In Brief:
- SEC charges two people for participating in a fraudulent scheme involving Meme-stock options.
- The guys used a type of market manipulation known as “wash trading” to illegally receive liquidity.
- One of the men involved kept the scheme going even after his broker-dealer accounts were closed.
The Securities and Exchange Commission(SEC) charged two people on Monday with engaging in a fraudulent trading scheme utilising so-called “meme stocks” in order to profit from a rise in retail trading fueled by social media in early 2021.
Suyun Gu and his friend and business associate, Yong Lee, of Florida, allegedly utilised a sort of market manipulation known as “wash trading” to take advantage of a “maker-taker” arrangement in which an exchange reimburses liquidity providers for their market participation, according to the regulator.
According to the SEC, in a maker-taker scheme, a trade order sent to an exchange and executed against a later received order creates liquidity and results in a rebate from the exchange.
The SEC said, Gu became aware of the surge in volume and volatility produced by meme stocks and created a scheme to profit illegally from rebates by trading options on such stocks with himself using several broker-dealer accounts.
According to the lawsuit, Gu utilised broker-dealer accounts that offered customers rebates to place initial orders on one side of the market, then used broker-dealer accounts that didn’t charge fees to take liquidity for his subsequent orders on the opposite side of the market.
As per the SEC, Gu made over 11,400 trades with himself, earning at least $668,671 in liquidity rebates, while Lee made approximately 2,300 trades with himself, netting $51,334 in rebates.
SEC said, “in addition to collecting these ill-gotten rebates, the wash trading scheme allegedly impacted the market as it skewed the volume in certain options contracts and induced other traders to place trades in otherwise illiquid option contracts.”
According to the SEC, Gu and Lee chose far out-of-the-money put options on various meme stocks when choosing items to trade.
Although people are adopting cryptocurrencies widely, they are still blind to a lot of rules and regulations. Recently, SEC chairman Gary Gensler provided information about the crypto market in an interview and talked about Crypto Regulations.
After several broker-dealers cancelled Gu’s and Lee’s accounts in early March, Gu continued the scam until mid-April. Gu was able to conceal his behaviour by misrepresenting to broker-dealers his trading technique, utilising accounts in other people’s names, and accessing the accounts over virtual private networks, according to the SEC.
Without admitting or denying the SEC’s allegations, Lee agreed to pay $51,334 in profit, plus $515 in prejudgment interest and a $25,000 civil penalty. Gu’s case is currently being debated in court.
