TL;DR: I believe there’s a trove of information buried in Overstock that will tell us exactly what Shitadel and friends are doing. In fact, I think they are working to an identical playbook using modern versions of the same techniques to manipulate the market.
Sun Tzu is the good shit:Apes in January:
If you know neither the enemy nor yourself, you will succumb in every battle.Apes in March:
If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.Apes in May:
If you know the enemy and know yourself, you need not fear the result of a hundred battles.
Edit: Pulled on who some of the people named are. One of them, Thomas Tranfaglia was one of the executive implementors of Merrill’s do-not-flip system and now works for Jane Street.
Edit 2: I received a messaged from a fellow redditor who wishes to remain private. They had a theory that may explain where the magical morning shares on IBKR and others appear from, which relates to a quote regarding share generation through reverse conversions. I am reproducing their comment here unedited:
I’m a total ape and just know how to google what a Reverse Conversion is so here’s my interpretation. Please let me know if this is logical
a reverse conversion is a way of creating synthetic longs or shares by buying a put and call at the same strike price and I dont konw why but that will appear as a long position on whoever owns those option’s books, and short the stock at the same time driving down the price. Then they sell those same stocks to prime brokers (IBKR, Fidelity, TDA), who then lend out the shares again to the naked shorting hedge funds.
That then get converted by a market maker into a reverse conversion, creating a long position and shorting the underlying stock. Then those shares created by the conversion get sold back to the prime brokers… holy shit
thats why the borrowing rate is so low, thats why theres 400k shares always available to borrow every morning, that drop to low thousand or hundreds then go back up every morning the stock is hard to borrow and easy to borrow at the same time. its the same people borrowing the stock who have certain market making privileges to always return/sell shares to the lender who are making a killing off borrowing fees and dont question where theyre getting the stock from but if anyone else trys to borrow, well theyre shit out of luck theres no shares for those guys
Tagged as possible DD because my wrinkles are pretty smooth.
After listening to Lucy’s AMA, several things she raised in her storytelling sent chills down my spine. It all coalesced with what DrT and Carl have been saying, which has been “dig into overstock”
One such thing mentioned was Wolverine Trading, and how Goldman told them “we will let you fail”.
So I dug a bit, and I found this old article from Rolling Stone: https://www.rollingstone.com/politics/politics-news/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-244035/
Which then led me to this frankly hilarious accidental release of things they were attempting to forever seal. Essentially, they accidentally showed their playbook. The entire document is fucking insane and deserves to be read in its entirety.
Laboriously hand-transcribed snippets follow. Yay for ancient PDFs with no OCR.
This first segment is, I believe, from things entered into the public record and available prior to this motion
Overstock was so hard to borrow that clearing brokers in 2006 charged borrow fees as high as 35% annualized.
Everyone “on the street” constantly talked to other brokers looking for stock and therefore had a realistic, shared sense of how hard it was to locate stock and how expesnive it was to borrow
Facing the same supply constraints as all of the other brokers, Defendants decided to manipulate supply and demand for short sales by consciously opting not to settle certain short sales in hard to borrow stocks
Goldman and Merril decided to create FTDs in their affiliates GSEC and Merrill Pro so they could correspondingly create “supply” in Goldman Sachs and Merrill Lynch. Millions of shares of FTD were concentrated in GSEC/Merrill Pro so that millions of shares of corresponding “supply” could be artifically created in Goldman Sachs/Merrill Lynch
Goldman’s own hedge fund clients remarked on how they would ask “to short an impossible name and be shocked to learn that Goldman’s rep can get it for us”
Short sellers typically pile in to the same securities, which increases short interest in a small number of stocks. Client shorts were typically concentrated in the red hot stocks
Goldman Sachs circulated lists of the top shorted stocks to clients [..]; the data Goldman Sachs circulated included the false, inflated short interest data (emph mine)
The fails created supply in excess of six times the average daily trading volume of Overstock
Merrill’s decision to intentionally fail these trades was accomplished through what Merrill called the “do-not-flip” process. [..] That process is a process by which Merrill Pro does not borrow stocks to settle those trades, but rather fails them. After Reg SHO, Merrill Pro put the do-not-flip system into place in Aug 2005. Thomas Tranfaglia, Linda Messinger and Peter Melz were the Merrill execs who decided to do this
Who the fuck are these people I hear you ask?
Thomas Tranfaglia now works at Jane Street, a company long suspected of being involved in this shit.
Linda Messinger now works at Cowen and Company
Peter Melz may or may not still be the CFO of CF Secured, LLC (a subsidiary of Cantor Fitzgerald, LP) . Brokercheck says he’s no longer employed. His Linkedin claims otherwise.
Merrill Pro agreed to fail trades for their market-making customers and stopped borrowing shares for their short sales.
Millions of shares of reported short interest in Overstock were created by the naked short sales that Defendants decided in advance to fail to deliver, and therefore the short seller had no negative rebate cost to factor into its short selling decision
Merill Pro and GSEC clients were naked short selling Overstock in the form of reverse conversion trades.
Merrill and Goldman also effected fraudulent trades to extend the duration of FTDs. These trades allowed Defendants to avoid regulations designed to ensure that fails did not persist past thirteen days after settlement date
Merrill instituted policies to accommodate manipulative trading styles such as “killing” required buy-ins, and providing clients, including Hazan with information that would enable them to “sell into” buy-ins, resulting in matched trades between Merrill Pro and their clients.
Hazan, as a result of Merrill working to get Merrill Pro to intentionally FTD his trades and Merrill informing him up front that Merrill would fail all trades, and knowing he could roll the fails longer than 13 days, proceeded to naked short sell millions of shares of overstock for over a year.
an internal Merrill Pro email notes that traders “were knowingly putting on shorts and then basically rolling them every 13 days”
The naked short selling resulted in short positions on Defendants’ books and records, even though Defs had never borrowed stock and made delivery to settle the short position.
This artificially high short interest caused by the naked short selling was reported to the marketplace as bona fide short interest. Defs. actions injected false information into the marketplace [..] in the form of artificially high short interest figures [..] so that market participants would be induced to view the stock more negatively, creating downward price pressure
A Merrill email referse to “Fuck compliance” in response to Merrill’s manually failing the first trade for Hazan
Defendants were members of an industry group that expressly referred to Overstock as an “enemy” and discussed “neutralizing” a potential Overstock expert witness in this case
FUCKING WAT?!
When overstock obtained passage of a law that would require disclosure of clearing firms’ FTDs (which is kept secret from the public), the Goldman Defendants gloated when their lobbying organization got the law overturned, with one person remarking that Goldman was seeing a return on its lobbying investment
The January 31 2012 Wolfson Order explains how Wolfson [..] proceeded to naked short sell 491 reverse conversions to prime brokers, details the precise trading methodology, gives examples of how the reversals worked, including pricing and the illicit profits made from the scheme, and how it worked on their clearing firm’s books and records.
I linked the order. Need an ape with wrinkles to dissect it.
The order explains that the conversions were purchased by prime brokers, who purchased the non-existent shares in order to acquire a long stock position that the prime broker could loan out, and receive significant fees from the borrowers.
The order also details the sham flex reset transactions used to extend the failes, explaining the purpose was to reset the Reg SHO clock at the clearing firm without any stock ever being delivered.
FLEX: FLexible EXchange (FLEX) options combine the benefits of customization with the advantages of listing and are available on all option products listed on NYSE American Options. Both Equity FLEX and Index FLEX options allow investors to customize key contract terms, including expiration date, exercise style, and exercise price, and to take advantage of expanded position limits.
So hiding FTDs via sham options. Yeah, we long suspected that.
The document also mentions that Hazan and Arenstein orders had similar details:
https://moass.info/wp-content/uploads/2021/05/34-60441.pdf – Hazan
Arenstein is supposed AMEX 07-71, but I cannot locate that document. I did manage to find these documents without numbers:
https://moass.info/wp-content/uploads/2021/05/SArensteinSBA_Decision_072007.pdf https://moass.info/wp-content/uploads/2021/05/BArensteinALA_Decision_072007.pdf
I also found this document from an SEC meeting: https://moass.info/wp-content/uploads/2021/05/s71907-336.pdf
Narrowing the OMM exception is not an option; it must be eliminated entirely. As the AMEX/Arenstein decision makes clear, FLEX options and other equity derivatives can be used to hide and roll failed position.
Anyway, back to the accidental reveal document:
The documents, testimony and pleadings Defendants seek to seal in this call all concern the same scheme described above.
So shall we begin? Here’s some excerpts of the evidence they wanted buried before their smoothbrain lawyer attached them all to the motion and entered it into the public record. Much of this is from discovery.
In a half page email, a Merrill executive suggests “we might want to consider allowing Sage customers to fail”
In June 2005 Tranfaglia emails “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we have to borrow them? We want to fail on them”
An August 2007 email between a Merrill employee and a Goldman employee forwards the Arenstein sanctions order and Merrill employee notes “I am sure you saw this. Our boy”, and the Goldman employee responds “nice… You think there will be any fallout on clearing firms?”
A January 2006 telephone transcript reflects a discussion between Merrill’s compliance officer and another employee regarding the fact Arenstein is not making a market in Overstock, that he keeps “recycling” his short sales in ten to fifteen stocks and this is “not okay”
This internal GSEC email refers to Scott Arenstein and his entity SBA Trading “providing very aggressive liquidity to Goldman” in the form of conversion trades with Goldman Sachs’ securities lending group. A senior GSEC executive observes that “that doesn’t make sense” [because a naked short seller like Arenstein had no actual stock to sell to a securities lending desk]
Ex 63 is a list of compliance bullet points that refers to using conversions to “Create inventory to allow customers to short.” Ex 89 is an email that refers to Goldman Sachs “intentions to create supply and perpetuate selling in stocks with a large amount of short interest.”
“As far as I’m concerned, this is totally unacceptalbe – we are failing when we have over a million shares of stock available… Is there a blanket agreement that we allow every market maker client to continue failing even if there is enough availability?”
September 2006 telephone transcript between Merrill exec Collin Carrico and a client contains a discussion by Carrico about how a trader could do non-market making trades within a market making account, which is illegal, but would never get caught, and discusses strategies to carry out this illegal activity.
a presentation Merrill gave to regulators regarding its Reg SHO tracking system. The key point in this document is that Merrill says in multiple places its system requires “delivery” of stock. Messinger testified that this was false – their system did not require delivery.
“We have to be careful not to link locates to fails because we have told the regulators we can’t.”
Cohodes transcript that Lucy referenced:
A. I think the securities lending market is just like the mob. I think it’s completely rigged. It’s a completely manipulated black hole, non-transparent market.
Q. Now, when you say you think they’re just like the mob, are you referring to Goldman Sachs?
A. Yes. I think Goldman Sachs is like the mob.
Q. And are you referring to them in particular or them and the rest of the market altogether?
A. I think Goldman Sachs is a racketeering entity that does whatever they can to make a dime without conscience, thought, foresight or care about ramifications. I think they are cold-blooded and could care less about the law. That’s my opinion. I think I can back it up.
So… yeah.