The SEC Needs to Step In

These days, former Clinton's Under Secretary of Commerce Robert J. Shapiro is a Senior Fellow at Gergetown’s McDonough School of Business. Shapiro doesn’t buy the tale of small online day traders having teamed up on Reddit against Melvin Capital's malignant plans to wrestle GameStop (GME) stock to the ground. .

Shapiro has analyzed publicly available GME daily data data: trading volumes, prices, short sales and holdings of big institutional players. To him the data suggests that, far from being the instigator, the Reddit crowd was instead a very marginal player in a battle between large hedge funds. (https://bit.ly/NoReddit) In its peak trading week, over 150B worth of GME stock were transacted, in blocks large enough to exclusively point to hedge funds transactions. No matter how solidary had the Robinhood Jacobins remained, they would have never been able to muster such transactions.

Interestingly, at least 20 million GameStop shorts were “naked shorts”: never borrowed and never delivered to their buyers. A naked short seller/stock borrower doesn't deliver the stock when due. Its collateral or its broker eventually covers it. But in the meantime, flooding the market with that stock drives its price down – which is all the naked short seller had intended. Understandably, the SEC has banned naked shorting, as it artificially depresses stock prices and throws the markets in turmoil.

There are worrying parallels between GME and JP Morgan’s “spoofing” of the silver market (for which Morgan have agreed to pay the SEC close to $1B , back in September 2020 https://bit.ly/JPMorganSilver) Unlike naked shorts, spoofing takes place in the derivative markets. Traders flood the market with large derivative orders they never intend to complete. Like naked-shorting, spoofing moves the market in perpetrators' target direction. Needless to say spoofing is also illegal.

The SEC must subpoena hedge funds records to get to the bottom of this mess. This is quite a test for Biden&Co. Will they pick the right fight and do the right thing? Or, will they merely name a commission to issue an insipid report a year from now?