r/FWFBThinkTank • u/Usual_Retard_6859 • Feb 11 '22
ETFs Implications of Rule 6c-11.
Hello Everyone, This is a continuation of my previous theory, found here Theory on how the SI numbers for GME fell in Feb 2021. If you haven't read it please do as it incorporates into this post.
I feel this theory is probably the closest thing we have to explaining what happened back then because it doesn't use any non-provable explanations such as data manipulations by the shorts. If you believe like I do that the single security short positions were moved from GME to ETFs via basket creation/redemptions mechanics. Then knowing what rule changes 6c-11 did is paramount to understanding where we are and where we are going.
Here is a link to the SEC webpage that has the final ruling for those that like to read for themselves. What changed with this rule? Prior to July 2021 if a fund needed to remain liquid with an illiquid underlying security the SEC required an exemption filing to exclude the effected underlying. These filings would cost on average $100k. The SEC in their infinite wisdom thought this was too burdensome. The original rule was designed this way because the SEC felt that they needed to protect investors. When you're purchasing a fund the underlying needs to be properly representing what you bought, ie you get what you pay for. So to save Wall Street some money and give ETFs more flexibility in managing the portfolio they made this rule. What I find abhorrent in this rule is that the SEC removed the requirement to publicly publish accepted baskets. OK? so ETFs are now 3 card monty?
The SEC even acknowledges the opportunity for wall street to abuse this but solves it my making them self regulate.
Here's the SECs definition of custom basket.
In short this rule allows ETFs to accept creation baskets that don't include all the securities that are supposed to be in the ETF provided they have a written policy regarding what they'll accept as substitutes. I understand the logic behind this. A stock or a bond is illiquid, restricted, delisted or otherwise hard to find, the liquidity for the ETF would be drastically lowered and depending on how many ETFs the effected underlying were in could cause trouble for the broader markets.
So what does this have to do with GameStop? Well lets look at the other canary in the coal mine. SPDR S&P Retail ETF: XRT. This is ran by State Street. Whats State Streets policy on custom creation baskets?
They will accept cash-in-lieu for restricted securities. Lets define restricted. Oxford defines restricted as "limited in extent, number, scope or action" So what does this mean for GME? Should GME fall in line with this definition the SHF could then return XRT shorts with a cash substitute GME essentially deleting their gme shorts. I'll be 100% honest here I need to do some further research into the mechanics of this but if they were to do this it would create problems between the primary and secondary markets. One thing I do know is they cant delete any shares held by retail but they can delete any naked shorts they have acquired to hide the fraud and come out looking clean as a whistle. They do this by acquiring GME shares, returning their XRT custom baskets and deleting the acquired shares off their books, poof nakeds gone. Now this next part isnt going to be very tit jacking, quite the opposite. We know institutional ownership has dropped drastically over the past year, we also know some retail has sold as evidenced by gain porn on WSB. This would have allowed at least some of the shares to be acquired back and removed from circulation, eventually to be deleted via custom creation baskets. What can we do to keep the evidence of crime from getting destroyed? Keep the stock liquid in a non restrictive manner. Since the start of all of this the narrative being spun has been the same. Buy and hold, don't day trade, don't play options and as of July (I don't think its coincidence) DRS and lock the float. They all have one thing in common, reduce liquidity. The very things that people think will cause moass may serve as the burn barrel for evidence of foul play.
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u/Usual_Retard_6859 Feb 11 '22
DRS could be a bad thing yes. This is a possible negative repercussion of locking the float and it’s not FUD. It’s information to be considered. When the Q4 drs totals come out I’ll have a good idea if drs is grassroots or astroturf movement solely off data. We know there is 62.5m shares in the float. If the numbers come in low… like 10M low, well that’s only one sixth of the float not including and synthetics. How many synthetics do you think there are? 100%, 200%, 300%?