The term "legalized fraud" is an inherent contradiction because fraud is not legal.
But it is the term that best describes Wall Street. Here's an easy to understand example of what I mean.
If you have a boat and sell it three times you commit fraud. If you sell your house to three different people you also commit fraud.
But if market makers have 1,000 shares of stock and sell 3,000 of them, supposedly that's legal.
That is not precisely how it happens. More accurately, the shares are lent out and sold. The new buyer allows the shares to be lent out again and effectively the same shares are lent out and shorted again.
Call that what you want, but I think of that as legalized fraud.
It makes as much sense as Hertz or Avis leasing the same car at the same time to several people simultaneously.
Naked Shorting is Illegal
Naked shorting is supposedly illegal and has been since the Great Financial Crisis.
This got me into a semantics debate on Twitter last week.
I claimed naked shorting was happening but others chimed in that it was not naked shorting because what was happening was legal and naked shorting is illegal.
Practically, speaking, I prefer to think of naked shorting as selling more stock than exists.
Loophole Not Closed
I cannot locate the precise rule or legislation that makes naked shorting illegal, but the loophole is apparently as big as the moon.
Securities Lending 101
- The broker dealers make a huge profit on lending shares.
- They would like to lend the same shares over and over again.
- The lobbyists (that is actually who writes every piece of legislation and makes every rule), made sure this lucrative practice could and would continue.
- The broker dealers and market makers are happy.
ZeroHedge reported the cost to borrow GameStop shares got as high as 200%.
Is that crazy or what?
Stock Market is Broken
The stock market is broken. It always has been but the Reddit traders exposed that fact for everyone to see.
Wolf Richter at Wolf Street discusses the corruption in his latest podcast.
- The big players are overleveraged because the Fed encouraged them. The whole thing is propped up by stimulus and bailouts of consumers and companies alike.
- This coordinated short squeeze pushed two hedge funds and Robinhood to the brink. It revealed for all to see how broken the stock market has been..
- You know it’s serious when the New York Times puts a stock chart at the top of the page in a Saturday morning edition.
Traders who follow prudent strategies are ridiculed and have zero returns. The Fed is the biggest manipulator out there.
Those traders on Reddit have succeeded in showing how completely broken the stock market is.
The Fed is a big proponent of this through its monetary policy for the wealth effect. It is responsible for reckless leverage, crazy trading strategies, and the huge incentive to manipulate.
Richter also discusses the long side.
Using Tesla as an example, he explains why the market makers have a huge financial incentives to manipulate up the shares.
His video is well worth a play.
The whole damn thing is one big rigged casino that that Reddit WallStreetBets just exposed for all to see.
Jaime Rogozinski says he saw the GameStop chaos coming.
"It's fascinating to watch," said the founder and former moderator of WallStreetBets, the now-famous Reddit online forum that recently sent shares of GameStop, AMC and other beleaguered companies soaring in a battle with hedge funds betting the shares would fall.
"This is a great conversation that the whole world is having right now," he said in an interview with All Things Considered.
The amateur day traders who banded together to fuel a short squeeze on the video game retailer, inflicting enormous losses for hedge funds, are part of a "symbolic movement," Rogozinski said.
What's happening now, he said, invokes the same sentiments of the Occupy Wall Street protests against corporate greed: "It's resurfacing in a kind of poetic justice."
Two Background Articles
- Naked Shorting is Illegal: So How the Hell was GameStop 140% Short?
- Buy and HODL Forever, Legendary Short Seller Throws in the Towel
Silver Coin Dealers are Overwhelmed
The silver ETF, SLV, is the latest target of the WallStreetBets group.
This morning, 5:35 AM Central, I see Silver is up a whopping 10%.
Silver won't fly like GameStop, but that's a nice gain.
Robinhood limited traders to 1 share of SLV which I find preposterous. That restriction seems to have been lifted. The Restricted List is now down to 8 names.
Who the heck are they protecting?
Curiously, you can only buy 1 shared of GameStop but they will allow 5 options which is control or partial control of 500 shares.
Multiple lawsuits have been filed against Robinhood for breach of contract.
I discussed silver yesterday in Silver Coin Dealers are Overwhelmed With Orders as Reddit Speculators Takes Aim.
The broker dealers and market makers knew full well more than 100% of GameStop was shorted when they lent these shares over and over.
They just did not give a damn because there is profit in securities lending. Besides, it's "legal", supposedly.
Just don't try the same thing with your house or boat.
One good thing came out of this mess. Wall Street is exposed for what it is, a casino.
But even if you win, the house never loses. Hedge funds are not the house as a few of them just found out.