~*~Mining and Metals Du Jour~*~

[ConferredDiligence]

Laws? Only For You. Bend Over

The snicker factor of a bunch of hedge fund and other Wall Street folks screaming about GameStop (GME) and others is astoundingly funny.

Let's start with the law: It is illegal to "manipulate" a stock or other security -- that is, it is unlawful to express an intent to sell or buy for any other reason than to actually sell or buy, and it is also illegal to intentionally mislead others about your reasons for doing so.

This is why "spoofing" (although almost-never prosecuted) is against the law. "Spoofing" is the practice of laying in a bid or offer you have no intention of being filled on for the express reason of making other people think you want to sell or buy something, when in fact you want to do the opposite. They attempt to follow your claimed "expression of intent" only to find your offer or bid has disappeared, the price moves and they come in on the other side. It sounds like picking up pennies in front of a steamroller and it is, but it can be very profitable especially if your connection to the exchange is fast enough that the risk of getting filled is extremely low in that you can cancel your order before anyone can hit it.

This could be prevented on a trivial basis by the exchanges through a simple rule: All orders must remain valid for enough time for the signal to travel around the globe twice (once there and once back) or until executed and you may not have more open orders at any given instant than you can clear (e.g. margin capacity.) Now if you try to "spoof" you will get filled and the scheme fails. But note that despite this being blatantly obvious not one exchange has implemented such a rule and neither has the SEC demanded it. Gee, I wonder why not? Might it be that they really don't give a **** so long as only the "right" people cheat?

Spoofing is an extremely common practice that I've raised Hell about for years, a practice that especially screws small retail traders such as myself because we are nowhere near as fast with our fingers as a computer and also not sitting next to the exchange either and a number of years ago one particular idiot was dumb enough to do it when the futures market was open over a holiday weekend. I caught it on video from a retail trading terminal (mine), and put it on Youtube, which got the CME very pissed off at me claiming that I should have called them first. Uh, no, if they gave a **** they should have stopped it before I could catch it, but they didn't. Ultimately, and to my great amusement, the person responsible was actually prosecuted and I was asked to come to DC and talk to some very nice government people and explain in detail on a tick-by-tick basis the video that I had recorded, since it was evidence. Go figure.

Oh by the way, they never have gone after the "big guys" doing the same thing nor changed the rules on order validity.

Given how simple it would be to instantly stop this crap does that tell you everything you need to know?

But there is nothing illegal about bidding up (or shorting) a stock for a transparent and truthful reason that has nothing to do with its underlying value. The only requirement is that you not lie; witness firms like Tesla that have crazy valuations for which there is no rational justification, or Amazon, or similar. They're everywhere and always on the exchanges and always have been. Fundamentally a company that pays no dividend has no value beyond the liquidation value of its assets in the free market when it comes to common stock. Therefore, if you want to get down to it every single stock that pays no dividend trades on nothing more than hype since there is no discounted cash flow to you as a holder, ever, and no expectation there will be.

That's the dirty little secret that nobody wants to talk about when it comes to the stock market, and is why you can have a market that trades at 666 one year and a few years later trades at 3,700. Did the economy expand by a factor of five over that period? Did it even double? Not even close.

This by the way is why they got pissed off at Musk and his "$420" claim. It wasn't that he believed that was a reasonable number; it was that he claimed to have the deal in the bag when he in fact did not.

The sort of short squeeze that we've seen occurred due to fraud -- but not by the people causing the squeeze. And don't get your panties in a wad about this either; yes, the "at home" trading cadre has materially expanded with the pandemic lockdowns and such, and we're sending "stimulus checks" to a lot of young adults with nothing to do with their time, so staring at a trading terminal attempting to make money sounds pretty good, especially if you win a few times. But that's not the whole story -- not even close.

If you want to short a stock you are supposed to first borrow it. That is, ordinary people cannot sell what they don't have, so if you wish to short you must first borrow that which you want to sell. This is one of the ways brokers make money; they keep all the stock their customers have in "street name" and keep track of who has what. They can (and if supply is limited do) charge you to borrow that stock. There's nothing wrong with this, provided the stock borrowed is real. It's one of the things you agree to allow if you have a margin account; as part of the "price" of that privilege the broker can loan your stock to others for the purpose of shorting it. However, since you own it if you demand it back because you wish to sell it the broker either has to find some other set of shares to replace what he lent out of yours or the short-seller is forcibly bought-in at the market because they have to return your shares. If that causes to take a loss, tough crap.

Yes, I've been forcibly bought-in before. It's a risk of the game.

There is an exception to this rule: If you are a market maker then you can short naked, that is, without borrowing first. Why? Because a market maker's job is, as the name implies, to make the market -- that is, to take the other side of whatever the customer wants to do. If I want to be long something in order to do it someone else has to sell it. Now in the physical security market this is easy; there either is or is not what I want to buy out there on the sheet offered by someone else. But in the options market there is no physical security; the entirety of it is synthetic. This means if someone wishes to buy a CALL someone else has to sell one. The MM's job is to, when necessary, be that other person.

Well, that's dangerous because naked short options positions are obligations to deliver. Specifically if you are short an IBM CALL @ $100 (for example) then you are obligated to deliver 100 shares of IBM stock on demand at any time before expiration for $100 each. It does not matter what IBM's stock is worth; if the holder of the CALL exercises their option you must deliver them. If the shares cost $500 at that time you're ****ed.

Likewise I can buy a $20 PUT on some stock. This gives me the right to PUT that stock on the other person for $20/share up until expiration. IF the price is under $20 I of course have every reason to do that -- I can buy the shares for $10 and make you pay me $20! Who doesn't like that deal? Likewise, the market maker never wants that directional bet either since on the short side of an options trade you're obligated to perform if demanded by the long side.

Nobody would stay in business being a market maker if this sort of thing could happen to them, so as soon as they take the opposing side they execute a balancing trade on the other side. In short if you're a market maker you always want to be neutral on every security you make a market in; you make a (very) small profit on each transaction but you never, ever want to be exposed directionally because the amount you get paid is tiny compared to the risk, and one mistake will bankrupt you.

Therefore if you're a market maker you can short without locating first for this explicit reason. This doesn't lead to a problem generally because nobody in their right mind as a market maker wants a directional exposure, ever. As a result the failure to locate is transient and does not accumulate; you will lay that risk off and remove the imbalance if you have to since you can construct synthetic positions that perform financially the same as real ones.

So how do you get 130% of the available shares short? It would seem impossible and is unless someone cheats.

There are some players in the market who have "market maker" status but also trade their own books or have cross-interests with those who do. Allegedly there are "Chinese walls" between those pieces (or interconnected entities.) Quite obviously that is a load of crap because otherwise what you've seen would be impossible but it clearly not only has happened before but is still happening to this day. These entities are how you wind up with short sales where the locate and borrow hasn't happened first and the position remains open across time. This is supposed to be illegal but other than a few hand-slaps in the futures markets for physical commodities I'm not aware of any criminal prosecution for doing it.

And let's be clear here: This practice is counterfeiting.

There is nothing wrong with borrowing a share of stock from someone and selling it, provided that if the person who you borrowed it from wants it back you are forced to deliver it. That is, if there are 100 shares of stock in the world the only entity who have the right to control how many total shares there are is the company itself. Provided there are 100 shares who loans them and on what terms is nobody's business; that's a private transaction and it's perfectly legal. If I own something I have the right to lend or sell it to someone on whatever terms I choose.

But if you sell something without locating it first you are counterfeiting because you are now representing that there are 110 shares in the marketplace but the company never authorized the other 10. You thus are in fact diluting every one of the existing and real shares by 10% and pocketing the money from those sales. In short you are stealing by partially destroying the value of everyone else's holdings in that stock.

Counterfeiting is a criminal offense -- always and everywhere.

So now you have some folks who have discerned that in fact there is more than 100% of the public float out short. This cannot happen through lawful trading activity, but it leads to an interesting conundrum: If you drive the price up you force those who committed that offense to cover their bets and there aren't enough shares to do it. Oh, someone will eventually fork up their shares at ever-increasing prices to unwind the fraud but in the process the people who shorted naked get a telephone pole up their ass in terms of losses.

There is nothing illegal about targeting people who do this; you are not lying about your intentions and ramming someone's criminal conduct up their ass is not only legal it's what they deserve to have happen to them. Remember that no company stock is actually worth anything beyond liquidation value at any instant in time when it comes to hard valuation; the entire remainder of the price is speculative premium -- that is, the expression of belief in future prospects.

Further, the folks on Reddit aren't the whole story of the pressure either. There appears to be a "gentleman's agreement" among hedgies that they don't go after this when done by their "friends." The practice would never survive a day otherwise; competition is like that if it's honest competition. The reason we ban collusion generally is because it destroys honest competition and that is bad.

But as with any thieves guild breaking ranks can make you a lot of money and when something like this gets going you can bet there are folks with lots of money happy to jump on the bandwagon and add a few telephone poles -- or a few hundred -- to the pile being shoved up the short side's ass. Why not if they can profit from it especially if they don't get identified to the other guild members as the ones who broke ranks?

Were I the CEO of one of these firms that was targeted in this way such as GameStop I would file immediately for a shelf registration and issue stock into the ramp. Now I have lots of cash, legally acquired -- and I get to do that at the short-sellers expense. That this hasn't happened already astounds me, to be frank -- I'd be all over this as it's a perfectly legal way to exploit a speculative frenzy and stick a big fat wad of cash in the corporate bank account which both makes the firm money and screws the shorts.

After all the shorts thought I was going to run out of cash and go bankrupt -- oops, now I have a big pile of cash and they're double-****ed.

So cry me a river, hedge fund mavens and screamers like Cramer -- who, by the way, admitted on video many years ago how he used to manipulate markets before he had his own TV show. He never went to jail for that, did he?

What's the difference?

These folks on WSB are telling you exactly why they're doing what they're doing -- they intend to shove a telephone pole up some cheater's asses and break it off, making a profit at the same time, which is the truth. That's legal. There's no deception at all; every one of their "buy" orders is in fact a bona-fide intent to purchase and they're being entirely transparent as to why.

That their intent has nothing to do with their view of the underlying company's value in its present state means nothing; basically zero of the stock and option trades on the market, ever, are about today's state of a given firm -- they're all about tomorrow's beliefs which by the very nature of that being tomorrow are speculative.

Now one more thing: Why would Robinhood and others halt buys in a stock?

Not crank margin to 100% (or some multiple of it for a short), stop it entirely irrespective of cash in your account?

The broker does not care what the buyer and seller transact at and further, if there is no margin involved the broker also does not care if you grossly overpay and wind up with zero. He loses nothing and this was your own self-directed decision, not his recommendation. All an actual broker does is match buyers and sellers; they are not involved directionally. Well, not legally anyway.....

Further, there are claims that people not on margin were force-liquidated. On what basis? Legally, maybe you signed something saying they could liquidate you "if they believed you were placing at risk" or even "if they're at risk" (without you being the cause.) However the question still stands: Why did they liquidate the accounts if in fact they did?

National Review claims Robinhood and IB were "adults in the room." Bull****. Let me quote some of their nonsense:

Robinhood makes money by routing trades from its platform to large brokers, who compensate the company for its order flow. The larger the trading volume, the better for Robinhood. But Robinhood also makes money through various forms of lending, primarily margin lending to customers.

Which is immaterial, as they had already set margin to 100%. In other words, there were no margin loans on GME stock. You put up cash before you buy, or you don't buy. If you have an existing position you can't borrow against it. That's perfectly legit and brokers do that all the time when things get volatile.

That generates no exposure for the brokerage.

From Robinhood’s perspective, the GameStop rally is beneficial insofar as it generates revenue from increased trading activity, but it is also extremely risky, because the brokerage platform is lending millions of dollars to retail investors buying a world-historically volatile stock. As more and more buyers have flocked to GameStop, Robinhood has lent out more and more money.

That's a lie since they had already set margin to 100%. They're not lending money against those positions; those are cash transactions and, allegedly and if nobody is cheating, all Robinhood is doing is matching buyers and sellers.

It’s unclear how much GameStop stock Robinhood has lent to hedge funds, but whatever the amount, they’ve been lucrative, commanding as much as 80 percent in interest due to the massive amount of money betting against the stock.

Ah.... now we're getting somewhere. You see, brokers do that; they lend out stock and, in cases of hard to borrow shares there is often a fee that can get quite steep. The brokerage would lose that income stream if the short was closed. But.... so what? There's no existential risk here -- just lost opportunity. Which doesn't explain the clamp-down, does it?

NR goes on to try to excuse this as being the "adults in the room." Nope. Once you have margin set to 100% of a long position (and, I remind you, if there is no available float then you can't short without breaking the law) then there is no risk to the brokerage. If the bubble pops, it pops. Your job is to match buyers and sellers and so long as you're doing that and not doing something you shouldn't be there is no problem. The customer may lose his or her shirt but in a self-directed account with no margin loan outstanding against the position there is no risk to the firm provided everything you're doing on the up and up.

THERE ARE ANSWERS TO THE "WHY" QUESTION and I'd love to hear one that doesn't implicate criminal activity. National Review is, to be blunt, playing cover for people; their "explanation" makes no sense. So why publish it at all until and unless they can get the answer to the actual question: Why?

This I can tell you -- I was logged into multiple trading platforms as I have accounts in a few places, all with "real" brokerages. While I did not buy any GME, AMC or the others today, I could have; none of the ones I was on were blocking orders in those names. All had margin at 100% for longs and 200 or even 300% for shorts (!!) and during the day one of them even went ETB (borrowable, in other words) to short GME -- had I wanted to.

So why did certain platforms do what they did?

I'll bet there's a common thread and you won't like it if and when it comes out into public view -- and that's being kind.

PS: There are rumors the White House was directly involved. If that proves up -- and so far it's a claim of an alleged whistleblower -- whoever you voted for you damn well better demand and enforce an immediate impeachment, removal and barring from office for life for both Biden and Harris. No ifs, ands or buts.

https://market-ticker.org/akcs-www?post=241454