SEC takes action against two for wash-trading
The US Securities and Exchange Commission has filed a complaint against two Robinhood users alleging a wash-trading-based arbitrage scheme that has utilized meme stocks.
As per a September 27 complaint, Suyun Gu and Yong Lee had taken advantage of varying trading fee schedules offered by several retail brokers in order to extract arbitrage during wash-trading.
The SEC has estimated that by trading between venues offering rebates and those who charge no fees from market takers, the two have generated over $1.5 million worth of rebates in what seems like a wash trading scheme.
According to reports, Gu and Lee are believed to have kept more than half of the rebates as profits, each of them profiting $668,671 and $51,334, respectively, during the wash-trading activity carried out in between February and April of this year. The duo has been reported to execute 11,400 and 2,300 trades through the scheme, respectively.
Further, the pair are also accused of targeting put options contacts for meme stocks, including AMC Entertainment (AMC) and GameStop (GME).
The complainant explained that Gu and Lee believe that other marker participants’ interest in purchasing meme stocks and relating price increase would result in put options on those stocks less attractive, hence making it easier for Gu and Lee to trade with themselves.
While it is not explicitly mentioned about the trading venues in the court documents, it is hinted the pair were using the popular fee-free investment app Robinhood. The documents further detail that that Gu concocted the scheme after he watched the CEO from “Broker-dealer B”, highlighting in a February court testimony that his company does not charge taker fees from its customers.
In the same month that Vlad Tenev, CEO of Robinhood, testified before congress about the market volatility relating to GME and other meme stocks, Gu had started the process.
The so-called “meme stocks” like Gametop and AMC had become widely popular due to Robinhood and Reddit-based pump and dump group r/wallstreetbets saga earlier in 2021.
Robinhood had also been a part of the controversy in January 2021 after the platform had blocked trading on GME amid the short squeeze hedge funds led by the Reddit community r/wallstreetbets.
The group had responded promptly, converging on crypto when Dogecoin pumped by 980 per cent on January 28, the same day Robinhood had acted to dampen the meme stock speculation.
Robinhood had since then estimated that Dogecoin accounted for 62 per cent of its total crypto revenues during Q2.