Meme stock options fuelled trading scheme, SEC alleges

A trader illegally generated almost US$700,000 worth of trading rebates by wash-trading options on so-called “meme stocks,” the U.S. Securities and Exchange Commission (SEC) alleges.

The regulator charged Suyun Gu for allegedly violating securities rules in a scheme to exploit the high volume and volatility in meme stocks by wash-trading put options on those stocks in order to generate liquidity rebates offered by exchanges with “maker-taker” trading fee models. Exchanges that use these arrangements pay rebates for trades that supply liquidity.

In its complaint, the SEC alleged that “Gu was able to generate illicit profits by using broker-dealer accounts that passed rebates back to their customers to place initial orders on one side of the market, and then using broker-dealer accounts that did not charge fees for taking liquidity for his subsequent orders on the other side of the market.”

In total, the SEC alleged that Gu executed approximately 11,400 trades with himself, generating at least US$668,671 in liquidity rebates.

“In addition to collecting these ill-gotten rebates, the wash trading scheme allegedly impacted the market as it skewed the volume in certain option contracts and induced other traders to place trades in otherwise illiquid option contracts,” it said.

The SEC said that Gu and his friend, Yong Lee, who also engaged in the scheme, selected put options that were far out of the money on certain “meme stocks,” as they thought it “would be easier to trade against themselves because interest in buying the ‘meme stocks’ and related price increases would make put options on those stocks less attractive.”

The allegations against Gu have not been proven.

Lee settled the SEC’s charges without admitting or denying the allegations. He agreed to pay US$51,334 in disgorgement and a US$25,000 penalty. The SEC alleged that he generated $51,334 in liquidity rebates from approximately 2,300 wash trades.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.