🚀🚀 The Shell Game, Revisited - How ETFs work and what their FTDs mean for GME
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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/augrr](https://www.reddit.com/user/augrr/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/mwnnmj/the_shell_game_revisited_how_etfs_work_and_what/) | 

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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)

🚀 The Shell Game Part II - Breaking through to the apes.

[The Shell Game](https://imgur.com/wKBpPdI)

Linking DD for context:

1.  [Shell Game I](https://www.reddit.com/r/Superstonk/comments/mvvmvp/time_to_expose_the_shell_game_ftds_can_be_reset/)

2.  [FTDs and why the squeeze has not squoze](https://docs.google.com/spreadsheets/d/1VhxsUkiMEdSFybr5E4jI0iARQ6urRvVYafjZe1uLly4/edit#gid=0)

3.  [Shell Game III - Posted 4.25.2021](https://www.reddit.com/r/Superstonk/comments/myn9vn/the_shell_game_iii_lifting_the_final_cups_for/)

Now that I have separated the mechanism of FTDs from existing as simply a mechanic of the "Deep ITM Call Options" DD. Please allow yourself the time to learn the basics of what ETFs are so you can fully understand how they directly link to our problem.

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Disclaimer: I am simply an ape, like one of you. These are my interpretations of the market and solely my own. Do the homework yourself like I have (that takes time and dedication).

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An ETF is a fund that you, an ape, can invest into and gain exposure across a broad basket of stocks. Ideally, the intention is that for every $ you invest into an ETF, the ETF Manager will take that $ and purchase additional stocks in the fund. When that occurs, the value of the underlying stock will also increase. Depending on how the ETF is managed, the ETF price will also move up as result.

Before we go any further, I am going to start using some terminology that might be a little above your ape brain. If you want to feel that wrinkle REALLY FOLD IN, I implore you to visit the website below, watch the 2 minute video + read the entire article (10 minutes).

-   <https://www.etf.com/etf-education-center/etf-basics/what-is-the-creationredemption-mechanism?nopaging=1>

In the middle of this transaction is the "Authorized Participant". In our example above, when you give your ape $ to the system to buy XRT because it is your favorite GME ETF and you want to have broad exposure to the retail basket of stocks, you are actually giving your money to the AP. And it is the AP's duty to purchase your GME shares + the other shares needed in the basket of stocks that comprise of the ETF. Because you, the investor, bought XRT [because you read their prospectus](https://www.ssga.com/us/en/institutional/etfs/funds/spdr-sp-retail-etf-xrt) and agreed with the way that this ETF manages its portfolio. You gave them the $ after all.

This is where we begin to go wrong. You see, when you provide an inflow of cash into the AP, especially one that is unpredictably large, the AP using high-frequency trading algorithms (HFTs) will go through arbitrage.

<https://www.investopedia.com/articles/investing/032615/how-etf-arbitrage-works.asp>

This is an opportunity for the AP with their fancy HFT to buy the dip and sell the peaks faster than any "normal" trader could possibly do. That process takes time though and time = $. To speed up the process of arbitrage, short positions can be opened at key times ahead of an impending stock market crash (COVID 2020 sound familiar) with the intention of buying the super dip, effectively creating a heavy profit to both the AP and ETF Management Company and paying off those fancy algos.

However, instances may arise where the arbitrage process is simply too slow. The AP's collateral obligations are rising faster than the AP can HFT the capital to cover. One of those instances is the FTD rate of our favorite stock, GME, rising to levels that are surely being noticed. And since this stock is still a completely illiquid stock and we cannot use Deep ITM Call Options/NSCC Shares to drive the price down to arbitrage/cover our short obligations, what do we, the Authorized Participant, do?

[We take the underlying securities after purchasing them from the market, let them settle via T+2, and then loan them out to short GME.](https://i.imgur.com/UUhVF0T.png)

This process is known as operational shorting. I found this video to really be enlightening to the scope of this problem. Coincidentally, the Presenter, Richard Evans, talks about our favorite ETF that holds GME, XRT, at 27:10.

-   <https://youtu.be/ncq35zrFCAg?t=1630>

Hopefully I've been able to connect the FTD problem on GME with the bigger FTD problem that exists within the entire system through FTDs on ETFs. And if I haven't, well. There's always another day! Speaking of which... I hear Margin likes to call at 3:00AM. Rest up while you can.

🚀 In Conclusion

[IT IS TIME TO COVER](https://imgur.com/6U25Mcv)

Moon Soon.
