Open Letter to Big Finance
Dear Big Finance,
To you I am nobody. I am a simple trader, and I’ve seen my share of major successes and major failures. And recently, it’s been mainly the latter. Perhaps my successes deluded me into thinking that the market is fair, and that what I achieved was real.
Then I did some more research, and found that my failures mostly follow a certain pattern. Something which has the markings of a large institutional job. Something only Big Finance can pull off and get away with. Everything that is evil and insidious in finance is somehow connected to Big Finance, I just know it. But you know what?
I finally come to terms with the consequences. You win, plain and simple. There is nothing I can do about it. Big Finance always wins. Big Finance has cornered the market, but in this case the market is absolutely everything.
I am a victim of one of the very many Big Finance schemes which involve the market. I shall describe it in more detail, so that you know I’m someone who knows what the hell they’re talking about.
In Layman’s Terms
Suppose I am one a short seller — one who makes a profit out of falling stock prices. I would “sell” some shares of a stock at present, then “buy” them back later at a lower price. This is known as short selling, and it is the inverse of what most decent retail traders do, which is buy shares of a stock and sell them in the future. Short selling works by making a promise to buy stock in the future: I would borrow money equal to what I would spend if I bought the stock at present. When it comes time to buy the stock in the future, I would pay back what I borrowed, plus interest.
If the price became higher when I bought it back, I would pay back more; if the price became lower, I pay back less, and hopefully this becomes a profit after subtracting interest.
The stock market is normally unpredictable for both short sellers and regular traders alike. Naturally, I would want an edge over other people. What if I had the means to load the dice, manipulate the stock market? It would be a great business opportunity for me. In fact, Big Finance is an entire industry devoted to loading the dice, for themselves, and for their clients. The fact such an industry exists should come as no surprise to anyone with common sense.
As a short seller who wants an edge, I would be interested in methods of trashing the price of a stock in a predictable manner. Such a method does indeed exist, and has been applied on a massive scale since 2016 or earlier.
The Big Con
It is a fiendishly simple scheme. First, I choose a stock which has a small enough market cap, say, 2 billion dollars. Larger market caps would require me to pay far more interest. Then, I find a way produce counterfeit shares of the stock. Finally, I make a profit by circulating the fake shares into the system. This phase of the plan is exactly like counterfeiting money.
In typical cases, only insiders at the highest level can produce shares of stock. For example, the initial public stock offering — the IPO — is an event where shares of stock are produced so that the public can trade them. On the other hand, if I, as an outsider, do this without the proper authority, it would be just like printing fake money! Of course, I would not have added any real value to the company, even though I increased the number of shares.
How is this possible? I can not issue real stock, because I am not in a position to sign the appropriate forms with the government. Instead, I would take advantage of the system to put up fake shares for sale. This is possible by putting in short selling orders to a brokerage firm, then having them propagate these orders through the system, legitimizing them.
But wait, you may say, how is this really possible? Isn’t this a perfectly legal use of short selling? Not so fast. Usually short sellers — who can be honest traders— have to promise to buy back real shares of the stock, from a real person who owns those real shares. This is known as the “locate” requirement. A brokerage should only allow short selling of shares which they can prove are owned by someone willing to sell them in the future. If this requirement is not met, the system registers it as a “fail to deliver” event, and the brokerage should reject the order.
If the locate requirement is violated, there may come a time when people or firms have to buy shares which simply do not exist, and someone has to pay the cost. Essentially it creates risk further into the future. This rule is enforceable by law, something known as Regulation SHO. As with many laws in finance, this one is utterly unenforceable — as long as you’re big enough not to prosecute.
So now, an unscrupulous brokerage can simply accept a short selling order for which there is absolutely no promise to buy back real shares. I could put in an order for as many shares as I want, even if no one wants to sell them, even if there aren’t enough shares to locate. There was an incident where someone bought 100% of all outstanding shares of an obscure small-cap company, and the very next day an even greater number of shares were traded — shares which simply did not exist.
When I place the short selling order, no fake shares would be produced. However, the brokerage would “cover my ass”: they would legitimize my promise to buy in the future by sending the right signals through the system, filing the proper forms, and so on. And eventually, I will buy back the shares, or the company goes bankrupt — more on that later. At that point, I wouldn’t be the one paying the cost, and neither will the rogue brokerage I signed up with.
Down the Rabbit Hole
The next phase of the plan is to attack the stock price. In theory, in a fair market, these fake shares should trade normally and I wouldn’t gain an edge over anyone else. If I fulfilled my promise to buy back real shares, I would be paying “retail” price. But here is where the other element of the scheme comes in: circulating the fake shares into the system. This is exactly like money laundering.
Listen: the act of short selling, borrowing money to pay it off in the future, is perfectly legal. The act of paying back money is also perfectly legal. The illegal stuff goes on behind the scenes, with these firms which are too big to prosecute.
The typical pattern is as follows. There are multiple responsible parties who “trade” with each other using these fake shares. One would place an order to short sell them at a lower price than the real price, and another would buy them back. Rinse and repeat until the desired price is reached. To achieve this, the fake shares are not traded publicly on the stock exchange. Instead, the players would conspire among themselves on a private trading forum, all with the cooperation with the rogue brokerage. They would send the right signals and file the right forms certifying that these trades were made and are legitimate. As a result, the data on the exchange would be updated with these events, making it look like the price is going down step by step. This is known as “walking down” the stock.
To make the price drop look plausible, the perpetrators would run a propaganda campaign using online media. When any kind of news is released — good, or bad, or perfectly normal events which any company would go through such as simply borrowing money — they or their hired goons would post negative comments wherever large numbers of investors congregate. Since the stock market is unpredictable, the price of a stock can indeed go down with good news. However, the trick is that humans try to make correlations between events; if they can correlate any event at all with the stock price dropping, they will. So the price drop “makes sense” to them each time it occurs, good or bad. What happens next is that people will sell their shares in panic, often to the very same perpetrators who placed the short selling orders.
Usually the desired price is zero — in other words, making the company bankrupt. If this occurs, the perpetrators would never have to buy back their shares. They would make a profit and no one would know. However, they can also buy back their fake shares before the company goes bankrupt — this circulates the counterfeit shares into the system by transferring real shares from a real investor into their own hands. By the time someone notices there was any foul play, those extra shares have changed hands many times and thus become “real”.
And So It Goes
What I’ve described is the classic counterfeit-and-money-launder scheme, adapted for a modern age with modern technology. Just like physical counterfeiting, it has long-term effects on the economy. It introduces more risk into the system by intentionally damaging companies so that they collapse, bringing others down with them because everything is interconnected. It introduces risk by polluting the money pool with bad money. Eventually, people who are caught trying to spend bad money can simply lose the money, or get prosecuted because they’re not too big to prosecute.
All this would not be possible without Big Finance, which enables this kind of behavior by violating laws on behalf of unscrupulous clients. The collapse in 2008 was caused by this poor behavior. This is exactly like paying the government to look the other way so that you can cheaply dump toxic waste into the rainforest. Like pissing in the pool to the detriment of everyone.
And remember, this is only one of many tricks. Big Finance knows all the tricks. But the common pattern is this: an unscrupulous client wants to make a profit, so they sign their souls over to a rogue firm. The rogue firm uses its authority to enable them to make a profit, while taking a cut of the profit themselves. This directly causes some honest investors to lose money, and introduces risk into the system further down the line. Rinse and repeat.
In the unlikely event that the client or the rogue firm is caught, they get a slap on the wrist, because the firm has all the money. They may pay some tens of millions of dollars for one incident, when several other multi-billion dollar incidents go unpunished. The reason this happens is because the “good guys”, those who are supposed to enforce the laws, are on one hand underfunded and understaffed, and on the other hand colluding with the perpetrators. Why collude? The answer is always: money.
Folks, this is not something you learn at your CPA, CFA, or any other fancy-lettered designation. They only teach you how things are supposed to be. Too big to prosecute is not how it’s supposed to be — and they won’t say a peep about it.
Rogue firms enable unscrupulous clients to take money from honest clients, all under the guise of legitimacy and creating a “fair” market. Sure, short selling can be fair as long as you don’t create counterfeit shares, and buy back the real shares when the time comes. I’ve been on the side of the honest client. I would never take the side of the unscrupulous client. They never win in the end, trust me.
But you know what? You win. You Big Finance big-heads, you know all the tricks and have all the money, so you win forever. Well fucking done! And guess what? I’m tired of losing.
So here’s my offer. You’ve beaten me, so I want to join you. I have some considerable skills for hire, and I hope I measure up to your lofty standards. I’ve worked for companies your employees would give an arm and a leg to be hired by. However, I would give an arm and a leg to be hired by Big Finance. I love to help people and make them happy, and I’d love to help make your dreams come true. I love money fanatically, and I’m very good at anything I do.
Like sun-dials and chamber-pots, scruples are a thing of the past. They may have had some non-negative survival value in a more civilized age. But now it is 2017, and the world of my parents is obsolete. I’m prepared to abandon my old principles and become someone with no scruples whatsoever.
If this does not pan out, I’ll keep on being an honest loser person. But I would never, never, stoop to the level of the scum who makes a quick buck from an honest investor. Not unless I wore the cloak of legitimacy, anyway.
So do you want to deal?
[my Medium username] [at] [gee-mail dot com]