SEC Charges Two Traders in Meme-Stock Wash Trading Scheme

abdelaziz Fathi

The Securities and Exchange Commission charged two traders in a wash trading scheme that resulted in more than $700,000 in illicit profits.

Centered on trading derivatives of so-called meme stocks, the SEC accuses Suyun Gu and Yong Lee of taking advantage of the maker-taker model in options markets to collect liquidly rebates offered by a number of stockbrokers.

The Florida resident and his business associate simultaneously placed buy and sell orders for the same meme stocks, including GameStop. While the practice leaves their actual exposure balanced, the net result was that their risk-free positions yielded rebates thanks to the pricing model offered by broker-dealer platforms.

As some exchanges reimburse traders for providing liquidly through their market participation, Gu executed more than 11,000 trades with himself, netting at least $668,671 in liquidity incentives. His partner, Lee, also executed 2,300 that netted him $51,334.

The alleged subterfuge went something like this: the defendants selected far out-of-the-money put options on some meme stocks, assuming that such bets “would be easier to trade against themselves because interest in buying the ‘meme stocks’ and related price increases would make put options on those stocks less attractive,” the SEC explains.

In a parallel statement, the SEC said Gu and Lee falsely represented they had made bids, and while the washed trades had taken place to create an illusion to encourage other investors to trade against their genuine orders and move the market for their own benefit.

The agency further explains that the dodgy activity impacted the market as it skewed the volume in certain option contracts and induced other traders to place trades in otherwise illiquid option contracts.

Even more suspect, two brokers closed Gu’s and Lee’s accounts in March over wash-trading concerns as the sketchy trading pattern suggested their accounts were engaged in arbitrage. However, they managed to continue their questionable scheme through mid-April by opening accounts in other people’s names. They were able to access their accounts through virtual private networks to mask their illegal activity, the SEC said.

Without admitting or denying the allegations, Lee has agreed to settle the SEC’s claims and pay $77,000 in disgorgement, fines and interest. He also agreed to a securities industry ban, according to a consent order. Unlike his partner, the SEC said it will proceed with litigation against Gu in a federal district court.

“As alleged in our complaint, Gu and Lee engaged in a deceptive wash trading scheme to game the exchanges’ maker-taker programs and take advantage of market conditions associated with meme stocks trading. This case demonstrates the SEC’s ability to quickly investigate and expose complex trading schemes, including those conducted during times of significant market volatility,” said Joseph G. Sansone, Chief of the SEC’s Market Abuse Unit.

The charges against Gu and Lee were part of a broad US crackdown on dramatic price run-ups in heavily shorted stocks, promoted by retail investors’ groups on Reddit’s boards.

The SEC said it is parsing the activity to probe market instability and see if there was deliberate manipulation or fraudulent intent more broadly on stock markets.

The agency added that its commissioners are working closely with fellow regulators, including FINRA, and stock exchanges, to assess the situation and review the activities of brokers and other market participants.

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