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> What SEC rule is WSB violating?

Market manipulation. Loosely, market manipulation happens when you artificially influence the price of a stock, resulting in a personal gain. Buying stock with the intention of causing a short squeeze can be interpreted to fit that definition. I believe that WSB is creating artificial demand to try to "screw over" certain institutional investors. I am not a lawyer; this is not a legal interpretation.

> Apparently, the sort of crappy market manipulation that led to the 2008 Volkswagen "short squeeze" or the 2010 "flash crash" is absolutely fine because it was driven by traders.

How were they "absolutely fine?" You do know that regulators attempted to prosecute the traders/executives responsible for the 2008 VW short squeeze [1], and successfully prosecuted a trader for the 2010 flash crash [2]? For the VW short squeeze, regulators were not able to find evidence that the traders involved intended to cause a short squeeze or engaged in any artificial demand; they actually demanded the stock because they sought to take over VW. This is also evidenced by the fact the Porsche sold stock on the open market once they released that a squeeze was happening [3].

[1] https://www.ft.com/content/ad782326-ed02-11e5-888e-2eadd5fbc...

[2] https://en.wikipedia.org/wiki/2010_flash_crash

[3] https://www.ft.com/content/0a58b63a-4294-3e07-8390-c3aabef39...

> Loosely, market manipulation happens when you artificially influence the price of a stock, resulting in a personal gain.

Every purchase influences the market, and results in gain, otherwise people would not be buying, and selling things.

Every purchase, is a market manipulation by the definition.

> Every purchase, is a market manipulation by the definition.

Well, I don't think this would hold up in court. Both the SEC and courts have made a distinction in the past between "real demand" (i.e. demand motivated because you think the stock is undervalued) and "artificial demand" (i.e. demand that is not based on any underlying analysis, but instead motivated because you intend to trigger other market mechanisms, including coverings of short positions). Like most legal definitions, the actual definition is hazy, and courts may have established legal tests. Read Matt Levine for a nuanced analysis [1].

Again, not a lawyer, this isn't legal advice.

[1] https://www.bloomberg.com/opinion/articles/2021-01-26/will-w...

And every time, an effort to judge whose demand is more real that other ends up with absurd, scandalous legal rulings.

They should not be.

These guys have full understanding how laughable it the attempt to judge somebody by pretending the judge/bureaucrat can peer into somebody's mind, and yet they do it.

> pretending the judge/bureaucrat can peer into somebody's mind

But historical cases don't peer into people's minds. They look at evidence, such as texts in chat rooms that show clear intent to manipulate. See the Libor scandal chats [1], where one trader wrote "its just amazing how libor fixing can make you that much money" and "its a cartel now in london."

I think it's unlikely that the SEC will be able to successfully prosecute WSB traders, though, due to lack of evidence. It's also probably not even worth their time.

[1] https://www.buzzfeednews.com/article/matthewzeitlin/why-bank...

It's not market manipulation if it's true.

> Market manipulation. Loosely, market manipulation happens when you artificially influence the price of a stock, resulting in a personal gain. Buying stock with the intention of causing a short squeeze can be interpreted to fit that definition. I believe that WSB is creating artificial demand to try to "screw over" certain institutional investors. I am not a lawyer; this is not a legal interpretation.

Bill Ackman went on CNBC last year in near tears saying the end was coming, helping stocks continue their nose dive...all the while he was buying tons and tons of stocks which he turned into billions. How is that allowed but people on a message board sharing positions and high number of short floats isn't? There is literally, and has been for a long time, a website that tells you the short interest in a stock. It's sole purpose is to help people find short squeezes. That's why you have stats like "days to cover."

> Bill Ackman went on CNBC last year in near tears saying the end was coming, helping stocks continue their nose dive.... How is that allowed?

It shouldn't be allowed without proper disclosure on their actual positions. The SEC has prosecuted people in the past for making public statements while taking the other direction without proper disclosure.

I believe that this should be investigated by the SEC, but it likely may not since, at the direction of the Trump administration, the SEC has instead focused their efforts on other financial crimes.

I personally believed that stocks would continue at depressed valuations for the duration of the pandemic, yet bought during the crash because I knew there would be a recovery. I don’t think those actions are contradictory. (And of course I wound up being surprised how quickly prices recovered.)

You weren't a huge fund manager on TV talking down the market in real time while having your firm buy. A lot of people vested around last March, that's completely different than trying to scare people out of positions on national TV so that you can get into the position at a lower price.

> The SEC has prosecuted people in the past for making public statements while taking the other direction without proper disclosure.

There a difference between "This stock is going down. (I buy long because I know something I'm not saying)" and "This stock is going down. (I buy short because I believe what I say)"

This is essentially Reddit saying "This stock is going up, so buy options to exacerbate that and to profit." No misrepresentation.

If the SEC doesn't like this, they should fix the underlying market structure that makes this action possible. Effectively: what allows the traders to create leverage by abusing / forcing brokers to take specific actions.

Or just give up and accept that by digitizing markets we're past the rubicon to smart trading and predatory pack algorithms being successful.

First, I am not arguing that WSB is engaging in fraud or misrepresentation, as is alleged with Ackman. That is entirely different from the activity I am alleging is being done on WSB (by a subset of posters).

> This is essentially Reddit saying "This stock is going up, so buy options to exacerbate that and to profit." No misrepresentation.

I see threads where WSB is saying "This stock is going up, and if we make it go up more, hedge funds & market makers will have to buy more stock to cover their short positions, and therefore it will go up even further [and we will make more money]." That's the manipulative part — creating artificial prices to induce even more demand.

I think it's the "manipulative" that's debatable here, because the manipulation is effectively being done by a second party.

Is it manipulation if you're so predictable that an action by me causes you to always act a certain way? And I profit when you take that action?

If hedge funds refused to cover their shorts (I'm probably using the wrong terminology) and left them open, this wouldn't be an issue, no? Or, conversely, if market makers refused to sell options on overly volatile stocks / stocks being manipulated?

> Is it manipulation if you're so predictable that an action by me causes you to always act a certain way? And I profit when you take that action?

It depends, but approximately, yes if there was any intent to exploit that fact. See spoofing, other prosecutions for creating short squeezes, etc.

https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis...

The rationale is that markets are better for participants when their prices are accurate and reflect true supply and demand. Price manipulation subverts that, so the SEC disallows it (except in some cases where manipulation is explicitly allowed for historical reasons).

> refused to cover their shorts (I'm probably using the wrong terminology) and left them open, this wouldn't be an issue, no?

This is imprecise; hedge funds might cover short positions to hedge further losses, or because their prime broker might require them to maintain a certain margin (to reduce counterparty risk). I have no experience in institutional investing, so that's a guess.

> Or, conversely, if market makers refused to sell options on overly volatile stocks / stocks being manipulated?

Market makers will increase a premium for options on "overly volatile stocks." If the risk is too high, then they may stop selling the options altogether. But the problem is — it's difficult to predict which next stock WSB might start manipulating. That's another issue. If regulatory agencies don't step in and prevent this type of manipulation, the premiums on all retail-adjacent options will be higher because of the increased risk and fear that a capricious WSB crowd might turn on a MM. That's bad for people who use options "correctly" — not for gambling, but as a way to hedge and reduce risk.

> ...all the while he was buying tons and tons of stocks which he turned into billions

It's called activist investing. His fund did not buy stocks, but bought Credit Default Swaps to the tune of $27 million USD. In the event that the markets dropped, they were awarded massive gains if they exit position. They gained $1.3 billion.

Prior to exiting the position which was publicly released, he went on media outlets and promoted the idea of shutting down the economy. This is what activist investors do. They actively spread rumors that will help their positions.

https://assets.pershingsquareholdings.com/2020/03/26122842/P...

How is this not market manipulation?

> It's called activist investing.

I'd be really interested in learning more about the Olympic level mental gymnastics one has to go through to write this off as O.K. but then turn around and say that a bunch of random people on an open public forum saying to buy an over-shorted stock is market manipulation. They don't even have the purchasing power to make a difference here.

I remember, a few years back, that Musk made news because he shut down someone asking questions in a public earnings report. The press was giving him a lot of flack about it. Then I kept reading, and found out the person who was trying to ask those questions represented a firm(s) that had large short positions on the stock, and was trying to cause the stock to dip. Musk knew what was going on, and headed it off. Seemed like he made a good call, but then the press made THAT the story instead.

That is -not- what an activist investor is. An activist investor is someone that buys a large enough portion of a company in order to have a say in board operations, etc (even liquidation.) You can go on air and talk up your company, ever CEO, etc does that. That is expected. What he did was talk down positions he was going into. That is not activism.

What is artificial about buying a stock and encouraging others to buy it?

Because the encouragement affects the outcome of your own investment instead of "happening on its own".

So no one should be allowed to speak for or against buying or selling stocks they own?

> There is literally, and has been for a long time, a website that tells you the short interest in a stock. It's sole purpose is to help people find short squeezes. That's why you have stats like "days to cover."

Again, I am not a lawyer, I am not your lawyer, and this is not a legal interpretation or legal advice; just my personal opinion.

Motivation and intent are the main factors in determining manipulation. So there are two cases:

1. A trader buys stock, seeking to profit, because they believe that a short squeeze may be incoming soon.

2. A trader buys stock, seeking to profit, because they intend to drive the stock price up, thereby causing a short squeeze.

(1) is legal (in my understanding; see the disclaimers above). (2) is not. They differ in their intents. The first one is "legitimate" demand, the second is "artificial."

Now, it's difficult to prove intent in court. And clearly, many people in WSB legitimately are buying the stock because of (1). But there are some who are doing (2). They have plausible deniability, though, and that's why it's unlikely that anyone in WSB will be successfully prosecuted without more concrete evidence.

This is not artificially influencing the stock price. Buying a stock believing it will increase in value is basically the point of the stock market. Believing it will increase in value because it's been over-shorted is a legitimate reason to ascribe value to it.

> The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".

It is my opinion that this demand is not artificial, it is genuine, although caused by factors other than the inherent value of the stock itself.

If this is considered to be 'creating an artificial price', I don't see how a position where 140% of the shares of a company are shorted could not be, meaning significantly wider implications than just a single subreddit.

You never need the disclaimer about not being a lawyer. Ever

Since I am not a lawyer and therefore unfamiliar with the potential liabilities I might incur by not including that disclaimer, I would rather cover my ass.

https://law.stackexchange.com/questions/683/usa-is-i-am-not-...

Also, are you a lawyer, and is that legal advice? :)

Sure and yes it is.

There are no repurcussions for not having that antiquated disclaimer. Which wouldn't hold up even if there was some magic that allowed a case to be brought

Wall Street asked for exactly these sorts of deregulations. It's absolutely hypocritical for them to ask for exceptions to be made now and those half-assed versions of older regulations brought back but for only some traders.

Facts won’t matter, they can ban just out of lawyer fear that they are at risk if they don’t ban.

IMO the same is true with mask mandates. Businesses probably fear lawsuits from employees and customers who might get sick, and blame them for not doing enough. Sometimes a business does something that it claims is in the public interest but in reality is to protect them; i.e. Green Washing.

https://en.wikipedia.org/wiki/Greenwashing

Yep. In Virginia a church sued and forced the mandate to put the misdemeanor on the individual rather than the church. I wish they would do this for businesses as well.

None, but Reddit doesn't need a valid reason to ban a subreddit. Where there's a will, there's a way.

The hedge funds went to CNBC and told them they settled their short positions at $90. This news rippled through the entire trading community, exactly the same as WSB information ripples through the entire trading community. There is zero difference.

Most likely this will be like accessibility to poker online and in casinos which don't profit off the game directly interestingly in the 2000s. A lot of people got involved. A few made a lot of money and the rest went to do other things after a while.