This doesn't make sense to me. Why is the amount of risk taken a concern of the government? If I understand correctly, the source brokerage was offering rebates for trades, with the hope that the trades were providing liquidity. The trades did not provide liquidity. The brokerage's hope would seem to be at fault here.
If you'd like to read about how this scheme works in more detail, check out the sec.gov link here. https://www.sec.gov/litigation/litreleases/2021/lr25224.htm The actual complaint is at the top.
I have a suspicion that they were manipulating the option prices, something like creating fake UOA signals, but it was easier/better for the SEC to convict them of wash sales. Something like when Mobsters go to jail for mail fraud instead of the real bad stuff they do but is harder to prove. Just my guess, welcome a rebuttal.
Interesting read. The rules quoted are regarding deceptive practices rather than self trading in options. It seems like this guy invented a card counting scheme that worked, got kicked from the casino and their legal complaint is that he hid his identity to get back in. It would seem the SEC didn't think they had a particularly strong case for their position as the fine is less than 1/4 of the alleged profit. It almost looks like the SEC is trying to find anything they can to distract form the apparent GameStop naked shorting and the subsequent Melvin=>Citadel=>DTCC=>Robinhood apparent market manipulation
That's a good point, furthermore the complaint states they plan to continue doing this in the future, so they are seeking an injunction.
If the exchange pays the rebate to the broker1, and broker1 pays to the trader, and broker2 doesn't charge for taking liquidity, who is losing here? It seems like it's broker 2, for not charging for the trade, which they would have had to pay to the exchange. Even if broker 1 isn't paying, it's broker 2 getting the short end right?
Yeah. They're trying to make it simpler for the customers and normally it would all wash out, but folks like this are the reason we can't have nice stuff.
I can't feel bad for broker 2 because they obviously had some other plan to make money off their customers. Perhaps hoping to sell the order flow. The real problem is all these crazy varying rules for different customers and brokerages. And payment for order flow is an obvious conflict of interest. This is like when the US Treasury was allowing people to buy currency with a credit card at face value. I can't really blame the people who capitalized on the situation. It was a voluntary transaction between two parties. The fault is with the person who set up the system to sell at a loss. They may have a case regarding his concealing of his identity, but that might be weak. It doesn't sound like he had been previously barred from trading via some SEC enforcement action. It sounds like the brokerages just closed his accounts and he partnered with someone else to open new açcounts. How far should these brokerages be able to go in banning someone from the financial system? At what point does it become illegal collusion to protect their own profit? This certainly isn't Nancy Pelosi level insider trading. Or Elon Musk 420 "funding secured". This seems like the rich and powerful punching down. Let me know when we see a detailed accounting of the fails to deliver in GME.
No, broker 2 neither gives rebates or takes rebates. Since most of their order flow is retail, the guys the orders they don't give the rebates to in general balance out the orders they don't take the rebates from. Until jackasses like these come in and exploit that, like I said they selfishly ruin it for everyone. If the brokers take these guys into account, they can't just charge a fixed or no commission, they have to take rebates into account on every order plus and minus, which makes it both more complex for customers and more costly for everyone. No one benefits from the whole "it's the broker's fault, they should have protected themselves" line of thinking when they actually do take the steps you are insisting on to protect themselves. And trading directly from one of your accounts to another at another brokerage is per se illegal under the law, regardless of if you actually manipulate markets or not. This has nothing to do with Pelosi or Musk or any more than me saying I shouldn't get a DUI when I was driving drunk because George W Bush didn't or that I should be allowed to give my employees millions in untaxed fringe benefits in lieu of salary because Trump did. They broke the law, they pay the consequences, full stop.