Wash Sales and Maker-Taker Fees

Maker-taker fees and payment for order flow are much discussed topics. SEC Chair Gensler, had repeatedly talked about payment for order flow, for example, suggesting that he wants to reform the process. Whether and when that may happen is an open question. As the discussions continue, two friends devised a way to create what is essentially a riskless profit from the fees paid through the use of wash sales – riskless at least until the Commission uncovered the process.

SEC v. Gu, Civil Action No. 21-cv-17578 (D.N.J. Filed September 27, 2021) is an action which names two friends as defendants, Suyun Gu and Yong Lee. Defendants implemented a trading scheme in the first quarter of 2021 to utilize wash trades to take advantage of the maker-taker fees in the markets paid by some brokers.

First, Defendants used accounts at a broker that passed back to clients the rebate collected for providing liquidity by placing limit orders for out-of-the-money options. Second, Defendants would go to a different broker that did not pass along take fees to place orders on the opposite side of the market for the same put options. This trade completed the wash trade since it effectively canceled out the first trade. Defendants profited by keeping the rebate. By implementing the scheme repeatedly, Defendants were above to make over $1 million in profits in a short period. Stated differently, what were actually riskless wash trades made a profit.

To conceal their actions Defendants used the accounts of friends. Defendant Gu placed most of the trades. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Section 10(b). To resolve the case Defendant Lee consented to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to pay disgorgement in the amount of $51,334, prejudgment interest of $515 and a penalty of $25,000. Defendant Gu, who placed most of the trades did not settle. That action is in litigation.

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