# WHERE ARE THE SHARES?? A Beginner's Guide to Hiding 100 Million FTDs - (FINAL)

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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/leavemeanon](https://www.reddit.com/user/leavemeanon/) | [Reddit](https://web.archive.org/web/20210605141015/https://www.reddit.com/r/Superstonk/comments/nsuf5l/where_are_the_shares_a_beginners_guide_to_hiding/) | 

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[DD 👨‍🔬](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22DD%20%F0%9F%91%A8%E2%80%8D%F0%9F%94%AC%22&restrict_sr=1)

## TLDR:

The system is rigged in favor of HFT firms. Because computers are really good at finding derivatives for cheap to hedge sales for profit, naked short selling is no longer *part* of the system, it is the system, short term, over and over and over. What we're seeing might be the product, and possibly the unraveling - of that system.

Man that was melodramatic. Hey, I wouldn't believe me either, to be fair. I still really don't believe it.

//

Acronym Index and Glossary

*Because I wish the SEC would include these, for the Fed if nothing else...*

ETF - [Exchange-Traded-Fund](https://www.investopedia.com/terms/e/etf.asp) -

This is a more detailed explanation than the rest, because ETFs are *incredibly* important to understand.

An *Exchange-Traded-Fund* is a fund who's portfolio holdings is represented and traded on open exchanges via shares of the fund: ETF shares. Simply put, ETFs are hybrids between funds and stocks. They, like any fund, hold some portfolio of securities. And like any stock, they trade as shares on open exchanges. The fund's portfolio is typically designed to track some index or sector. Thus, an investor with some opinion about the ETF's portfolio can trade the ETF shares to eliminate some of the risks involved in trading single equities.

The *price* of ETF shares is determined at market value, based on their trading in the market - like any equity stock. The *value* of ETF shares is called their NAV, and when NAV differs from price (which is always true in some ETF, somewhere in the world), a profit opportunity exists via arbitrage (see [Chapter 1 for more](https://www.reddit.com/r/Superstonk/comments/nplv75/where_are_the_shares_a_beginners_guide_to_hiding/?utm_source=share&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_medium=ios_app&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_name=iossmf).

ETFs also provide a source of dynamic liquidity in the markets. This is because Authorized Participants (APs), acting as 'referees', oversee the markets and allocate supply to meet demand. APs are authorized to *create/redeem* ETF shares *with/for* representations of the ETF's portfolio. This mechanism is integral to liquidity provision, and helps align ETF share prices with their NAV.

The "creation/redemption" mechanism mentioned above is the bridge between *ETF shares*, "*liquidity*", and *particular securities*.

NAV - [Net-Asset-Value](https://www.investopedia.com/terms/n/nav.asp) An ETF's NAV is the value of the funds assets, minus liabilities. Functionally, for ETFs, the NAV is the value of the fund's portfolio, and because ETFs are only rebalanced a few times yearly, the *market price* of shares trading on open exchanges often differ from the NAV of those shares.

FTD - [Failure-to-Deliver](https://www.investopedia.com/terms/f/failuretodeliver.asp) - after the sale of a security, the seller (believe it or not) has 3 days to deliver the security to the buyer, otherwise the share is deemed failed-to-deliver - a FTD. FTDs should be rare, because they can build up and cause systemic issues, [as Patrick Byrne explains](https://youtu.be/I0WXg5T3cBE).

AP - [Authorized Participant](https://www.investopedia.com/terms/a/authorizedparticipant.asp) - "An authorized participant is an organization that has the right to create and redeem shares of an exchange traded fund (ETF)...." APs include Morgan Stanley, Goldman Sachs, Bank of America, JPMorgan Chase, and Citadel Securities. [BlackRock describes](https://youtu.be/iX7fOx5G40A) APs as referees, monitoring markets to allocate demand to meet supply - resulting in better liquidity and decreased volatility.

MM - [Market Maker](https://www.investopedia.com/terms/m/marketmaker.asp) - Market Makers, very generally, oversee markets and quote bid/ask prices to create a spread. They stand ready to buy or sell in their market, and they have algorithms coded to hedge these transactions and profit from arbitrage along the way. The are similar to APs in that they both monitor markets and ensure trades have counter-parties, however, the MM acts as a primary source of the APs information - MMs quote bid/ask spreads, and APs react to these spreads (in real time). This allows the MM to have more direct access to (and influence over) bid/ask quotes in their particular markets, however they rely on the AP to provide market liquidity via ETF creation/redemption.

HFT - [High-Frequency Trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp) - "High-frequency trading, also known as HFT, is a method of trading that uses powerful computer programs to transact a large number of orders in fractions of a second. It uses complex algorithms to analyze multiple markets and execute orders based on market conditions. High-frequency-trading is characterized by high turnover rates and order-to-trade ratios. Some of the best-known high-frequency trading firms include Tower Research, Citadel LLC and Virtu Financial." This is *how* MMs and APs profit from volume, HFT algorithms scan for arbitrage opportunities.

//

Preface

First of all and for the record, this ape loves his country 🇺🇸. I have no doubt that some apes love their's more, and I'd say that's awesome. I'd probable even say *c'est bonne* (and be rightfully mocked)

It's *because* I love my country, that I am concerned. Deeply.

And despite the fact that my *entire* understanding of the financial system is merely 6 months old and limited to what I can find online - there are much older, much wiser, and much warier opinions than mine. Tendies or not, I absolutely do not wish for disaster or advocate wishing for disaster. I hodl for the same reason I originally bought - I like the stock.

Secondly, I really don't advocate for *anything* except using your own brain, shiny or not, to come to your own conclusions. None of this, including my other posts/comments, is financial advice or intended to be defamatory in any way.

This series is essentially a brain-dump - resulting from my attempts to identify what the hell, *exactly*, has been going since January.

*Why listen to me?* - You shouldn't. Not at face value at least. I have no special insight nor expertise. I like logic and puzzles. That's all.

I may have gone wrong here, way way off even - I'm just not exactly sure how. *insert Michael Burry - 'Big Short' quote* So if you find holes to punch, *please*, punch away. We're all learning here. And frankly, in many ways, I'd love to be wrong on this.

//

Chapter 3: The Machine

Where we Stand

[Chapter One](https://www.reddit.com/r/Superstonk/comments/nplv75/where_are_the_shares_a_beginners_guide_to_hiding/?utm_source=share&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_medium=ios_app&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_name=iossmf) dove into ETFs, and the ever-growing role they play in market liquidity. In principal, the relationship between ETFs/underlying securities is like a hydraulics system. Securities have some of their supply distributed in various ETFs, and the buying pressures in these different markets are the pistons *squeezing* their respective market's liquid. As pressure (demand) builds in a given market, APs can dial pressure up in the ETF markets to force liquid wherever it's needed. *APs can only add pressure.* They cannot reduce buying pressure, except indirectly by providing supply.

This *pressure control* system is vial to keeping markets at bay and keeping ETFs aligned with their NAV. Overall, these are good things.

Chapter One explained the *mechanism* behind that *pressure control* system, and how APs profit from it through arbitrage: if there are price discrepancies between ETF shares and their underlying, APs are profiting on it.

[Chapter Two](https://www.reddit.com/r/Superstonk/comments/nrw9xi/where_are_the_shares_a_beginners_guide_to_hiding/?utm_source=share&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_medium=ios_app&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_name=iossmf) looked at options trading and its role in hedging. Both equites and options have Market Makers that hedge their sales with options, and I mentioned the fact that options create "synthetic positions" that mimic the returns of some other position. This creates yet another arbitrage opportunity, as price discrepancies in the synthetic positions and their *analogs* can be profitable.

A few apes mentioned in chapters [One](https://www.reddit.com/r/Superstonk/comments/nplv75/where_are_the_shares_a_beginners_guide_to_hiding/?utm_source=share&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_medium=ios_app&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_name=iossmf) and [Two](https://www.reddit.com/r/Superstonk/comments/nrw9xi/where_are_the_shares_a_beginners_guide_to_hiding/?utm_source=share&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_medium=ios_app&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;utm_name=iossmf) that a certain... (*don't say je ne sais qoui, don't say je ne sais quoi*...) 'something' was missing. Like trying beer for the first time and it's flat. I'm sure others knew what I was hinting at, and I'm sorry if it felt like I was pandering. I'm going for *no ape left behind*, and I think the overall machine is far better understood in light of it's inner workings.

//

Je Ne Sais Quoi

Okay all five question words let's go -

*Who?*

Citadel, *en masse*: an Authorized Participant, Market Maker, Broker Dealer, Hedge Fund, and probably a dozen other things.

*What?*

Wallstreet's God. Naturally, they adopted the triumvirate of Father Fed, the many (some prodigal) Sons, and the Holy Ghost of Liquidity - always there in the background to fill your purchase orders. Yeah, Citadel accounts for close to half of that Liquid Holy Ghost.

*When?*

For the last 5 years at least, but particularly in January 2021, and *specifically* on January 27th. Ken stated in the [Congressional Hearing](https://youtu.be/lxdp-wU3UZI) that, "on Wednesday, January 27, we executed 7.4 billion shares for retail investors."

*Where?*

Primarily on RobinHood, I'd imagine. At first, at least. Then, a few nanoseconds later, processed through Citadel's network of black boxes to find a better price than you, then sell to you.

*How?*

THIS is why I started with the boring details.

I get to skip this part. Arbitrage is how. Via ETF, forced hedging, all those ways we went through

now for the coolest, most ignored question word

//

Why?

( With a splash of how? )

Arbitrage is great, but it has one major problem. It doesn't make very much money, *per trade*. You're only netting small differences, because these arbitrage trades *should* be for equal things. The only reason arbitrage works is because of inefficiencies in pricing. This is where arbitrage meets its best friend: High Frequency Trading.

[Investopedia](https://www.investopedia.com/articles/active-trading/092114/strategies-and-secrets-high-frequency-trading-hft-firms.asp) includes four types of arbitrage among the 6 listed money-making strategies, one of which is *volatility* arbitrage. I think Ken said it in the Congressional Hearing, but I'm not sure -

HFT firms make SIGNIFICANTLY more money in VOLATILE markets.

I mean I can't believe I have to point this out, someone must be saying something, but this creates a CLEAR CONFLICT OF INTEREST when the HFT firm is an Authorized Participant.

*Why?* because, APs CONTROL THE LIQUIDITY in the ETF market, and, indirectly, the markets of the underlying securities.

Maximum volatility = maximum profit per arbitrage trade = *$$$$$$$$* for HFT/AP firms

It's a simple move and I mean - just pick a couple of GME's ETFs and look at ownership since 2015, I'd guess it's up 500% on average, probably more. Whether this was natural (as underlying price decreased) or intentional, I don't know. *But*, if there happens to be both 1) more volume in the underlying than in the ETF and 2) underlying NAVs consistently dropping lower than ETF price, APs have an opportunity for massive profit.

So to earn that $200m bonus, you look for an ETF with *just* the right blend of wimpy and popular. Then have your trading firm buy ETF all day, or turn the AP's "gobble ETF shares" dial up a few notches, maybe tell your buddies how cool the fund is, anything you can to increase buying in the ETF. AP is *required* to siphon supply from the underlying to meet the ETF demand.

Easy. Done.

Over time, your own ETF buying increases the price of your own holdings. And these are *funds*, they're meant to be stable. And many of them are illiquid - so when ETF buyers show up, APs likely *need* to siphon underlying shares. All this *siphoning* makes the underlying more volatile, so when you're responsible for putting the shares back to meet demand, you can take your sweet time and suck as much money as possible from regular investors. Every millisecond counts.

And as long as you keep buying ETF, or convincing someone to buy ETF, after each ETF rebalancing, the ETF inflation will dictate that ETF price is higher than NAV, *forcing* you, as an AP, to buy underlying until they equate (then maybe you buy again). I think you can see how this quickly becomes a vicious cycle.

Do I sound crazy yet? Oh, *long time ago?* I know, I've felt crazy for weeks. I cannot prove that this happens, I can only say that the system exists such that it is possible, and very profitable. And frankly it's very likely that the cycle is a natural byproduct of increasing interest in ETFs. Whether or not it's intentional:

"ETFs have grown to $131.2 billion in assets under management by 2016, up from only $3.9 billion in 2007 representing a growth rate of 3300% over ten years."

That information is remarkably hard to find, but [this Harvard paper](https://scholar.harvard.edu/files/kevin_pan/files/etfarbunderliqmismatch.pdf) mentioned it.

Oh wait, lol no it's not hard to find - [Statista (not sure if reliable but looks legit)](https://www.statista.com/topics/2365/exchange-traded-funds/#:~:text=The%20assets%20under%20management%20%28AUM%29%20of%20global%20ETFs,5.6%20trillion%20U.S.%20dollars%20of%20the%20global%20total.) reported -

"he assets under management (AUM) of global ETFs increased from 417 billion U.S. dollars in 2005 to over 7.7 trillion U.S. dollars in 2020. The regional distribution of the AUM of ETFs was heavily skewed towards North America, which accounted for around 5.6 trillion U.S. dollars of the global total."

Holy Liquidity Mother of Fed, that is a f*cking ton money. 5.6 TRILLION DOLLARS worth of North American stocks trading instead in ETFs. *All that illiquidity, all that volatility...* see what I mean?

//

GameStop, The Machine, and The House of Cards

I took some Philosophy in college. Non-metaphorically, even. And if you've ever taken a Philosophy class, you've likely asked yourself why everyone in it thinks everything has to be an argument all the time.

Well, as I would for my apes, I'll stand up for my fellow philosophers by saying that sometimes - and *particularly* when you don't know what the hell you're talking about - the safest way to move forward is to:

First, break things down into facts, or get as close as possible.

(Descartes currently holds the record at one... though, naturally, it's disputed. Getting all the way to 0 earns you a clinical diagnosis, and trying to prove it earns you *at least* one more, and possibly a PhD)

Then, use logic, as best as you can, to propose *new facts* based on the old facts. They call these new facts 'conclusions', I think. Or 'heresy', maybe, depending.

The *goal* of an argument, formally, is to reach a valid conclusion. The *utility* of these conclusions is... something non-philosophers bother with.

Valid conclusions are reached by using facts and logic mathematically. If the facts are verifiable and the logic is sound, the conclusion is valid.

So why is everyone always arguing? Philosophers, a significant portion of college kids, and, ironically, HFT algorithms, *think* in the structure of argument.

Alright lets try one -

//

Facts

Quotes [directly from the SEC](https://www.sec.gov/investor/pubs/regsho.htm) :

"Short selling is used for many purposes, including to profit from an expected downward price movement, to provide liquidity in response to unanticipated buyer demand or to hedge the risk of a long position in the same security or a related security."

and how *should* this done?

"Typically, when you sell short, your brokerage firm loans you the stock. The stock you borrow comes from either the firm's own inventory, the margin account of other brokerage firm clients, or another lender."

and if, say, there are no shares to borrow anymore, where else can shares be found?

"In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail")."

and, um, *why* is that legal?

*(try not to read this in Ken G's voice from the first congressional GameStop hearing btw... If you don't remember how it sounded, its eerily similar to Michael Scott - but really nasal like Steve has a terrible cold, and choppy like he's short circuiting from the cognitive dissonance.)*

"There may be legitimate reasons for a failure to deliver. For example...delays can result from transferring securities in physical certificateobsolete ... A fail may also result from "naked" short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives."

""Naked" short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, "naked" short selling contributes to market liquidity. For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time. "

Speaking of the hearing, here's another fact: Ken stated in the Congressional Hearing that, "on Wednesday, January 27, we (Citadel) executed 7.4 billion shares on behalf of retail investors. To put this into perspective, on that day, Citadel Securities cleared more trades for retail investors than the entire average daily volume of the entire US equities market in 2019."

I shit you not, [at 24:35](https://youtu.be/lxdp-wU3UZI).

He also said, "During the frenzied period of retail trading, Citadel Securities was able to provide continuous liquidity every minute of every trading day. When others were unable... or willing to meet the demand, Citadel Securities was there. I could not be more proud of our team."

//

Logic

If demand for a particular security *rapidly* increases, the AP, or some AP, must provide (as I've quoted a few times now) liquidity to meet that demand, even though the demand was for a *particular security*.

If supply is lacking in a *particular security*, APs have a responsibility to provide it. Throughout January 2021 and *particularly* on the 27th, there was unprecedented volume -

whether this was shorts covering, regular retail trading, apes gobbling GME pacman style, some of which are among the thousands of high schoolers with pandemic stimulus money and almost nothing to spend it on except a free iPhone app that lets them buy cool stocks they saw online like a video game at zero commission -

all of that buying pressure - much of which was heavily skewed toward a few dozen securities, likely required unprecedented liquidity in those *particular securities.*

As beaten to death at this point, ETF redemption and hedging are ways of turning "liquidity" into *particular securities*.

To take full advantage of *both* of those, it helps to be an Authorized Participant *and* a Market Maker in the markets in question.

//

Facts, again, but with some logic too

Directly from [Citadel's Website](https://web.archive.org/web/20210428124834/https://www.citadelsecurities.com/products/equities-and-options/) -

"Citadel Securities is a leading market maker to the world's institutions and broker-dealer firms. Our automated equities platform trades approximately 26% of U.S. equities volume....We execute approximately 47% of all U.S.-listed retail volume, making us the industry's top wholesale market maker. Citadel Securities acts as a specialist or market maker in more than 3,000 U.S. listed-options names, representing 99% of traded volume, and ranks as a top liquidity provider on the major U.S. options exchanges."

Citadel is a Market Maker *and* an Authorized Participant - capable of capitalizing on liquidity provision *and* hedging responsibilities.

but.. how again, exactly? Like, cash to GME, what's in the middle?

Hedging is the easy part. Well easier to explain at least. 2 options:punintended 1) directly sell short and hedge with some long options position. 2) sell calls / buy puts (as MMs, they can influence these prices and choose which trades to take), and then sell the shares you were forced to hedge with

I'm not *entirely* sure #2 is legal but #1 most definitely is.

Directly selling short is the way to go, though, because you don't increase the buy pressure, whereas hedging would force you to buy then resell.

I really should say: "Directly selling short is the way to go because you get to force the price down, whereas hedging would allow the movement to remain natural."

I've been reading too much of this shit...

Anyway, there's another way to sell without buying, directly forcing the price down: Get the shares from an ETF:

From [BlackRock's iShares IWM prospectus](https://www.ishares.com/us/literature/prospectus/p-ishares-russell-2000-etf-3-31.pdf?stream=reg&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;product=I-R2000&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;shareClass=US+Class&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;documentId=925868%7E926239%7E926348%7E925613%7E925577&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;iframeUrlOverride=%2Fus%2Fliterature%2Fprospectus%2Fp-ishares-russell-2000-etf-3-31.pdf) -

"...the Fund sells and redeems its shares directly through transactions that are in-kind and/or for cash, subject to the conditions described below under Creations and Redemptions."

*to the fine print we go*

"A creation transaction, which is subject to acceptance by the Distributor of the Fund, generally takes place when an Authorized Participant deposits into the Fund a designated portfolio of securities, assets or other positions (a "creation basket"), and an amount of cash (including any cash representing the value of substituted securities, assets or other positions), if any, which together approximate the holdings of the Fund in exchange for a specified number of Creation Units."

So if I'm reading that right, [any pile of securities, short sales, derivates, or cash] = [ETF shares]...

And, of course, it works backward as well:

"Similarly, shares can be redeemed only in Creation Units, generally for a designated portfolio of securities, assets or other positions (a "redemption basket") held by the Fund and an amount of cash (including any portion of such securities for which cash may be substituted)."

So *actually* -

[any pile of securities, short sales, derivates, or cash] = [ETF shares] = [Underlying Shares]

Oh, and to reiterate from the first post:

"To the extent the Fund engages in in-kind transactions, the Fund intends to comply with the U.S. federal securities laws in accepting securities for deposit and satisfying redemptions with redemption securities by, among other means, assuring that any securities accepted for deposit and any securities used to satisfy redemption requests will be sold in transactions that would be exempt from registration under the Securities Act of 1933..."

So, naturally, they don't have to report these shares.

You should really skim through that IWM prospectus. Especially the 'Creation and Redemption' section.

And, obviously, no physical shares are being exchanged - it's all data. Specifically, the ETF issuer treats the deposits as "redemption credits", basically looking at the 'asset/cash' pile and saying - *can't tell if that's ETF or underlying, so we'll just say it's both*. So if the AP prefers the underlying (to meet demand there), ETF issuer returns so called ["redemption credits"](https://www.sec.gov/rules/sro/nscc/2017/34-82193.pdf) for the asset/cash deposit, and these trade just like real shares.

Why doesn't the ETF just use the shares it owns? Well maybe because redemption credits are written against taxes, but probably because the fund already lent all of its real shares. A couple times. Each. That's what they do.

and these "redemption credits" are used cumulatively for tax write-offs, so they are tracked somehow. Not reported of course, and there's a little blurb in the IWM prospectus that says something like "we've elected to not adopt an automated regulation system for the creation/redemption deposits..."

Oh wait, here it is -

"The Board has adopted a policy of not monitoring for frequent purchases and redemptions of Fund shares ("frequent trading") that appear to attempt to take advantage of a potential arbitrage opportunity presented by a lag between a change in the value of the Fund's portfolio securities after the close of the primary markets for the Fund's portfolio securities and the reflection of that change in the Fund's NAV ("market timing"), because the Fund sells and redeems its shares directly through transactions that are in-kind and/or for cash..."

Unbelievable.

so the only intermediaries between infinite derivative/cash deposits and infinite liquidity is 1) the algo's ability to find a synthetic that's cheaper than the shares (arbitrage) within 3 days (or 4 in 2018, or 6 in 2020, but really the max has always been 35 days...) and 2) blessing of the Distributor, BlackRock, who doesn't monitor this activity, and 3) the custodian's stamp of approval.

*Who* is that custodian, sweeping up garbage and reporting the load to BlackRock?

State Street.

Seriously. I felt like someone was just messing with me when I read all this.

(( The very *existence* of this mechanism depicts the chasm between Wall Street and the public. They would say it improves liquidity and decreases volatility. I would say it's potentially manipulative, potentially *deflationary* to underlying securities, and I'd argue that [it's actually major culprit in liquidity issues](https://scholar.harvard.edu/files/kevin_pan/files/etfarbunderliqmismatch.pdf). Which isn't so surprising since it's the very mechanism siphoning liquidity away in the first place. ))

//

GameStop, for real this time

So after *all that* - this next part, uh... this might be a little awkward, but.. back to those 7.4 billion shares Citadel executed for *retail investors alone* on a single freaking day. Do you remember the price increases of some *particular securities* that were sold?? Can you imagine filling all of those buy orders?

Probably not, and I don't know if Ken did, either. Remember, this is the system, or roughly half of it. This is where your trades go, and how the system is *designed* to react.

The *other* half would be the other APs. JP, GS, you know the crew. The ones that all reported ownership of GME's ETFs in the last few months.

Why is that relevant? Well, as GME buying pressure goes up, APs need ETF to redeem. So the buying pressure in ETFs goes up but *uh oh* - who's selling the ETF? Some of them are pretty illiquid to begin with, so which AP bites the bullet, and shorts the ETF?

That'd be the one that didn't report buying them. Because they can't. Citadel Securities LLC.

I'm probably just seeing things, but those 13F filings, to me, say *Wasn't me!* To me, they may as well be fingers pointing at Ken.

Now, I have absolutely no idea *why* Ken bit the bullet in January. It could be that the technology netting him half of retail's trades, possibly their risk profiles, and the capability of that technology to generate the liquidity provided to *literally* keep the system from collapsing - it is possible that their technology may have been uniquely capable of handling the demand.

It is also possible that all of the APs and Market Makers share pieces of the GME debt-*gâteau*.

I believe based on, well, the above and the work of [u/atobitt](https://www.reddit.com/u/atobitt/), Wes Christian and the like, that the true answer is some combination of those two and the following -

//

Guesses, as educated as I can make them

It is likely that GameStop has been aggressively sold short for many years - particularly since 2014. And as the ETF market grew from $100 billion to $5.6 Trillion in assets, I'd argue that ETF creation/redemption, intentionally or not, facilitated this process.

Remember the ETF gobble/profit cycle I mentioned earlier? Maybe, and this is just a guess, this is some part of the "distribution" BlackRock is referring to in IWM's prospectus -

"Because new shares may be created and issued on an ongoing basis, at any point during the life of the Fund a "distribution," as such term is used in the 1933 Act, may be occurring."

Well, that gobble/profit cycle would *love* for Hedge Funds and other firms to short sell GME, right? Price goes down, you get to make more ETF. It feeds directly into the cycle.

So, in my worthless opinion, I think there's a significant possibility that many firms were short GME for many years, then ETFs came along, allowing APs to get in on the action, then HFT came along and combined a targeted short attack with a arguably dodgy, yet profitable trading tool and "accidentally" created a massive ocean of rolling FTDs, ...

Yes that sounds crazy. But I'm not pulling that out of thin air. I remember even MarketWatch said GME had over 60 million shares short on January 15, and I went through like 10 ways to skirt reporting. Look at the ETF growth: $4 billion in 2007 to $7.7 trillion last year. That's over 192,000%. 15,000% a year on average.

Honestly, from everything I read, naked short selling is the primary route of HFT liquidity. That's terrifying because these are just computers programmed within certain parameters, but I think that's *why* naked short selling is the go-to: these things don't locate, it's far simpler and far faster to just sell now and use the 35 day settlement cycle to look for a cheaper long synthetic position to hedge with.

And when the delivery day comes, they do it again, and again, and again, because they're coded to look for profits, to *make money*, and I don't know if there's a parameter than accounts for all the shares sold, trading, and collateralized on the books with derivatives that build up over time as excess supply.

I could go on and on.. how spikes in GME FTD volume are perfectly in between those of its ETFs. How the spikes in options OI also line up perfectly. Or how creation baskets can even be "custom" and just theoretically be 50,000 GME's. It doesn't matter, the bottom line is - it's a mess.

*So why hasn't BlackRock laid the hammer? And who even gets the hammer?*

actually, I'll let BlackRock tell you,

"Close-Out Risk for Qualified Financial Contracts.

Regulations adopted by global prudential regulators that are now in effect require counterparties that are part of U.S. or foreign global systemically important banking organizations to include contractual restrictions on close-out and cross-default in agreements relating to qualified financial contracts."

note - "contractual restrictions", not "restrictive contracts"

they restricted from forcing the close-outs.

"Qualified financial contracts include agreements relating to swaps, currency forwards and other derivatives as well as repurchase agreements and securities lending agreements."

"The restrictions prevent the Fund from closing out a qualified financial contract during a specified time period..."

So they can't even touch the hammer. In favor of -

"Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters subject to the prospectus delivery and liability provisions of the 1933 Act."

So it's the *underwriters* that are *underwater*.

❤️

Oh and the buyers of that underwritten pile get the hammer too.

"Broker-dealers...that are part of an "unsold allotment"...would be unable to take advantage of the prospectus delivery exemption..."

//

If you're learning all of this for the first time, *shit*, honestly I can't imagine it. Like I said in the first post, it's taken me months to put all of this together - and I've felt crazier by the week. Maybe I'm missing something huge here, but 5.6 Trillion dollars is a lot of dollars, so this ETF thing seems kind of important. And really, I think I just needed to get it out of my brain and into words.

and make no mistake, there were 1 billion GME shares traded in the January run up. Idk if the original shorts were able to actually cover *anything*, but even if they *did* - those buy orders were filled with short sales all the way up, just like the system was coded to do.

Almost $500 billion in GME was sold in January. Of all the *concentrated*,*particular stocks* in January's madness - GME sold the highest dollar amount by $496 billion. Second was AMC, at $4b. AMC has since surpassed its January peak by over 350%. Just saying.

//

3 tiny little things before I go...

First, this overall explanation of the market does a great job of explaining similar price movements we see in multiple stocks. In the face of HFT algos naked short selling possibly *billions* of shares in a single day, we see multiple prices move along the FTD cycles.

First and a half, it also explains TSLA - the notoriously shorted, Meme Lord/Destroyer-of-Shorts owned recipient of a 800% run since 2020. TSLA traded over 6 billion shares in early 2020 between $70-$140. It proceeded to reach $800 the following year.

Second, it also connects the treasury markets - because as [u/atobitt](https://www.reddit.com/u/atobitt/) explained, the 10-20 year treasury bonds are the preferred collateral of the Repo Market, the largest and most liquid market on the planet (I think). AP buys (or otherwise obtains) treasury ETF shares, redeems them for bonds, and go to the Repo Market. *voila* cash to do everything I just described.

Second-and-a-half, Michael Burry shorted a 20 year treasury ETF for like 500mil I think. TLT.

Last thing - IWM rebalances every February, May, August, and November. If you look at GME toward the ends of months, price and volume tend to increase. Which is weird, since GME has been in increasing in price since last November.

While increasing, you'd expect the ETF to be redeemed for shares (ownership decreases), and if the price in February greater than in November (it was, $15 to $50, and $15 may have been what they were shooting for...), then the ETF should have to sell GME shares to maintain its proportions.

So why is GME's price going up while its ETFs are selling shares?

Dr. Burry, again, comes to mind. Remember when he sold in October, and it took his brokers weeks to find his shares? If an ETF needs to sell shares to maintain the portfolio, but previously lent all its shares, it needs to recall enough shares to meet the sale. And if the shares were borrowed and re-borrowed and re-borrowed, they'd need bought and rebought and rebought.

GME price, on average, has steadily increased since August. At the end of those months, GME price rapidly goes up further, despite ETF selling. GME went from ~$15-25 in November and then January happened. And the end of February happened.. and May..

//

So, all put together, it almost looks like the shorts tried to cover, failed, almost broke the system by doing it at the same time as everybody else, and now the system that was coded to prevent the MOASS, and was successful, is trying to release all that pressure into *fractions* of the volume that created it.

*There are the shares.*

Naked shorts and derivative collateral and cash covered ETF swaps, maybe buy-writes and married puts too - and when it comes time to cover just do it again, because it's cheaper that way.

And if you need *cash* to do all of this 10 times over to prevent the system from collapsing, formally known around here as the *delaying the MOASS*, maybe you buy treasury ETF for the bonds inside, probably derive some synthetic collateral too, and take the bonds to the Repo market.

Well wouldn't that just make the whole problem worse, now that all of January's volume is gone and the volume is dry?

*That, maybe, is the House of Cards.*

//

If you heard me out and still think it's too crazy, I don't blame you. Thank you for humoring my brain dump. And I hope I didn't offend my French apes, really Idk why I ran with that theme.

HODL 🚀🚀
