Consider this screenshot of a meme from Roaring Kitty. It comes from time 33:25 in the video compilation of his memes [0]. Notice the cartoon character Goofy inserted into the live action film. The detective is deep in thought while staring at Goofy. Then the detective drops his coffee mug –– shattering it on the floor.

This is a reference to a moderator of r/walltreetbets. He posted a photo from a Christmas party at Walt Disney World exclusively for Citadel employees. The implication being that this moderator is a Citadel employee at the party [1] [2].

r/superstonk reposts the photo, and riot of posts ensues. Mods must have been out for Christmas. Maybe also at the Citadel party? And then the next day, every post and every comment on this topic is deleted. “This content is not appropriate.” I confirmed on reveddit at the time.

Later the moderator at the Citadel party claimed that he was not a Citadel employee –– but rather a Walt Disney World employee playing Goofy at the party.

[0] https://x.com/roaringpika/status/1792256419544055876 [1] https://lemmy.world/comment/5020083 [2] https://x.com/john55144586/status/1602405226614558728

“Roaring Kitty, once I decided to follow you, you promised to walk with me all the way. But during the most troublesome times, there is only one set of footprints. When I needed you most, why did you leave me?”

“My precious child, during your times of trial and suffering, when you see only one set of footprints, it was then that I carried you.”

(original content)

In this tweet from @TheRoaringKitty [0], a pizza is repeatedly sliced into thinner and thinner slices. This is a reference to the reply from New York Federal Reserve to the Clearing and Legal Certainty Group from the European Commission [1].

When you buy stock, you don't actually get stock –– just a security entitlement. This is a pro-rata share of the stock held by the intermediary. When other shareholders DRS, then their security entitlements at the intermediary become real stock at the transfer agent.

So the intermediary is left with less and less stock, and your pro rata share gets smaller and smaller. Like the thinner and thinner slices of pizza.

[0] https://twitter.com/TheRoaringKitty/status/1790770363627921776 [1] https://archive.org/details/ec-clearing-questionnaire

Tennessee House Bill 2806 / Senate Bill 2640 amends the Uniform Commercial Code to:

• Move the jurisdiction for security entitlements to Tennessee
• Give entitlement holders priority over secured creditors of intermediaries

The civil justice subcommittee hearing features testimony from:

• David Webb –– author of The Great Taking
• Don Grande –– private practice attorney
• Andy Guggenheim –– Securities Industry and Financial Markets Association
• Tim Amos –– uniform law commissioner

Andy Guggenheim: "While holding securities in street name is the most common choice for investors, they do have alternatives for holding securities in other ways if they prefer including physical form via stock certificate when that is available by the issuing company." (He won't say the word DRS!)

David Webb: "DTCC itself is planning to start up and pre-fund a new central clearing counterparty when one of the existing ones fails. The industry is talking about the very real possibility that major central counterparties will fail."

Related Links:

• Bill Text
• Legislative History
• Video of the Civil Justice Subcommittee Hearing
• EU Clearing and Settlement Legal Certainty Group Questionnaire

GameStop’s earnings report: 15 things you might have missed

GameStop published their latest form 10-K on March 26, 2024. While the filing date was on March 26, the document date is February 3, 2024. In this article we dive deeper into the filing and highlight some interesting bits you might have missed.

You can find the form or read along with us right here!

Our merchandise? Collectibles, which included digital asset wallet and NFT marketplace activities

On page 2 of the filing GameStop mentions their merchandise, which includes hardware, accessories, software, and collectibles. Under collectibles they mention their collectibles also included the digital asset wallet and the NFT marketplace activities. “However, both activities were wound down in the fourth quarter of 2023.”

GameStop refurbishes products and recycles and achieved a reduction in YoY carbon emissions in excess of 10%

Also on page 2 there is mention of sustainability. “In 2023 alone, through our U.S. refurbishment center, we refurbished over 1.1 million software discs and over 3.0 million consumer electronic devices, and recycled over 0.6 million pounds of e-waste.”

States with the most and least store locations

Based on the map, one could say there are more GameStop locations on the east coast of the US and fewer in states that are more distant.

GameStop’s competition

According to the filing, GameStop says their competitors in the USA (among others) are:

• Walmart
• Target
• Best Buy
• Amazon

In Europe they are FNAC-Darty, Media Markt-Saturn, Amazon, and major hypermarket chains like Carrefour.

In Australia: JB HiFi, Big W, Target, and Amazon.

Every region has Amazon as GameStop’s competitor. This goes hand in hand with Chewy going head-to-head with Amazon and GameStop wanting to become an Amazon-killer.

Interesting reminder: Matt Furlong, former GameStop CEO was an executive at Amazon.

Scholarships

GameStop says they have provided more than $800,000 in scholarships, as per page 5.

Holiday season can have a big impact on financial results

On page 7, under the RISK FACTORS item, GameStop mentions a potential reason why Q4 2023 revenue was less than expected. “Our business, like that of many retailers, is seasonal, with a major portion of our sales and operating profit realized during the fourth quarter of fiscal 2023. (…) Any adverse trend in sales during the holiday selling season could lower our results of operations for the fourth quarter and the entire fiscal year and adversely impact our liquidity.”

Risks related to their common stock include some interesting things

Starting on page 12, GameStop lists risks related to their common stock. Some notable parts:

• “Short squeezes”. “A large proportion of our Class A Common Stock has been and may continue to be traded by short sellers which may increase the likelihood that our Class A Common Stock will be the target of a short squeeze. A short squeeze has previously led and could continue to lead to volatile price movements in shares of our Class A Common Stock that are unrelated or disproportionate to our operating performance or prospects and, once investors purchase the shares of our Class A Common Stock necessary to cover their short positions, the price of our Class A Common Stock may rapidly decline. Stockholders that purchase shares of our Class A Common Stock during a short squeeze may lose a significant portion of their investment.”
• Comments by analysts, blogs, articles, message boards, and social and other media.
• Large stockholders exiting their position or an increase or decrease in the short interest.
• Actual or anticipated fluctuations in our financial and operating results.
• Acquisition costs and the integration of companies we acquire or invest in.
• The costs associated with the exit of unprofitable markets, businesses or stores.
• Some interesting aspects, which are thoroughly known by GameStop’s retail investors.

2024 has the most amount of store leases expiring

At total of 1,350 lease terms will expire in fiscal 2024. This offers flexibility for extension or relocation.

Size of offices and distribution facilities

Office and distribution facilities total an approximate of 2 million square feet, which is the size of this:

Or almost as big as Grand Central Station.

Does not anticipate a dividend

Written on page 17, GameStop says “During the past four fiscal years, we have not declared, and do not anticipate declaring in the near term, dividends on shares of our Class A Common Stock.”

Simplified stock chart on page 17

Thanks GameStop, this is sure to raise questions when asking unknowing traders and investors what that big spike in 2021 was!

GameStop also provides a convenient table to see how the stock’s price has fared against the general market:

GameStop mentions the market price of its stock has been extremely volatile due to circumstances, including a short squeeze

“As noted above under the heading “Risk Factors — Risk Related to Our Common Stock”, the market price of our Class A Common Stock has been extremely volatile due to circumstances outside of our control, including a short squeeze that led to volatile price movements that were unrelated or disproportionate to our operating performance.” (Page 18)

Cash on hand is actually $921.7 million

Though in total, GameStop has control over more than $1.1 billion and $475.7 of available borrowing capacity under their revolving credit facilities, but that 1.1 billion includes marketable securities of $277.6 million. GameStop mentions this on page 22.

The only remaining debt is $28.5 million and consists of six separate unsecured term loans

They are held by Micromania SAS, the French subsidiary of GameStop. The total amount was €40 million (just over $42 million) in fiscal 2021. You can find it on page 22.

Advertising expenses decreased a lot

“Advertising expenses for fiscal 2023, 2022 and 2021 totaled $39.3 million, $75.0 million and $93.6 million, respectively.” This is stated on page 44.

We might have easily missed more interesting or important information. That’s no surprise, seeing as how big reports can be. Which things you read in the 10-K were the most surprising or interesting to you? Let us know in a comment!

This rule change (approved by the SEC) prevents issuers (such as GameStop) from withdrawing their shares from the DTC.

> Recently a number of issuers of securities have independently requested that DTC withdraw from the depository all securities issued by them.

> As explained in further detail by many of the commenters opposing DTC's proposal, the issuers making these requests have alleged that their securities have been the target of manipulative short sellers.

> DTC's proposed rule change provides that upon receipt of a withdrawal request from an issuer, DTC will take the following actions: > > (1) DTC will issue an Important Notice notifying its participants of the receipt of the withdrawal request from the issuer and reminding participants that they can utilize DTC's withdrawal procedures if they wish to withdraw their securities from DTC; and > > (2) DTC will process withdrawal requests submitted by participants in the ordinary course of business but will not effectuate withdrawals based upon a request from the issuer."

• Wired: Ryan Cohen is dying.
• Tired: GameStop is dying.
• Expired: Bitcoin is dying.

Explanation of the Wired / Tired / Expired meme from Know Your Meme.

Gamestop’s data reporting ‘idiosyncrasies’ warrant a closer look

BY JACK TAZMAN

DECEMBER 2, 2021

Data anomalies flagged by GameStop investors have required corrective action representing over 350 million GameStop shares.

Say what you want about GameStop’s loyal individual investor base, they are definitely keeping a close eye on things.

Every SEC filing, every court case, every job board, every news release, every GitHub update – any bit of information that has to do with their favorite stock is quickly detected and discussed by the colossal following in various GameStop-oriented subreddits.

They aren’t the only ones tirelessly checking the forums for new information. Topics that gain traction in the individual investor community often find their way into headlines of mainstream media sites including Motley Fool, MarketWatch, Investor’s Place, CNBC, and others.

How strange then that the very community these publications depict as reckless, mindless hype followers is one that they depend on for news. For almost a year now, mainstream financial publications publish several articles per week with news and updates plucked straight from GameStop stockholder community.

Even more perplexingly, these institutional publications’ articles only address these topics to dismiss them as invalid without providing any real basis for doing so.

Most recently, the GME investor base discovered something in Fidelity’s data that raised questions. The response by the media was revealing to say the least. It falls in line with an alarming trend of massive GameStop glitches in data reporting.

Fidelity’s GameStop glitch: Shares available to borrow

On Monday, November 29, 2021, the top post across several GameStop-focused subreddits centered around the number of shares stockbroker Fidelity listed as ‘available to borrow.’ Stock brokers lend their account holders shares out to short sellers who in turn use them to artificially distort supply-demand dynamics with the goal of driving stock prices down. Short selling has been at the center of the GameStop saga since long before it caught significant traction with retail investors in late 2020.

Fidelity had mistakenly listed 13,767,545 GameStop shares as available to borrow to short sellers. That figure represents more than 20% of GameStop’s total issued shares. Fidelity is just one broker. Interactive Brokers, for example, listed 500,000 of their account holders’ shares as ‘available to borrow’ that day as well.

Almost fourteen million shares is significantly above Fidelity’s average range of lendable GameStop shares, which hovered between one to three million shares for most of 2021. GameStop shareholders had a very reasonable question: Where did Fidelity get these millions of extra shares, which the broker itself labels as ‘hard to borrow’?

MarketWatch, the Wall Street megaphone

True to form, the financial media responded to what they had read in GameStop-centered subreddits like r/Superstonk and r/GME about the Fidelity lendable shares.

MarketWatch writer Thornton McEnery writes that it was “pretty cringey to see that a growing band of retail Apes spent much of Tuesday morning ignoring the macro bloodbath across indexes and combing through what they thought looked like a fishy discrepancy on Fidelity’s platform, regarding GameStop,” in an opinion piece published eight hours after the topic rose to the top of GameStop-oriented subreddits. He then goes on to quote then ridicule various Redditor comments and points of discussion on the matter. The irony, hypocrisy, and cringiness of the piece must have been lost on McEnery.

Additionally, McEnery is dismissive of the $2.2 billion, 11 million share discrepancy the GameStop shareholders flagged, describing it as “what they thought looked like a fishy discrepancy.”

He goes on to clear the air with the satisfying and purely speculative explanation: It might have just been a harmless case of someone “fat-fingers a keystroke and few zeroes get added.” He goes on to say that it “happens all the time, even in the highest echelons of finance.” Apparently, individual GameStop investors questioning a 20%-of-the-float error as something that warranted an explanation seemed amateurish and beneath McEnery to offer any real information on.

Nothing says quality reporting like describing a $2.2 billion data discrepancy as an “oopsie,” then redirecting the narrative to discrediting the people who discovered the discrepancy in the first place.

Fidelity responds

But in case MarketWatch‘s explanation left something to be desired for GameStop shareholders – or anyone with a preference for meaningful financial reporting and accountability – Fidelity would eventually respond to the numerous inquiries regarding the mysterious 11 million GameStop shares listed as available to borrow.

However, it was less of an explanation insomuch as it was a recap of events followed by a shift of blame for the glitch that represents about 13% of GameStop’s total market cap. According to a response written by Scott Ignall, Fidelity’s Head of Retail Brokerage, the cause of the 11 million share “data anomaly” was that “one of [Fidelity’s] counter-parties provided an erroneous number for GME.”

In another post about the GameStop data glitch, Fidelity’s official response notes “…that error caused the number of short-able shares to be overestimated by approximately 11,000,000.”

That’s a pretty big overestimation! So it wasn’t “what they thought looked like a fishy discrepancy” after all. It was a bona fide, massive, $2.2 billion GameStop glitch that was only corrected after GameStop individual investors noticed it and raised the issue with Fidelity. Moreover, it was yet another glitch that benefited short sellers and brokers and hurt real GameStop investors, as all GameStop glitches curiously do.

Outraged GameStop individual investors pressed Fidelity for more information. Fidelity later posted the following reply to their subreddit:

"We have researched the issue with our lending services. In looking into the issue, it was found that one of the counterparties that may provide us shares to short had entered an incorrect number of shares available to short. That error caused the number of shortable shares to be overestimated by approximately 11,000,000. We have rectified the issue and the trade ticket should reflect the correct amount of shares that maybe available to short, which is approximately 2 million." –– u/fidelityinvestments

In another response post from Fidelity, the company said:

“After researching the volume with our lending services team, we were able to identify that the root cause was an incorrect entry of the number of shares available to short by one of our external counterparties. the issue was fixed by 12:10pm et today. the gme shares available to short is now correct on the trade ticket.” –– Fidelity response to GameStop glitch

Interestingly, that day, the stock had been in a steady decline until precisely 12:10 p.m., at which point the stock bottomed out, the reversed trend, regained all the losses up through 12:10 p.m., and ended the day up 1.15%.

GameStop glitches are frequent and large

MarketWatch's coverage of the Fidelity fiasco is right in one regard. When it comes to GameStop, these types of data discrepancies – or “oopsies” – do indeed happen “all the time.” But where MarketWatch is wrong is that these glitches are frivolous and investors should pay no mind.

To better understand why GameStop shareholders are so committed to their ongoing due diligence and thesis about the stock, context is key. Monday’s Fidelity fiasco was hardly the first massive discrepancy investors discovered in GameStop stock trading activity. In fact, it wasn’t even the third largest by share volume.

There were two other well-documented “glitches” involving large volumes of GameStop stock appearing in the data. Despite being brought to the attention and indeed, corrected by various data providers and brokers, none has been able to provide a satisfactory explanation as to why the discrepancy occurred in the first place.

One million deep out-of-the-money GameStop puts in the Bloomberg Terminal, July 2021

Back in late July, another major GameStop glitch was observed by individual investors. This time, it was first noticed in a Bloomberg Terminal.

Two Brazilian hedge funds, Constansia Investimentos and Kapitalo Investimentos, popped up for the first time in the Terminal’s GameStop options data on July 28, 2021.

Both firms were an holding exceptionally high volume of put options contracts (put options contracts bet the stock price will go down) on GameStop stock. Between the two of them, they held almost 1.1 million put option contracts.

To put that in to perspective, one option contract represents 100 shares. Those 1.1 million contracts represent 110 million GameStop shares – 143% of the total number of GameStop shares in existence.

But by the next trading day, July 29, 2021, both firms and their massive put positions were gone from the Terminal.

However, also on July 29, 2021, a new name popped up in the Terminal data on GameStop’s option chain. This newcomer also carried a massive put position: 540,000 contracts. Like the Brazilian firms, this GME options-chain guest star would only stay in the Bloomberg Terminal for one day.

By July 30, 2021, they too had vanished. That stealthy one-day appearance that immediately followed the Brazilian firms cameos was none other than Credit Suisse – the very neutral champions of financial discretion and privacy.

The three firms, holding over 1.6 million put contracts representing more than double the total GameStop shares oustanding, came and went in a 48-hour time frame.

One GameStop individual investor’s due diligence

One inquisitive investor did what many investors once thought the financial media might do. They looked into it.

Redditor u/lawsondt emailed the Bloomberg Terminal support team about the one-day cameo firms and the massive GameStop put positions they held. In their initial outreach to the Bloomberg support team, the Redditor notes several peculiarities, as well as some strange commonalities, the three fruit-fly firms had.

Firstly, all three firms carried massive GameStop put positions. Secondly, they were the only three institutional put holders that reported strike prices and expiration dates on their put positions. Additionally, all three only appeared in the Bloomberg terminal for one day.

“Can you please explain what happened with the GME put positions on July 28 and July 31, 2021?” u/lawsondt writes to Bloomberg’s support team after outlining what they’d witnessed in the Terminal.

“The ownership of those GameStop options by those Brazilian funds was a bug and has been addressed,” a Bloomberg Portfolios Data Team representative responds, later adding: “None of those puts should have been displayed as they were not puts on GME…Those 540,000 puts [Credit Suisse’s holdings] were not supposed to reference GME and be on this page in the first place, so they were removed. This issue was isolated to GME.”

While the Bloomberg representative explains how Terminal data is collected, the explanation doesn’t address how three different firms holding hundreds of thousands of GME put positions would briefly and erroneously register in the data.

The Bloomberg bug, Fidelity fiasco, and MarketWatch‘s ‘oopsies’ are insufficient explanations for the GameStop glitches that leave much to be desired, raising more questions than answers. The trend appears to be: GameStop investors discover these glitches and raise concern, the numbers are quickly “corrected,” and no meaningful explanation is given.

Whenever GameStop individual investors press for answers, they are routinely delayed for time, given fluff answers, and passed around company representatives. Despite Fidelity and Bloomberg reactively making massive corrections – representing more than double GameStop’s total shares outstanding between them – the financial media either doesn’t report on it at all, or portrays individual investors as mistaken and reactionary in their findings.

But as Upside Chronicles recently learned, this would not be the last of u/lawsondt’s correspondence with the Bloomberg support team, nor of GameStop’s chronic ‘data glitch’ problems.

Yahoo! Finance GameStop Glitch, September 10, 2021 – September 13, 2021

On September 12, 2021, a commotion broke through GameStop subreddits. Another massive discrepancy had been discovered and confirmed by numerous GameStop individual investors on Reddit. This would be the biggest GameStop glitch reported to date.

That Sunday night, Yahoo Finance! reported total shares outstanding for GameStop as 249.51 million shares. According to GameStop’s most recent 10-Q filing, the company has only ever officially issued 76.49 million shares.

Yahoo! Finance’s data was over-reporting the shares outstanding by 226%. Short selling adds artificial (borrowed) shares into circulation. It stands to reason then, that the additional 173 million shares over the company’s shares outstanding were borrowed shares in circulation – short positions.

Shifts in GameStop’s option chain

Upside Chronicles obtained historical options chain data for the Friday before and Monday after the Yahoo! Finance glitch was discovered.

On Friday, September 10, 2021, the total open interest (all strike prices, all expirations) for GameStop call contracts was 298,063. Total open interest on puts at opening was 568,900. By closing on that day, the open interest call-put numbers stayed exactly the same.

By opening of the next trading day, Monday, September 13, 2021, total open interest on calls had skyrocketed to 529,089. Total open interest on put contracts had dropped to 529,058.

At market open that Monday, the total open interest for call and put contract were almost one to one. Yahoo! Finance’s data was corrected to a much more “in line” float of 61.2 million.

By the end of Monday’s trading session, there were 768,774 open interest call contracts on the GameStop options chain – a 257% increase in calls across the entire chain within one trading day.

Another GameStop glitch in the Bloomberg terminal

That weekend, u/lawsondt was looking at Bloomberg Terminal data on GameStop options.

And once again, they noticed something. They resume correspondence with Bloomberg’s support team.

“More put options appeared than disappeared over the last 24 hours for GameStop stock,” u/lawsondt writes. “…In full disclosure, there have been several SEC complaints filed alleging illegal options for $GME stock used to reset Reg SHO Close-Out Obligations as described by the SEC on August 9, 2013.”

Five business days later, he got a response. Bloomberg would change the representative looking into the matter. From that point on, Bloomberg only responds to u/lawsondt’s follow ups with requests for more time. By October 1st, they still had not provided an answer. Full correspondence here.

GameStop glitch: Totals and timelines

Between the Fidelity fiasco, the Bloomberg Terminal “bug,” and the Yahoo! Finance data glitch, the leading finance industry data providers have corrected errors that reflect a total of 351 million GameStop shares – more than 450% of the total GameStop shares in existence. At GameStop’s current trading value (approximately $180), the total sum of “oopsies” and “bugs” amounts to more than $63 billion worth of data glitches relating to GameStop stock in the last four months alone.

GameStop investors are right to raise concern and continue their due diligence, as all investors should in anything they are invested in. Ultimately, these were not “what they thought looked like a fishy discrepancy.” On the contrary, what GameStop investors have discovered multiple, concrete, data-backed fishy discrepancies that required corrective action by Bloomberg, Yahoo! Finance, and Fidelity once GameStop individual investors asked about them.

Of concern to all investors

Glitches of this magnitude aren’t just the concern of GameStop investors – they should be of concern to all investors, especially if as MarketWatch states, “it happens all the time.” How can anyone trust the markets and those that run them with this level of “error” occurring being the best-case scenario?

Why is it that these errors seem to always be one-sided? Were they truly snafus, it would stand to reason that every now and again, they would happen in a way that favors GameStop’s real investor base – not consistently for the short sellers trying to erode the value of the company.

Dark pool activity has increased by 400% over historical averages beginning in 2021. Share volume trading hands exploded around the same time. The average number of shares traded per quarter in 2020 was about 70 billion. Starting in Q1 of 2021, that number skyrocketed to approximately 500 billion shares per quarter – a seven fold increase, according to FINRA data. That means that GameStop individual investors have been and will remain at significant information disadvantage as Wall Street pulls more and more trading activity into obfuscation. [See Upside Chronicles' dark pool report here.]

The level of secrecy in the so-called public markets is alarming. Markets needs more accountability and transparency. While GameStop investors might be keeping the closest eye on every metric relating to the stock, if it can happen here at this magnitude, it can happen elsewhere to this magnitude.

The financial sector seems to have forgotten that these aren’t just numbers on a screen and games – what happens in the market affects real people’s lives, jobs, savings, health, quality of life, and American prosperity at large. The market needs more watchdog groups like the GameStop individual investor base, not less of them. That the groups responsible for investigating illegal activity in the markets – the SEC and financial press – have either ignored these issues or worse, ridiculed those doing their jobs for them, should be enough for any investor with any semblance of faith left in American financial markets to pull the fire alarm.

Where the GameStop saga will go from here remains to be seen. But one thing does seem certain: It’s not over yet.

Jack Tazman

Jack Tazman is a Baltimore, Maryland native. He attended Washington University where he studied political science. Since then, he worked as a writer for various national news organizations specializing in politics and policy. He now resides in New York City as a freelance writer and political consultant.

Related Videos:

• The Apes and Wall Street
• How Redditors Exposed the Stock Market

"Subsection II.B. The Paperwork Crisis and the Birth of the NSCC and DTC" (pages 127 - 131) relates to "Taking Stock, Episode 14: The Birth of the DTC".

"When we think of securities markets, we imagine crowded trading floors, electronic trading screens, brash cable-news hosts, and titans of industry ringing the opening bell at the New York Stock Exchange (NYSE). But the institutions that really move money on Wall Street reside around the corner –– quite literally –– at 55 Water Street. This is the home of DTCC and its twin subsidiaries, NSCC and DTC. Today, NSCC is America's only securities clearinghouse, and DTC its only securities depository." (pages 122 - 123)

"NSCC guarantees that funds will be delivered to the seller and that purchased securities will be delivered to the buyer. If a counterparty defaults, NSCC will first use the collateral that the defaulting party posted as margin against its outstanding obligations. If those funds prove insufficient, NSCC can tap into a dedicated default fund financed by mandatory contributions from market participants as a condition of their membership. NSCC employs similar mechanisms to guarantee the delivery of purchased securities." (page 131)

"There is relatively little publicly available information about these regional clearinghouses and depositories. Other than the descriptions that follow, it is not known how they were governed, how much the regional exchanges invested in them, or how much money they made or, more likely, lost." (page 133)

"Importantly, the existence of these regional players prompted Congress to list 'competition among ... clearing agencies' as one of the primary goals of the newly created Section 17A." (page 133)

"As it encouraged the development of a 'National Market System,' the SEC repeatedly pointed to Congress's desire to facilitate competition among the clearing agencies. On multiple occasions, the SEC even stated that 'clearance and settlement is not a natural monopoly.'" (page 134)

"The SEC's emphasis on promoting competition was also reflected in the concerns among market participants and other regulators that NSCC and DTC would abuse their growing market power. In the late 1970s, the SEC received comments from the regional clearinghouses and DOJ's Antitrust Division challenging the SEC's approach to the National Market System on the ground that it was anticompetitive and would open the door for NSCC and DTC to obtain monopolies." (page 134)

"Yet, just twenty years after Congress amended the Securities Exchange Act to create the National Market System and only fifteen years after the SEC first granted registration to NSCC, DTC, and other clearing agencies, all the regional players had halted their clearing and depository businesses and transferred their operations to NSCC and DTC." (page 137)

"Predictably, once DTCC acquired complete control over U.S. securities clearing and depository markets, evidence began to emerge that it might have been abusing its dominant position." (page 155)

"They did so by imposing high fixed costs to connect to the new market infrastructure, by allowing NSCC and DTC to dictate the direction and pace of innovation, and by preventing the regional players from differentiating their products and services from those of their larger competitors." (page 138)

"The NYSE, Amex, and NASD appear to have used this position to advance their broader business interests. For example, in 2006, DTC proposed a rule that made it extremely difficult for nonmember transfer agents, regional exchanges, and brokers that were not members of the NASD to hold securities recorded on DTC's book-entry system." (pages 155 - 156)

"In effect, the proposed rule, which the SEC approved in amended form, forced these firms to choose between opening an account with DTC, creating their own infrastructure for electronically recording securities ownership, or simply exiting the marketplace." (page 156)

"This bleak calculus prompted at least one competitor to object that DTC was 'seeking to become a de facto regulator of the entire transfer agent industry' and to argue that DTC was using its position as 'a monopoly [to] engage[] in predatory, anti-competitive conduct with respect to its direct competitors.'" (page 156)

Awrey, D., & Macey, J. C. (2022). Open access, interoperability, and DTCC’s unexpected path to monopoly. Yale Law Journal, 132(1), 96–170.

Something big is lurking in Wall Street’s dark pools

BY JACK TAZMAN

DECEMBER 27, 2022

To the retail investor, dark pool history and current activity is every bit as unsettling as it sounds.

The stock market is a place where the public has access to owning a little slice of the American economy by buying fractional ownership of companies. Once a company goes public, their financials and ownership composition are subject to reporting requirements and regulation. …Right?

If the above statement sounds reasonably accurate to you, you are probably going to get absolutely steamrolled as a retail investor. When it comes to trading what you don’t know will almost certainly hurt you.

Remember that as a rule, complexity and obscurity are the nukes in Wall Street’s arsenal of advantages over retail investors. Wall Street spends top dollar fighting any attempt to bringing transparency to their practices or strongholds on power and control. Upholding this rosy but outdated perception of the market is just one of the many tools in their box.

In this continuation of Upside Chronicles‘s Wall Street toolbox of market manipulation, we’re diving into the murky waters of dark pool trading.

What are dark pools?

Dark pools are marketplaces where Wall Street can make trades and execute strategies outside of the public eye.

The general public does not have direct access to dark pools, which are also referred to as alternative trading systems (ATS).

Those that do have access to their murky waters are able to trade privately and directly with other participants. While dark pool volume is reflected “on the tape,” whether the trade was a buy or sell is not.

Dark pools do have some reporting requirements. Every week, the total ATS activity is listed by security on FINRA’s website.

However, by the time the data goes public, it is already out of date. Remember, this is coming from the industry that has the infrastructure to check multiple exchanges for prices in nanoseconds and execute billions of trades per day. But when it comes to basic transparency reporting….30-day latency.

Retail investor orders often get filled in dark pools through the payment-for-order-flow business model. In the GameStop run up earlier this year, it was revealed that Robinhood was routing its order flow to marker maker Citadel for fulfillment. That means Citadel essentially had exclusivity in processing Robinhood investor orders.

The way a healthy public market would work is that all participants – regardless of how deep their pockets – would be able to see the same pre-trade data, also known as the order book. This information is key to calibrating the buy and sell pressure on stocks to determine where their price is heading.

That is exactly why it is hidden from public view.

Rule 19c-3: There are no rules for Wall Street

True to their nature, dark pool trading slithered into legal standing through a seemingly innocuous enough, cleverly named ‘Rule 19c-3.’

In the Federal Register entry regarding the adoption of this rule, the SEC (yes, the commission tasked with regulating the markets) referred to it as a ‘limited proposal.’

For all the grandstanding Wall Street does decrying regulation, Rule 19c-3 is one Wall Street never complains about. That’s because it’s not really a ‘rule’ insomuch as an override of regulation pertaining to basic market transparency and fairness. Of course, those rules still apply to everyone else — the more money you have, the more of the full picture you get to see.

Prior to the passage of Rule 19c-3, trading in public companies had to be done…well, publicly. Dark pools were illegal between 1933–1978 under the Securities Act of 1933, passed during the Great Depression after the stock market crash of 1929.

There was significant opposition to the passage Rule 19c-3, which SEC defines as a ‘regulatory measure.’ Paradoxically, the “rule” actually reverses a real regulatory measure. Pointing out the obvious, the legalization of dark pools for big players would leave small brokerages and retail investors in the dark about what was truly happening in the market.

These concerns were overruled in favor of the Commission’s belief that giving big market players exclusive privacy privileges would “limit the expansion of the anticompetitive effects of off-board trading restrictions.”

In other words, giving big players exclusive “privacy privileges” makes for a more competitive market.

And that’s how dark pools became legal again.

The ‘theoretical’ justification for dark pools

Today, when the obvious advantages dark pools give to big Wall Street players is brought into question, the excuse mill they use to justify them falls into the buckets of:

1. There may be times where large transactions need to be executed privately to avoid rocking the stock price. Their favorite example to give is say, a former CEO with a large holding decides to retire and sell their stake.

2. They need privacy to execute “proprietary trading strategies” (and fraud, too.)

Of course, this directly contradicts their defenses of short selling‘s existence. It’s hard to argue that dark pools don’t drain liquidity from the market. Cushioning an insider sell off also interrupts “efficient price discovery.” Perhaps they mean it in the same playful way the word “Rule” is used in “Rule 19c-3.”

Dark pools hide the big picture about a stock’s true price

Dark pools obscure the real price of shares. Any given stock could have massive orders queued up in the order book, away from public view.

The prices retail investors see on the ticker tapes running across the screens of CNBC and Yahoo Finance generally aren’t truly reflective of active supply-and-demand pressures.

Imagine going to a dealer to buy a truck. When you pull up, you see two trucks in the parking lot. The salesman says these are the only trucks they have in their inventory.

The last dealer you visited only had one truck at about the same price. It seems a little expensive, but you go ahead and buy the truck.

After the paperwork is signed, you are led to the other side of the building. There, through a crack in massive blackout curtains that cover floor-to-ceiling windows, you see another lot packed with trucks. Moreover, the prices painted on the windows are thousands less than what you just paid.

The inventory on the back lot is only available to people in tax brackets much higher than yours.

Dark pool trading is a bit like that, except you’ll never see the back lot.

The very next day, all the trucks in the back lot are sold for $10,000 less than what you paid. The resale value of your truck falls.

Retail investors take note: The price you see on the ticker could very much be – and probably is – an illusion thanks to the SEC’s “regulatory measure,” Rule 19c-3.

Much like short selling, dark pools are one of the many ways Wall Street players can manipulate the market and by extension, a large part of the American economy.

GameStop price action reflects dark pool price manipulation

Frustrated retail investors noted that despite months of numerous brokers reporting significantly more buy orders than sell orders, the prices of meme stocks like GameStop would fall.

For much of 2021, Fidelity, the largest stock broker in the world, showed significantly more buy orders than sell orders, a trend that was mirrored by other brokers. Yet GME shares would still fall in price on these days.

On 8/18/21, Fidelity’s buy-sell ratio on GME was 82% buy, 18% sell. The stock still fell by over 6%. Retail investors suspected buy orders were being handled in dark pools to distort ticker price. Especially considering n this trend repeated itself day after day for months on end. Despite significantly higher demand than supply, the net effect on the price was a downtick.

Note: Orders reflect varying amounts of shares. This can happen if the sell orders were significantly larger than buy orders. Additionally, the ratio displayed above only reflects Fidelity’s buy-sell order ratio for the day.

Something is lurking deep in dark pools in 2021

#darkpools and #darkpoolabuse has been trending on Twitter for months.

In the eleven quarters leading up to and through Q2 of 2020, the percentage of total shares traded in dark pools averaged around 17%.

But Q3 of 2020 saw that figure shoot up to almost 50%. Of course, markets are dynamic, so anomalous spikes and drops happen. Yet Q4 2020 saw the 50% level sustained.

Incredibly, instead of floating back down to Earth, it continued to escalate. The first quarter of 2021 saw a jaw dropping 74% of all shares traded handled exchanged in dark pools. In Q2, it headed back in the right direction, but still landed just shy of 70%.

More than seventy percent of all shares that changed hands in the stock market at large in 2021 did so in dark pools. If this is the SEC’s idea of a ‘limited proposal’ that combats ‘anticompetitive effects,’ retail investors pinning their hopes to regulatory intervention shouldn’t hold their breath.

Massive volume increase

Interestingly, percentage of shares traded in dark pools isn’t the only thing ramping up.

The number of shares traded in the market overall exploded.

The ten quarters between Q1 2018 and Q2 2020 collectively averaged approximately 71 billion shares traded per quarter.

The second quarter of 2021 saw over 500 billion shares change hands. That’s a 700% increase compared to the historical average, and of those trades, almost 70% was executed in dark pools.

What is fueling the frenzied activity that Wall Street tries to frame retail for, (but can’t in this case considering 70% of the activity is happening in Wall Street insider exchanges) is the multi-trillion dollar question.

If this doesn’t reflect market manipulation by Wall Street insiders and marker makers, then all securities regulations are about as “strict” as Rule 19c-3. And much like Rule 19c-3 states, the rule is that when it comes to Wall Street, there are no rules.

Clues in trade size

Total volume percent traded in dark pools aren’t the only metrics going bananas. Trade size has been showing some unusual fluctuations that are rapidly breaking from historical trends.

A trade can contain one share, a thousand shares, or a million shares. In sync with the other exponential ramps from Q3 2020 onward, the trade size on public markets versus dark pool markets have also escalated.

Firstly, the trade sizes on public exchanges have been trending downward.

Between Q1 of 2018 and Q2 of 2020, the average size of trades executed on lit exchanges bounced around between the high 180s and low 200s. The cumulative average across that period came in at 196.4.

However, starting in Q3 of 2020 onward, there was a sharp decline. For the most recent data reported to FINRA, which spanned the period between 04/02/2021–06/30/2021, the average shares per trade on lit exchanges fell to 152.

Over the last four quarters (through 06/30/2021), the cumulative average shares per trade fell to 159.25 – a 19% decline. Strange considering the number of shares changing hands in the market at large was up 700%.

But a 19% fluctuation is small potatoes compared to what’s going on in dark pools over the same period.

Meanwhile, back in the dark pools, the trend is shifting sharply in the opposite direction.

The average dark pool trade size for the ten quarters leading up to Q3 of 2020 clocked in around 7,350.

But in Q3 2020, yet another exponential ramp started. The last four quarters’ average weighed in at just shy of 26,000 per trade – a staggering 350% increase. It peaked in Q1 of 2021 — the prime quarter of meme stock chaos — at almost 36,000 shares per trade.

Swim with caution

This year has been a good one for the stock market.

As of the time of this writing, the NASDAQ is up almost 18% this year, the S&P 500 has clocked just over 20% gains, and the Dow Jones is up almost 14%.

And yet, with a hard majority of the market’s activity hidden from view, something just doesn’t seem right. There must be some impetus for this extreme ramp in the need for discretion and frenzy in behind-the-curtain trading. The question is: What?

The truth is, no one can know for sure. Wall Street has built in cover with “regulatory measures” and “limited proposals” that hide more than 70% of the ‘public market’s’ trading activity from view to everyone but them.

The best we can do is take the information we do have, knowing that this is what the big players have “let” us know.

From there, perhaps a strategic place to start is understanding the depth of what we don’t know.

Jack Tazman

Jack Tazman is a Baltimore, Maryland native. He attended Washington University where he studied political science. Since then, he worked as a writer for various national news organizations specializing in politics and policy. He now resides in New York City as a freelance writer and political consultant.