The GameStop Counterfeit Shares Hypothesis

[HeRetiK]

I rarely start new threads of my own, but I just found this theory on r/wallstreetbets which would make for yet another case for decentralized marketplaces and cryptocurrencies, much bigger than Robinhood and other trading platforms restricting free trade: counterfeit shares.

Here is my hypothesis: I think the hedge funds, clearing houses, and DTC executed a coordinated effort to put Game Stop out of business by conspiring to create a gargantuan number of counterfeit shares of GME, possibly 100-200% or more of the shares originally issued by Game Stop. In the process, they may have accidentally created a bomb that could blow up the entire system as we know it and we're seeing their efforts to cover this up unfold now. What is that bomb? I believe retail investors may more than 100% of GME (not just 100% of the float, more than 100% of the actual company). This would be definitive proof of illegal activity at the highest levels of the financial system.

Check out the link for the whole argument:
https://www.reddit.com/r/wallstreetbets/comments/l97ykd/the_real_reason_wall_street_is_terrified_of_the/

Even if we never find out whether their hypothesis is true, it brings to light another important aspect of blockchain based markets: Transparency.

No matter how shitty an ICO you dumped your money in, at least you were always able to see how many tokens there are and where they went. Now with the classical stock market you have so many opaque processes involved that you may never know for sure how many shares are in circulation without an in-depth investigation at the highest level.


Think about it. It's overleveraged fractional banking all over again, just with shares and securities instead of fiat.


If it turns out to be a false hypothesis, an insane conspiracy theory, if you will, it still goes to show that blockchain transparency goes a long way.

If it turns out to be true though... aside from the disastrous economic implications... it will proof that it's time to do for stocks what Bitcoin did for fiat currencies.


What do you guys think? Valid hypothesis or insane conspiracy theory?

[jackg]

It already happened and its already legit.

There's a thing with shorts and it's that you're just borrowing a share to pay back at a later date. So you've already ended up with 2 buyers of the share in a short (one who promised to lend it and one who promised to buy it after it was lent - the third person buys a share back from anywhere to repay them). So you can end up with 150% shorts (which is what I recall was being stated about gme).

CFDs are not tangible assets they're just you telling someone you'll buy it and pay it back at a later date. This means that more of these can be produced from nothing (what if everyone had a 2x long on the S&P)? A 2x long in raw terms is getting a loan to cover yourself and collateralising your first purchase to cover the loan but this isn't what's going on with exchanges.

There are a bunch of links at the bottom of this site if you wanted to track open positions (they're paid services though - and check their legitimacy I just saw this posted on wsb also) : https://isthesqueezesquoze.com/

[HeRetiK]

There's a thing with shorts and it's that you're just borrowing a share to pay back at a later date. So you've already ended up with 2 buyers of the share in a short (one who promised to lend it and one who promised to buy it after it was lent - the third person buys a share back from anywhere to repay them). So you can end up with 150% shorts (which is what I recall was being stated about gme).

It's about much more than that. You can reach more than 100% short float with the mechanism you describe above, sure. However what their theory describes is something much more nefarious: Naked short sells covered up by either (1) passing the naked short between subsidiaries, thus prolonging the time until a fail-to-deliver gets reported to the SEC, potentially indefinitely, or (2) using naked calls to cover naked shorts.

Let that sink in for a bit. Naked shorts (ie. shorts that are not borrowed, but rather conjured out of thin air) can apparently be covered by using naked calls (ie. call options that are not covered by any shares either). At this point you have what essentially amounts to uncovered longs, ie. shares that do not exist, but are sold as if they were. (now you could argue that synthetic longs are also shares that do not exist, but are sold as if they were -- however those are usually created using options that are actually covered -- or so one would presume)

This whole process is described in more detail here (also linked in the reddit post above):
http://counterfeitingstock.com/CS2.0/CounterfeitingStock.html

Unfortunately I know too little about derivatives and the inner workings of the SEC and stock market settlement to form an educated opinion about how much of this is a valid concern and at which point we enter conspiracy theorist territory. But even so, the mere possibility of this being the case, especially given the opaqueness of the inner workings of high finance, has enormous implications for the market as a whole. If the $GME stock is affected, to which other stocks could this apply? What about precious metal ETFs such as $SLV or $GLD?

It ever so more underlines the importance of the old adage "don't trust, verify".

[aoluain]

I dont know much about stocks, bonds, shares and trading but the way I see it,
"They" dont like Bitcoin and never have because it represents change,
they dont want change because the alternative brings Transparency.

With blockchain they wont be able to swindle and deal in shady finances. The last taste
we had was in 2007/2008 and Wallstreetbets have highlighted something else which
has been played out under everyones noses.

[The Sceptical Chymist]

Now with the classical stock market you have so many opaque processes involved that you may never know for sure how many shares are in circulation without an in-depth investigation at the highest level.

I see your point, but I don't think the stock market (any aspect of it) acts like fractional reserve banking or whatever the theory is here (I haven't read the Reddit thread yet, but I will).  That would be seriously illegal and yeah, if it were true it would turn the stock market on its head. 

I'd love to see a stock exchange that was blockchain-based.  Total transparency and it would hopefully be open 24/7 for trading.

If it turns out to be a false hypothesis, an insane conspiracy theory, if you will, it still goes to show that blockchain transparency goes a long way.

Yeah, except blockchain technology hasn't yet been adopted in the functioning of stock markets.  I hope one day it will, but it seems like nobody with any power or pull on Wall Street is thinking of ways to do it.

[Hydrogen]

Here is my hypothesis: I think the hedge funds, clearing houses, and DTC executed a coordinated effort to put Game Stop out of business by conspiring to create a gargantuan number of counterfeit shares of GME, possibly 100-200% or more of the shares originally issued by Game Stop. In the process, they may have accidentally created a bomb that could blow up the entire system as we know it and we're seeing their efforts to cover this up unfold now. What is that bomb? I believe retail investors may more than 100% of GME (not just 100% of the float, more than 100% of the actual company). This would be definitive proof of illegal activity at the highest levels of the financial system.

....

retail investors organized on reddit managed to pump this stock and made some hedge funds suffer tremendous losses on their short positions

Retail investors are such a tiny and irrelevent minority demographic. Its impossible to imagine them generating sums of liquidity necessary to pull this off.

Remember some of us knew something was *off* about this 3 days ago.

Before it became obvious to uneducated and uninformed randoms posting on reddit.

...

If they didn't know something was shady about it 3 days ago. They don't understand what was happening at the time. And don't know anything about it now.

[davis196]

The financial derivatives (futures and options) can be way more in quantity,compared to the stock market capitalization.This might look weird to people,who aren't involved in the financial markets.
I don't believe that a company like Gamestop(or some financial broker) would issue and sell fake stocks.This is a major crime and the US authorities will catch the criminals for sure,because such crime cannot be conducted without any traces and leaks.
By the way,I'm still wondering how the members of a subreddit can mobilize billions of dollars,in order to pump stock prices and create a "short sqeeze".

[HeRetiK]

Now with the classical stock market you have so many opaque processes involved that you may never know for sure how many shares are in circulation without an in-depth investigation at the highest level.

I see your point, but I don't think the stock market (any aspect of it) acts like fractional reserve banking or whatever the theory is here (I haven't read the Reddit thread yet, but I will).  That would be seriously illegal and yeah, if it were true it would turn the stock market on its head.

It's not like something being seriously illegal has ever stopped hedge funds and banks from taking these actions. If you get fined a few hundred mills for a few billions of profit it's just the cost of running business.

Additionally those kind of dealings seem to be incredibly easy to hide and under normal market conditions are not even noticable. Just look at Jim Cramer gloating about all the shit they've pulled under the SEC's watchful eye:
https://www.youtube.com/watch?v=VMuEis3byY4

(unrelated to the hypothesis posted above, but you get the picture)


Don't get me wrong, I think this theory is highly speculative, but the mere possibility has serious implications.

If it turns out to be a false hypothesis, an insane conspiracy theory, if you will, it still goes to show that blockchain transparency goes a long way.

Yeah, except blockchain technology hasn't yet been adopted in the functioning of stock markets.  I hope one day it will, but it seems like nobody with any power or pull on Wall Street is thinking of ways to do it.

Of course! The point I'm trying to make is that transparency and auditability seem to be a currently widely underestimated property of cryptocurrencies and decentralized smart contracts. Even privacy-focused coins are for the most part at least auditable.

The financial derivatives (futures and options) can be way more in quantity,compared to the stock market capitalization.

Yeah, that's not what this post is about though. If you had read OP you would know that this is about a detailed analysis of concrete examples how certain derivatives enable loopholes that are close to impossible to detect by the SEC. This is not a "options are complicated so they are bad" kind of post.

By the way,I'm still wondering how the members of a subreddit can mobilize billions of dollars,in order to pump stock prices and create a "short sqeeze".

The majority of long positions have been taken sub USD 20,- or even sub USD 10,-, long before the short squeeze even became a matter of earnest discussion. Many of these self-proclaimed autists and retards are used to doing risky plays and taking crazy positions in the 4-5 digits. Despite the self-deragotory lingo they usually display, they are not some random 15 year old kids playing with their pocket money, as most of the media might have you believe. "WSB is just some stupid kids" seems to be the new "Bitcoin is only used by criminals" at that point. I mean, some of them are, but the demographic is much wider than that.

People are aware that whales, including institutional investors such as Black Rock, are in play as well. The implications have been publicly discussed. I wouldn't be surprised though if r/wallstreetbets had managed to collectively get at least 20-30% of the available float, even before the hype. At pre-hype levels of 1.7MM subscribers and USD 20,- a share that amounts to an average of less than 10 shares per subscriber, or USD 200,-. I don't think that's unrealistic, especially considering that some have bought significantly more at significantly lower price points.

[Tstar]

Counterfeit shares would blow the whole system away.

All eyes now are on GameStop, and any spotted counterfeit will get giant media attention.  I don't think they will risk trillions of losses over the billions of one or more hedge funds.