It was an easy money arbitrage fueled by this year’s meme stock mania. Some brokerages essentially offered free cash, while others did not recover any of the funds for the second stage of the bet.
And the traders who did got the clever idea from Robinhood Markets Inc. CEO Vlad Tenev, who unknowingly inspired them with a comment he made at a high-profile congressional hearing in February.
The problem, and the reason the Securities and Exchange Commission dropped the hammer on Monday, was that the scheme involved illegal trade in laundering or trading yourself.
The SEC accused Suyun Gu and Yong Lee of improperly pocketing more than $ 1 million in redemptions from stock exchanges from February to April, after conducting thousands of hot stock options trading such as GameStop Corp., AMC Entertainment Holdings Inc. , BlackBerry Ltd. and Nokia. Oyj.
The US stock market, including the related options business, is based on a system known as a maker-taker. Traders who submit orders that are in an exchange’s public order book, in many cases, receive a “creator” refund, an incentive designed to attract more liquidity. Those who trade against those resting orders pay a “taker” fee.
Gu, who lives in Miami, and Lee, a resident of Torrance, California, placed the first portion of their trades through a broker based in Greenwich, Connecticut and another in Morristown, NJ, who pass manufacturer refunds to Your clients. according to the SEC complaint. They targeted out-of-the-money put options for their rest orders, investments that others were unlikely to trade because the holdings offered few opportunities to make money except for something dire.
Gu, 35, and Lee, 37, then traded against their own orders through accounts they opened with brokers, including Robinhood, which does not pass “taker” fees on to clients. In short, your profits come from collecting rebates from manufacturers without having to pay taker fees. Gu executed approximately 11,430 laundering operations, pocketing $ 668,671, according to the SEC. For Lee, it was 2,360 laundering deals and $ 51,334 in profit, the regulator said.
Gu and Lee’s attorneys did not respond to requests for comment.
The SEC did not name Tenev or Robinhood. Instead, the agency refers to a “broker B” based in Menlo Park, California. The SEC complaint adds that the CEO of the company appeared before the House Financial Services Committee on February 18, where he said the company “pioneered commission-free and commission-free options trading.”
For Tenev, that day was a five-hour ordeal. It faced dozens of probing questions from lawmakers, who accused Robinhood of turning the stock market into a casino while failing to protect retail investors amid the frenzy of GameStop and other stocks.
But Gu heard the opportunity, according to the SEC. The former business systems developer who had worked at various financial firms concluded from Tenev’s testimony that Robinhood did not charge his clients “charge fees,” the agency said.
Gu’s friend Lee joined the scheme, according to the SEC. While Gu is contesting the regulator’s claims, Lee agreed to pay a $ 25,000 fine and about $ 52,000 in restitution and interest without admitting or denying the wrongdoing. The SEC added that its investigation did not initially motivate Gu to stop breaking the law.
“During the testimony of the investigation, Gu said that although he is not currently using his business strategy, he could do so in the future,” the SEC said in its complaint. “Gu also admitted that he continued to participate in laundering operations after receiving the investigation subpoena from the SEC.”
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