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Monday's announcement by the SEC stated that two individuals were charged with fraud in connection to a scheme that involved put options for certain meme stocks.
According to the regulator, the men illegally received liquidity rebates from exchanges through a market manipulation known as "wash trading."
The SEC stated that one of the men indicted continued the scheme even though certain broker-dealers had closed his accounts.
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Monday's announcement by the Securities and Exchange Commission stated that two individuals were charged with fraudulently collecting liquidity rebates from an exchange in a trading scheme that was centered around so-called meme stocks.
According to the regulator, Suyun Gu, a Florida resident, and Yong Lee, his friend and business associate used a form of market manipulation known as "wash trading" in order to benefit from a "maker-taker program," which allows an exchange to reimburse liquidity providers for market participation.
In a maker-taker programme, the SEC stated that a trade order sent by an exchange and executed against a later received order creates liquidity and generates a rebate.
Gu was aware of the rise in volatility and volume caused by meme stocks, and devised a scheme for illegally making money off rebates by trading options on those stocks with his broker-dealer accounts. The agency stated that Gu used broker-dealer account to place initial orders on one market side, and then used broker-dealer account to take liquidity on the opposite market side.
According to the SEC, Gu was accused of trading approximately 11,400 trades and netting at most $668,671 liquidity rebates. Lee was also charged with these trades and netting $51,334 rebates.
The SEC stated that wash trading schemes allegedly had an adverse impact on the market because they distorted the volume of certain option contracts and incentivized traders to trade in otherwise inliquid option contracts.
According to the SEC, Gu and Lee chose out-of-the money options for some meme stocks when choosing products to trade. A put option allows an owner to sell an asset at a fixed price, also known as the strike price. When a stock's current price is lower than the strike price, it is called out of the money. Gu and Lee believed such products would be easier to trade for themselves, as interest in purchasing'meme stock' and associated price increases would make options on these stocks less appealing."
Gu continued the scheme until mid-April, after Lee and Gu's accounts were closed by broker-dealers in March. The SEC stated that Gu continued the scheme by lying to broker-dealers regarding his trading strategy, using accounts under the names of others, and accessing accounts through virtual private networks in order to conceal his activities.
Lee agreed to pay $51,334 for profit, $515 prejudgment interest, and a civil penalty equal to $25,000. The case against Gu remains pending.
