SEC charges individuals engage in fraudulent options-trading of “meme stocks”

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The U.S. Securities and Exchange Commission (SEC) sued two individuals engaged in  fraudulent wash trading of so-called “meme stocks.”

Wash trading is a market manipulation scheme in which a trader (who acts as a buyer) and a broker (who acts as a seller) conspire to make profits by feeding misleading information regarding the supply and demand of a certain stock. Their main goal is to pump up the value of that stock. In some cases, a market manipulator acts simultaneously as both buyer and seller of the same stock.

In its complaint on Monday, the SEC alleged that a Florida trader named Suyun Gu and his friend Young Lee of California obtained more than $1 million in illegal profits by wash trading meme stocks.

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The defendants allegedly engaged in the illegal scheme in early 2021 when certain meme stocks such as GameStop (NYSE: GME) were being actively promoted on social media platforms and message boards including Reddit.

Defendants made illegal profits by taking advantage of the “maker-taker” program by options exchanges

According to the SEC, Gu and Lee took advantage of the “maker-taker” program offered by options exchanges to attract orders and increase market liquidity. Under the program, options exchanges pay a make rebate to broker-dealers for placing non-marketable limit orders that are not immediately executable. A take fee is paid by broker-dealers that direct marketable orders that immediately execute against pre-existing orders. The make fee is smaller than the take fee.