carl Hagberg)
Appreciate all the r/Superstonk mods that helped put the above together.