Legalized Fraud
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.
Why?
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.
Key Ideas
- 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.
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Traders who follow prudent strategies are ridiculed and have zero returns. The Fed is the biggest manipulator out there.
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Those traders on Reddit have succeeded in showing how completely broken the stock market is.
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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.
Manipulation Mess
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.
WallStreetBets
The whole damn thing is one big rigged casino that that Reddit WallStreetBets just exposed for all to see.
NPR notes Reddit WallStreetBets Founder Calls GameStop Stock Frenzy A ‘Symbolic Movement’
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.
Profit Motive
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.
Rigged Game
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.
Mish
This is nothing we didn’t know. The only way to end this is to ban derivatives. That would also immensely help the economy on main street by bringing down prices on everything.
This appears not to have been mentioned explicitely:
When the music stops, do you still own your shares at Schwab or ETrade or whatnot? That is, after they’ve lent the shares out and can’t produce them when you ask for them?
Associated note: I once took possession of some shares. Physical and on-the-books possession. Wanted to find out what it was like and maybe frame one on the wall for fun. … It was a weird nightmare. I think it was just luck that I didn’t have buy a 3-piece suit and hire a major law firm to sell that few hundred bucks worth of stocks. I think, to this day, the legacy of that experience gets yearly, 3-cent checks mailed to me.
Hedge funds should have had access to the shares shorted information. If the price is not going down while shares shorted go up on a daily basis, it’s time to close the short position at a loss. And did the shorts set any stop loss orders or buy calls to protect themselves? The explosive price gain in GME shows many shorts were highly were highly leveraged, unhedged, and ignorant of the risks.
No sense in talking about “Wall Street Sleaze and Corruption”, that’s a given and has been for a long time … and that is the guaranteed final state of anything based on “the love of money”. All who play in the casino, knowing that it’s sleazy and corrupt, are just as sleazy and corrupt as the sleazy and corrupt ones who operate the casino.
I wouldn t touch the rigged casino with a ten foot pole….but what ‘s the alternative to make a buck with your savings these days, since Central Banksters brought interest rates down to 0. I remember how I doubled my money in the late eighties, nineties, and up till the financial crisis each 7 or 8 years with almost RISKLESS investments (international bonds and currency deposits) Go figure, I fetched 12% on australian, and NZ deposits at the time, made huge profits on russian and south american bonds (except Argentina but even then I recovered half my investment) Those were the days, no globalised economic cycles disruption making the happy few even richer and deluding and endebting the stupid masses with ever cheaper money…..How sustainable is this CB’s created mess, that s the question !
Well, the brokerages(ALL) can put your shares at risk as well without your permission. As Robinhood did, buy selling the shares underneath the owners and saying,”sorry Charlie”
Don’t blame the Fed. Blame our dysfunctional legislative branch for the fiscal and regulatory policy mess.
Wash, Rinse, repeat to infinity.
Hi, is that legislation regarding shorting or doing something to prevent the masses from agreeing to trade simultaneously on the same stick etc? Or both?
I don’t know… whatever is written will not be read by any member of CONgress or the president, so it won’t be good for us.
Oh ok thanks.
Stock
sorry. I wrote that at 5AM posted it and huge numbers of comments got marked as spam. I went to bed and just now saw it. Comments recovered.
So Obama had a chance to uber-regulate the industry or at least criminally prosecute the bankers during the housing debacle. He decided not to go after them. This is why I don’t like neither Obama nor Hilary. To me they are “Republican light”. The little regulation that passed has already been destroy by Trump and the republicans. So do I have hope now? Hard to tell, at least this time people that are more aggressive on FINRA regulation seems to have more power. Will see, I guess.
I wonder what the silver basis is now, does anyone know?
I think it’s about 3.45% to the March contract, so the big banks will be quite happy with that, buy bullion and short the March futures.
Oops, my maths was out, nearer 2.39%
“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.”
― Norm Franz, Money & Wealth in the New Millennium: A Prophetic Guide to the New World Economic Order
I see it is difficult to come up with a good analogy of why short selling is a problem. You can’t sell a boat twice because of physical limitations. Stocks are fungible though. Reminds me more of a bank loaning out more money than it had in deposits. Loaning out the same dollar twice.
Mish – Isn’t selling something you don’t have the essence of Fractional Reserve System? Banks continuously create money to lend that no one deposited in them granted that bank lending is backed by collateral. At the time of GFC banks did not care about collateral they were busy collecting fees. I guess stock brokers figured they can collect order of magnitude higher fees by adopting this practice.
I was thinking along those same lines.
I this coruption or is this an issue of transparency where the parties don’t have up to the minute knowledge of what shares are lendable? Sounds like this is a problem arising from lack of transparency and timely reporting
2nd try as it seems my post from hours ago went into the bit bucket.
To those that follow silver spot on Kitco – did you notice that the Bid/Ask spread for silver is now $1? I don’t ever remember seeing the spread being anything but 10 cents in the last 12 years.
Netflix is raising prices again. Up 40% in 5 years. My AT&T streaming service started at $35 four years ago and is now $65.
Youtube TV increased their service about 25% last year.
inflationary?
If you look at something like cell phone prices over time….and cost of cell phone plans over time……you see some interesting trends.
The price of phones has slowly been going up since the iPhone was invented.
The cost of cell phone plans has been a very long term deflationary trend…..until 2020, when it went into positive territory.
Too soon to say if those trends mean all that much….but worth watching.
Category problem. A “cell phone” is not the same thing over time. Also, cars, houses, etc. But super “not the same” in the case of anything electronic.
This “category problem” is a source of so much confusion. Frustrating and painful to watch.
Netflix is becoming a content creator along with being a content conduit. That money has to be recovered somewhere.
If the BLS used internet charges in the CPI basket, they’d have a substitution policy like they do with cost of canned food. Change brands to a cheaper one. The cost of free TV over an antenna would be the substitute and therefore there was no inflation. Other than that, you won’t own anything in the future, you will rent it and you will be happy.
Crazy…. Lots of wealth has been created in the U.S. this past year. On the average the consumer has seen their discretionary income go up and debt go down.
There are 312 U.S. cities with a typical home value of at least $1 million — 45 more than a year ago.
The one-year net gain, a 17% jump in million-dollar cities, is the largest net gain in at least a decade, and follows a decline in 2019
More than 70 percent of the million-dollar cities are concentrated in nine coastal metros, primarily San Francisco, New York and Los Angeles.
I don’t know….it just looks to me like there has never been a more important time to own a home…in terms of either participating in the rising wealth effect…..or conversely, getting left behind forever, as wages stagnate.
It’s unrealized capital gains rather than an increase of wealth I would argue. A big percentage of people weren’t working then and consequently not creating any wealth. It’s an illusion created by the FED. It reminds me of Mark Twain’s semi autobiography book “Roughing It” in which he gives the best and most hilarious account of a financial bubble I have ever read in the chapter “Chapter XLIV. Flush Times in Virginia City”. He was a newspaper reporter there at the time. The more it changes the more it stays the same.
How is “unrealized capital gains”….aka equity in your house….not a form of wealth?
For individuals it’s included in most statements of net worth, AFAIK.
Because until you sell it it’s worth is virtual. Real Estate as you know isn’t very liquid compared to most financial instruments so it’s difficult to know the true price until you sell it. However I recognize that you can use them for collateral for loans for real money.
I read all those Twain gold rush era stories when I was a kid, but I’ve slept since then.
Did the Virginia City Bubble trend look anything like this?
I have fond memories of both Virginia City and Carson City from my childhood. That was some time after Mr. Twain passed through there, so I assume there must have been an eventual recovery. 🙂
You know Shakespeare and Mark Twain! Sir, you are a gentleman and a scholar. I think the Virginia City silver boom and bust was much quicker something like two years. What I liked is that he got the mood of the people so right and the description spot on. The role of newspapermen then is the same as it is now, cheerleaders paid by the companies to praise their mines and prospects. Truth never came into the equation. The stock market today is like silver mines in Virginia City 1862, a few good ones, some mediocre but most are at these levels frauds.
Virginia City never recovered once the Comstock Lode ran dry in 1880. At its peak it had 25,000 residents. It now has only 900.
When I was there (1960?) it was a booming tourist trap full of beautiful old restored saloons with names like Bucket O’ Blood…..Bonanza was a newish TV show that was very popular…..I remember immense piled tailings everywhere…..which were no doubt full of lead, mercury, and arsenic. I was a little boy with boots, hat, and shiny pistols that shot caps…I fit in perfectly. They already had open carry.
Route 66 vacation…..one of several. In those days you could take a ride in a motorized mine cart…through an old shaft underneath the State Capitol in Carson City….not sure if that still exists or not.
Twain, Bret Harte, H.H Munro, P.G. Wodehouse, Chekov, Flaubert….I was an equal opportunity short story fiend for a while. I’m another kid who owes a lot to the person who got him his first library card (my mom)……we lived out in the country, past the last school bus stop…you get the idea.
I am from small town Ohio and I remember spending lots of time in the huge library that Andrew Carnegie built for the town. One of the best social investments ever made. I never made it to Virginia City but I did make it to Cripple Creek Colorado.
The crux of the problem is delivery of stock which is the job of the DTCC. The Depository Trust & Clearing Corporation (DTCC) has been accused many times of allowing naked short selling as far back as 2007. It has been sued several times as well for non delivery of stock. Regulation SHO was supposed to clarify the issue but it looks to be outdated now or more likely it is being ignored. If you overhaul the system to one-day delivery no matter what the problem could be solved. Naked short selling is the same thing as counterfeiting and should be punished the same way. Wall Street gets away with a lot because the company when caught pays a fine and that’s all. If you wanted to cut naked short selling really illegal then you must give fines and prison sentences to the individual who do it and who authorised this illegal activity. That would send a message.
MMs and BDs, if they had any position, were long, and made loot on this move lending out shares. They weren’t “exposed,” as nothing bad happened to them.
The BDs and MMs weren’t “exposed” on this move. If they have any position, they are long when they loan shares out to others to short. The BDs and MMs have made loot on this move. There’s no way they “learned their lesson” from this.
Check out the fraud at USO. They didn’t honor trades in March and April and only notified traders of it later. Now they are getting sued. The fix to this problem of speculation is a ban on all derivatives. Period.
“The fix to this problem of speculation is a ban on all derivatives. Period.”
Too drastic.
Transparency, yes, as in eliminating the allowance in the CFMA for investment banks to hide positions in futures, options or derivatives from public scrutiny.
Banks are given far too much trust, this is how the Sub-prime was enabled.
Hmm, post deleted?
Ok I’ll try again because it is important and brings to light just how badly rigged the system is.
There is no interest on WallStreetBets in silver. This is a distraction by bot post and hedge funds.
Silver is the sucker’s play.
Saw your earlier post. Thanks for that. I don’t follow the Reddit crowd, but I appreciate the intel.
I put 15k in GME, fully ok with losing it all to contribute to the GMF (Giant Middle Finger). Reddit is fired up about it too… hundreds of thousands of people with 300 or 500 bucks all with the same attitude. They can stand to lose it, and see it as a way to strike back against decades of blatant corruption. The government certainly won’t.
I have a limit order at 5k, just to rub it in.
I feel like Furry Horn Hat Man, standing on the Senate floor!
Feels really good. If you have a bit of cash to spare, its more fun than Vegas…. like Vegas, but with a helping of quasi moral superiority.
It’ll probably fill the gap, the way it looks. Some rush. More like a pump and dump.
“It’ll probably fill the gap, the way it looks. Some rush. More like a pump and dump.”
Having watched slv for over a decade, price trends between $13 to $17 to where long or short bets can be relatively safe, except in 2011 where it dramatically spiked to ~$50 and immediately fell back to that trend.
If WSB is correct that JPM has some control of price, the total market cap for silver is $1.4 trillion.
The move this weekend in futures was probably either an intended head-fake by TBTF prop traders – a “dare” to WSB, or mass speculation that WSB “might” be able to beat JPM, but the simple math on total buying power they’d need doesn’t add up, it would take absolutely massive amounts of capital/leverage to do.
I’d be more inclined to initiate a short here, but that I support the idea WSB promotes, and, I very seldom bet on precious metals….definitely not crypto’s.
Position size is how I manage risk. No real harm done…. 🙂
But just for grins…it looks like the volume is there at 25 on SLV to hold that level…….it’s riding the rising 50 day EMA, and on the long term chart there is a bullish crossover on the MACD. Oscillator says neither overbought nor oversold. The 150 EMA seems to be another level of support.
So….silver doesn’t really need Reddit….it’s doing fine on its own. I expect you’re right about the head fake.
If you’re buying SLV, then you’re buying a derivative through Morgan Stanley, Citadel, etc.
Buy the metal or buy the miners.
Don’t worry. Big Chief Warren will give some grinning hoodlum a harsh scolding for the media simpletons.
Citadel = TBTF, TBT fine, TBT even call out, as they process 40% of all trades, including those ‘free’ for the muppets,
Mish, in your example where:
Person A buys 1 share and it gets loaned out to Person B who shorts it to Person C who buys it and it gets loaned out to Person D who shorts it to Person E who buys it the net effect is still just 1 share:
A (+1) -> B (-1) -> C (+1) -> D(-1) -> E(+1) = +1
There is no naked shorting here because no shares were created, a single share was just transferred multiple times. The right side parts of this equation (B->E) are essentially just side bets between parties B->C and D->E.
It’s not much different that leasing an apartment and then subletting it to someone else who sublets to someone else and so on.
Naked shorting is when you sell shares that don’t exist (or you don’t own). If person A sold 2 shares to person B to short that would be illegal.
That’s not quite true.
There is the transference of just one share, true, but it must be bought back 5 times to restore things. That’s not just one share, it’s 5.
And to get 5 shares shorted you must sell that share 5x without any purchase to offset it.
If it looks like a duck and quacks like a duck….
So one share has made it so that 4 people are short? How will all 4 people get paid?
This is my understanding of it as well.
What happens if Person A refuses to lend his 1 share? Person B won’t be able to deliver to C on settlement date, which now means D won’t be able to deliver to E and so on down the chain. The sum failing to deliver will be far greater than 1 share, indicating they’re all naked short.
Has anyone noticed (on Kitco) that the spread on Bid/Ask for silver has gone from 10 cents to one dollar since shortly after the world silver markets opened last night.
I guess im part of the problem looking at my slv position this am lol. Pelosi said she’s coming after the reddit group with some of them even making sound like they are going to collect individual names and prosecute them. How laughable. This will surely help congress 15% approval rating. I’m sick of this bs id just assume it burnt down.
Fractional reserve shorting.
The restrictions should be placed on the shorts which is where you can lose more money than invested. No one is going to go belly up being long either the stock or the options. The risk of default is with the shorts and that is where the increase in margins should come from, not the retail longs.
As you rightly point out you can short one share of stock multiple times, but for each short there must be a conractual long. So this alone shouldnt lead to a massive squeeze unless there are cascading failures in the settlement chain.
What leads to a squeeze is parties pulling the stock off lending.
The simple act of moving stock from a margin account to a cash account , if performed by a large enough percentage of the float in a stock that has > 100% of the float sold short , will blow up the chain and force a squeeze.
SOG
Nice post. Long overdue!!!
I have a buddy who told me he was buying into Game Stock last week. I was laughing knowing they are phasing out of discs. $80,000 plus later, I was crying.
I do admire these people for exposing this.
I wonder how many are taking profits and how many will be bag holders. I suspect more than few.
There’s a pretty big “dualism” on WolfStreet.com. Articles like this imply an opinion that is populist. However, I get routinely “moderated” by Wolfstreet any time I say anything truly critical of millionaires and their ilk The comments never appear. I didn’t buy a mug, though
Go figure
“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.”
This is a stretch, though yes, the Fed makes these things easier, the decision to break the law and counterfeit shares wasn’t the Fed.
That’s like blaming a homeowner for a burglary because he left the back door unlocked.
It was the burglar’s decision to enter, steal.
and trump didn’t technically tell people to overrun the capitol so he’s not guilty of incitement (wink, wink, nod, nod)
Ah, good point, forgot about Powell’s suggestive language to use low rates for illegal schemes, not just speculative stock buying.
I’ll let you do the honors and post us a link or quote of it.
Which is the better investment philosophy; Try to gain or try not to lose? The choice is as simple as that. It goes something like this: “I should have known that (stock, commodity, crypto) was going to really go. All the signs were there, but I missed them.” OR, “I could have sold that (stock, commodity, crypto) for a nice profit, but I thought/hoped it would go higher. I just held on too long. Now I’m losing money.” Another one; “I got out way too early and the (stock, commodity, crypto) just kept going up even though the fundamentals were really bad. If I just had held on, I would be a millionaire now.”
The internal recriminations are never-ending. The only way to be sure you don’t lose is to never play the game.
You don’t have to be a rocket scientist to know the stock market is a rigged game. This is the reason I generally stay out of stocks…..because the risk (imho) is not what is generally believed by the public, There is still a perception, reinforced by books, influencers and famous people….that the stock market always gives a decent return over time for those who buy and hold good companies ( and now indices) and stay the course. I don’t believe this is necessarily true. Since 2009 I am an occasional trader, but never a stock investor in that old-school sense of the word. This is a major tenet of my investing philosophy, such as it is.