Forcing a Crash: Inside a Wall Street Scheme (Court Documents Revealed)

Today's episode is an important public 
service announcement to warn you of an  
illegal naked shortselling scheme that a lot 
of beginner and even experienced traders are  
getting caught up in. All of this has come to 
light thanks to a lawsuit that was recently  
filed. In that lawsuit, allegations are put 
forth in court documents that walk us through  
the inner workings of how this scheme functions. 
And it is mindblowing. It's so much bigger than I  
would have guessed. And I'm going to tell you, 
if you've been trading for the last 6 months,  
you have seen this scheme happening right 
on the level two and right on the charts,  
right before our eyes. We've been talking about 
it. We've been asking, how is it possible that  
a stock could come out with good news, squeeze 
up, and then there's an infinite wall of selling,  
what feels like an algo pushing the price right 
back down. That has been naked shortselling. Okay,  
that makes sense. all of a sudden. Yeah, cuz 
we've been seeing that and we were trying to  
figure it out. So, thanks to this lawsuit, we 
now have an understanding of how it works and  
that's what I'm going to be sharing with you here 
today. Now, I wish I could say this is brand new,  
but it's not. This has been going on for a long 
time and even if this current shortselling scheme  
gets shut down, another one will pop right back 
up. Now, to be clear, shortselling is not illegal,  
but naked shortselling is. If you don't know 
the difference, you will by the end of today's  
episode. So, let's begin by playing a clip from 
the HBO documentary Gaming Wall Street. This is  
a former Morgan Stanley Banker talking about his 
experience naked shortselling. Let's hear what  
he has to say. This is going to set the tone for 
today's episode. You know, I would illegally naked  
short sale stocks every day. Every day, as long 
as I was collecting commissions. There it is. He  
would illegally naked short sell stocks every day. 
Every day as long as he was getting commissions,  
he goes on to say, "And the bank did not care." 
The bank did not care. Now, in today's episode,  
we have a special guest. He is a former attorney 
at the SEC. His name is Nick Morgan and he is  
also the founder of a nonprofit law firm, 
Ian, Investors Choice Advocates Network.  
So, Nick, are you ready to jump in and pull back 
the curtains on everything that's been going on  
here with naked shortselling? I'm ready, Ross. 
Let's pull back the curtain. This is a theme that  
was that it's a theme that's been true for years. 
This is true before the GameStop short squeeze,  
and it's still true today. Now, we're in a current 
regulatory environment where I fear that there's  
not as much attention on reigning in these big 
institutional players and these big brokers. Now,  
I could be wrong. The rules are the same. They've 
been the same. Nothing has changed with the rules,  
but the enforcement of the rules seems to vary a 
bit, partly from administration to administration,  
the political climate, and the whim of 
the regulators. And for whatever reason,  
naked shortselling has been unable to be fully 
reigned in. So, as I walk you through this scheme,  
we're going to begin part one with the bait. 
How are people getting involved in it? Are you  
involved in it without knowing? Well, this is how 
it starts. Posts on social media of people showing  
a chart like this with a bunch of red arrows going 
up. So, as the price goes up, what they're doing  
is they're shorting, shorting, shorting, shorting, 
shorting, and they're adding as it goes up. And  
they say this is easy. It's emotionless. You just 
add every x percent that the price goes up. And  
then look, nothing goes up forever. The statistics 
tell us that even the biggest moves like GameStop  
eventually come back down. So as long as you leave 
yourself room to keep adding, you'll be fine. And  
then you cover as it comes back down. And the best 
part of this is that you can automate it. It's a  
systemized short selling strategy. You can turn 
it into your own trading bot, your own algorithm,  
and it will trade the market for you while you're 
at work. What could be better than that? But  
you've got to use our special broker because you 
can't automate this type of trading using a Schwab  
or Robin Hood or Weeble account. Of course, you've 
got to use one of these special boutique brokers.  
So, what they tell you is that you don't need 
scanners. You don't need charts. You don't even  
really need to know how to trade. You'll have 
a high win rate. You can automate your trading  
and you can just use the statistics to create an 
algo. What could be better than that? But there's  
a catch. You can't trade with the trend like I 
do. You may know that I'm a momentum trader. So,  
I look for something that's already moving and I 
look to jump on that momentum and continue to ride  
it as long as I can. Now, this system of algo 
trading doesn't work for trend trading because  
it's it's just not something that it's able to 
do at this point just due to the complexity of  
knowing the discretion of do I jump in this 
stock right here that's already up, you know,  
100 plus%. Or is this too extended? Now, those 
are the discretionary decisions that I'm making  
as a long biased trader. Now, I'll tell you that 
historically long biased traders are kind of have  
kind of been thought of as being the dumb money. 
They jump into anything that's moving during the  
dotcom bubble. You know, the OTC pink sheet penny 
stocks and it was the short sellers who were a  
little bit more sophisticated that would bring 
the price back down. But then shortselling became  
so popular that the shortselling sector became 
quite crowded. And as it became quite crowded,  
there were a couple issues that you're going 
to learn about today, including availability of  
shares to borrow. Now, trading to the long side, 
you don't really have to worry as much about it  
being crowded because the shares that you buy are 
all part of the float. And as people buy shares,  
the price goes higher. But when you trade to the 
short side, you need to have the shares available  
to trade first. So if you're going to trade a 
system short selling strategy, number one, you're  
not trend trading, you're counter trend trading. 
So what that means is that as a stock goes higher,  
you're shorting or as a stock goes lower, you're 
buying. Now, a simple algo for retail traders is  
just not sophisticated enough to know that you 
could buy in the middle of a trend like this  
right here at $8. This stock just went from 550 
to 8 and you know reasonably is very extended,  
right? That's a very extended stock. Probably 
anyone typically looking at that on paper would  
say this is not a good place to buy right where 
my white arrow is. However, what we knew at that  
moment was that that stock had a very specific 
catalyst. That the theme in the market was that  
these stocks with these catalysts are making huge 
moves. And so for all of those reasons, we were  
able to make the discretionary decision to take 
the trade and I lock up $156,000 of profit. As you  
can see right here on the previous slide, I had 
$169,000 of profit doing something very similar,  
making the discretionary decision to buy in the 
middle of a trend. That discretionary decision  
cannot currently be automated to an algorithm, 
not in a successful way because there's too many  
variables. However, counter trend trading is 
a little bit different. So trading bots only  
trade reversals. And what they do is they add 
fixed shares at fixed intervals. They could do  
it either long or short. So as a stock is going 
up, they add, they add, they add, and they add at  
these fixed intervals. And then as it comes back 
down, they're covering and covering and covering.  
And this makes it feel very simple and very easy. 
So certainly the algo could work on buying weak  
stocks, but we're not talking about this. We're 
talking about naked shortselling. So why is that?  
Well, when a stock is weak, especially a small 
cap stock like this, often there's panic, there's  
fear, and it takes a long time for people to 
become greedy and want to buy a stock that's down  
50% or more. For that reason, it's very difficult 
to trade bottom reversals and expect a big rally  
back up, especially on small cap stocks. Usually, 
when they're dropping, it's for a good reason.  
And so, the bounces are very small. So if you 
start adding adding adding adding adding adding,  
you never really get the relief bounce to give 
you profit. But with trading to the short side,  
because the market is fundamentally long biased, 
companies want their stock price to increase.  
They're constantly putting out good news. And in 
a hot market, investors and traders experiencing  
FOMO and greed, stocks are more likely to trade 
at overbought levels versus oversold levels. So  
this means there are more opportunities to trade 
reversals short versus trading reversals long off  
the low, especially in the small cap market, 
which naturally is more appealing to beginner  
and intermediate traders with smaller accounts. So 
this leads us right into naked shortselling. Well,  
it doesn't have to be naked, but in this 
case, it is. So the idea with a short system,  
a short selling system, is that you use statistics 
to create your strategy. And so the idea here is  
that nothing goes up forever. We know that. 
And so as long as you leave yourself room to  
continue to add, then you'll be fine. And this in 
theory is true. You take a starter here. And if  
it immediately reverses, you have a winner with 
1x position. If you add to your second starter,  
your second ad position, then it reverses here 
before the third. You have a profit with 2x of  
position or 3x or 4x. And at a certain point, 
you get that reversal. So the idea is that  
you add 100 shares when the stock is up 50%. 
For instance, you add another 200 shares when  
the stock's up 75%. You add another 400 shares 
when the stock's up 100%. And by increasing your  
share size as the price moves higher, you're also 
increasing your cost basis. So when it rolls over,  
you'll be at profit sooner. And so you see how 
you keep doubling up. You go 100 to 200 to 400  
to 800 to 1600 to 3200 to 6,400. So, in this 
scenario right here, this works as long as the  
stock doesn't go up more than 500% and you have 
the buying power to have a full position here,  
which is the culmination of all of these shares 
added together plus your final ad. So, in theory,  
it works great. You remove emotions, you 
systemize trading, you systemize shorting.  
You're essentially trading against the very 
low probability of a 600% move. This, however,  
is a martingale strategy. So this strategy, it's 
Achilles heel is a black swan event because if a  
stock does go up a,000% or more, you end up taking 
that loss. But for every other time that it only  
the stock only goes up 300% or 400%, you may not 
get to your final ad before it rolls over and then  
that's fine. So this is a strategy unfortunately 
where traders can do really well for a long time  
until the black swan comes along and wipes them 
out. And so that actually creates an illusion  
during the period that things are going well that 
this system is awesome and I want to trade it with  
more and more size until you get that black swan 
where you give back a lot of profit. Now whether  
you give back all your gains or you give back, 
you know, just a portion of your gains ultimately  
depends on how quickly you're able to exit the 
position once you hit your max loss. What we  
know about trading these types of stocks is that 
they can move extremely quickly. We've seen times  
where stocks have gone up a,000% in as little 
as five minutes. So, if your algorithm was not  
fast enough to exit that position, then suddenly, 
you know, you're down substantially and you could  
even have a margin call to your broker. We'll talk 
more about that in a minute. So, in the past year,  
we've seen a lot of these moves where a stock will 
come out with news, it'll start to squeeze up,  
and then it just gets hammered right back down. 
And it's been very confusing why a stock with  
seemingly good news would be unable to hold these 
levels. And we've called them round trips. the  
stock pops up is not able to hold and it comes 
right back down. So a Martingale strategy is high  
risk but by itself it's not a scam. You you know 
you could use it. It's just it's high risk. That's  
all it is. So the idea of doubling each time you 
add that you'll eventually make back everything  
you lose is correct except that you have limits 
of scalability and a certain point you run out of  
equity in your account. So, the reason that it's 
being used as the basis for these trading bots  
is because it can be automated. You just add as a 
stock goes higher, it feels easy and it has high  
accuracy. Now, it feels easy. It's not actually 
easy when you factor in the black swan events,  
right? But this is this is the way it's marketed. 
And so, can you trade this strategy and automate  
it with Schwab, Robin Hood, or Weeble? And 
the answer, of course, is no, you can't.  
You cannot do it. They don't have good access of 
shares to borrow. So now to trade this strategy  
that feels so alluring. This is the bait. You have 
to use a broker that allows API for trading bots,  
has large availability of shares to borrow, has 
reasonably priced borrowing fees because anytime  
you borrow a stock, you have to pay a fee on it, 
and has flexible margin requirements because if  
they make you, you know, have a lot of equity 
in your account to take these trades and that's  
not going to work either. And so now you've got 
thousands of affiliates all pushing leads into  
these special brokers that are allowing naked 
shortselling. This is a problem. So Nick, can  
you give us a little bit of context around when 
people make these posts on social media um when  
there's an affiliate relationship because most 
of these posts don't make any disclosure about  
that at all. Right. Well, there's a real concern 
at the SEC about manipulative conduct by traders.  
uh and that uh manifests itself in a number of 
rules and and enforcement actions by the SEC.  
But when someone is talking about a stock and 
unbeknownst to the people reading the posts or  
the articles or whatever, they actually 
are being paid by an issuer or a broker,  
the SEC wants that to be disclosed so that people 
who are receiving the information know about  
possible conflicts of interest. So, I think it's 
pretty widespread that that the disclosures are  
not always as robust as they could be. So, part 
two, now we've got to talk about these brokers  
that all these affiliates are sending leads to. 
So, the broker makes money every single day,  
rain or shine. They make money on platform fees. 
They make money on the API fees for system trading  
and trading bots. They make money on commissions. 
And they make money on short borrowing fees. Now,  
these brokers are not commission free. So, every 
time you trade, you're going to pay a fee. Now,  
these fees typically are based on a per share 
basis or or charged on a per share basis. So,  
$1,000 shares times 0.005 is a $5 commission. So, 
$5 to trade a,000 shares to buy it. It's another  
$5 to sell it. So, if you end up doing 10,000 
share positions because you're scaling up, you're  
paying $50 total to buy and $50 to sell. That's 
a $100 round trip for the broker. That's the  
commission that you're paying. So now you can see 
how the broker is making hundreds of dollars per  
day per customer. You multiply this by thousands 
of customers and you add on the additional  
fees and you know everything else, they're 
making a lot of money. So with that profit,  
they're paying affiliates to keep driving fresh 
leads. But there were two problems. Now again,  
all of this is perfectly legal until you introduce 
naked shortselling. a Martingale strategy. It's  
high risk. Eventually, you could have a blowup, 
but it's legal. You could trade it if you want.  
Training the short side, that's legal, but the 
way it works when you're trading the short side  
is you have to borrow shares from someone who 
owns them. Too many short sellers meant the  
brokers were running out of shares to borrow. And 
the result was that it was increasing the cost to  
borrow for everyone. And so a lot of the big money 
traders were going to the broker and saying, "Hey,  
I've got a $5 million account with you. I want 
to short, you know, whatever 100,000 shares of  
this stock and the cost is outrageous or I don't 
even have shares to borrow. I can't find any. So,  
you know what? I'm going to close my account. 
I'm going to go somewhere else." And the broker's  
like, "No, no, no, no, no. Don't do that. Don't 
do that. We're going to figure this out. We're  
going to figure this out." So, for their top, you 
know, heavyweight traders, they don't want to lose  
all the commission they're making on them. So, 
they have to figure it out. And for all these new  
leads that are coming in that are doing the system 
short selling, they don't want to lose out on that  
profit either. So, they got to figure something 
out. Now, if you actually look at the charts, um I  
have I use this software called Ortex and it shows 
you the cost to borrow. And on this particular  
stock, PL ag borrow was up 315% just in the last 3 
months. And most of that was in the last 14 days.  
A 350% increase in the cost to borrow. So, the 
cost to borrow was going up. Why was it going  
up? Because everyone wanted to short it. Because 
it made a big move. But what's worse is that there  
was only uh 3% less than 3% shares available to 
short, the remaining 97% of the shares that were  
totally available for shorting are already spoken 
for. So, not only are you paying an elevated cost,  
there's hardly any shares left to borrow. So, now 
this is a problem. You try to borrow and it says  
symbol not eligible. Nope, no shares available. So 
my broker does this. It says no shares available.  
Now fortunately the broker that I'm using does 
not involve itself in naked short selling. So  
they just say no. Sorry, no shares available. 
That is what it is. Whatever. Now if there are  
no borrowers, if there's no borrows on shorts, 
the system short sellers will close accounts. The  
heavyweight traders close accounts and the brokers 
lose business. And so all of a sudden the pressure  
is on. And this is where we come back to when 
the pressure is on, what are we gonna do? I would  
illegally naked short sell stocks every day. 
That's the quote from the banker. And so this  
is this is a Morgan's former Morgan Stanley 
employee saying that. And what they would do uh  
is they would press an F3 button on the keyboard, 
the broker would to autolocate shares. In 2016,  
Goldman Sachs pays $15 million settlement on 
allegations made by the SEC that they were  
using an F3 button to autolocate shares. They're 
not alone. Maril Lynch, Goldman Sachs, UBS, uh,  
you know, Morgan Stanley, Interactive Brokers, all 
of these, all of these have had abusive, illegal,  
naked shortselling fines. This is widespread. This 
is not a small thing. This is happening across the  
market. It's happening on large cap stocks. It's 
happening on small cap stocks. it's happening on,  
you know, these random sort of Chinese stocks are 
popping up. It's it's across the board. So then if  
we take these relatively small penalties sort of 
as that that these were administrative bookkeeping  
issues, they paid a penalty, which in the scheme 
of the size of these companies is very minuscule.  
Um, have there been more well-known instances of 
actual naked shortselling schemes that the SEC  
has prosecuted or that have been alleged and that 
something has come of it or is this just something  
that continues to kind of happen without much 
action? Yeah. Well, kind of both. In other words,  
the SEC has brought a number of actions. Certainly 
from the perspective of shareholders in a company  
or management of a company being the subject 
of a persistent naked shortselling campaign is  
devastating. And so there have been some 
historical examples where companies got  
really incensed and tried to do something about 
it. The one that comes to mind immediately for  
anyone who's kind of been in the space for a long 
time is the famous case of Patrick Burn and the  
company he was CEO of, Overstock.com, which was 
the subject of a persistent shortselling campaign.  
He [clears throat] became so insensed by that that 
he went very public, filed a number of lawsuits,  
complained loudly to the SEC. Um, and ultimately, 
I think he was so frustrated by what was going on,  
he attributed the conduct to what he called a Sith 
Lord. Um, who he viewed as sort of a puppet master  
behind the scenes, coordinating the efforts of 
naked shellers and the press and the regulators.  
And ultimately, I I don't think he was right that 
there was a Sith Lord conspiracy because frankly,  
it's a lot more boring and mundane than that. It 
doesn't require a conspiracy. All it requires is  
sort of knowledgeable exploitation of the way the 
system is set up by people kind of doing ordinary  
kinds of things. That's very interesting. And so 
with naked shortselling, now you get a broker that  
gives you quote guaranteed borrows, automatic 
locates, which means you don't even have to  
locate. You just press the sell button and 
immediately you're short. Like magic. Yeah,  
it's magic. It's not real. In fact, what 
you're doing is you're selling shares that  
don't exist. So let's just think about how this 
works for a second. So if you want to go short,  
this is legal shortselling. So legal shortselling 
is you've got someone who owns shares. You've got  
an owner of the stock. They bought 10,000 
shares of Robin Hood, whatever it is,  
and they own it. Now, what Robin Hood does as a 
broker is the broker lends out the shares from  
one customer to another customer. So, this is the 
borrower. And now, the borrower can now sell the  
10,000 shares on the open market. The stock goes 
down. And this is all while this person is still  
holding the shares. They still have a position in 
their account that they're long 10,000 shares. If  
they sell the 10,000 shares, then immediately the 
broker needs to get back these shares from this  
person or replace that borrow with with another 
borrow. So this person's holding the shares,  
this person sells it. The price declines, they 
buy back the shares, 10,000. They make, let's say,  
whatever amount of money, doesn't matter. And 
they then have those shares given back to the  
original owner. Now, the owner earns a tiny little 
fraction of interest. And the broker also charged  
this person interest to be borrowing those shares. 
So every time you short, you're shorting shares  
and borrowing them from someone out there who's 
an owner of the share. And the broker sits as an  
intermediary that makes a profit from loaning out 
shares. Now, during the GameStop short squeeze,  
there's a lot of discussion about restricting 
the ability to of your broker to let uh people  
borrow your shares. And so you can actually go 
into your settings on some platforms and say,  
"Don't lend out my shares. I don't want that." So 
you could do that, but most people don't do that.  
And so the results is that your shares are are 
lent out. All right, that's fine. But there are  
instances where stocks have a very low float uh 
and there's simply not a lot of shares at brokers  
that are available to borrow. And so this person 
wants to borrow and they can't. But the broker  
could say, "Well, you know what? I'm just going 
to give you the 10,000 shares. I'm going to press  
that F3 button on my keyboard. I'm just going to 
give you the shares and I'm going to figure it out  
later. I have reason to believe I will be able 
to get the shares." That was what the F3 said.  
I have reason to believe, but they didn't have 
any reason to believe. They just that was the  
button they pushed. If I'm a broker and somebody 
comes and sends me a bunch of short sale orders,  
the regulations require that I have a reasonable 
basis that I can go out and borrow shares to match  
against those short orders. Well, they they do it 
by a various various means. Um, but the the the  
reasonable basis can be created by just looking 
at what's the inventory of shares out there. Um,  
and that that can give me a reasonable basis 
to think I can borrow, but at the same time,  
the broker next to me is doing the same thing and 
looking at the same pool and the broker next to  
him is doing the same thing, looking at the same 
pool. So, it's as though you were a travel agent  
booking seats on an airplane that has a 100 seats. 
Everyone's looking at the same 100 seats. If  
you've got 50 brokers all, you know, thinking they 
had a reasonable basis of 10 seats per broker, you  
can see how you could easily exceed the number of 
seats on the airplane because we're all looking at  
this same pool. So, that's the it's the ambiguous 
nature of who owns which shares at which point in  
time that allow the brokers to have a reasonable 
basis and basically overpromise shares to short  
sellers that are coming in. And the brokers, 
you know, they want to satisfy their customers  
who are putting in short sale orders. And so, um, 
there is an incentive to be less fidious about how  
how reasonable is your belief that you could 
go borrow these shares if you wanted to. So,  
that's the real problem. It comes from a 
good thing, a good innovation um that has  
created some problems and traders and brokers know 
about this and can sort of take advantage of it.  
So then to expand on the F3 button that Goldman 
Sachs was using, on the one hand, if you've got  
all of these um brokers checking an inventory, 
the inventory may not be updating in real time,  
second by second, when people are actively 
buying and selling so rapidly, which we know,  
even if those of you who have tuned in and watched 
me trade, how within seconds I could be an owner  
and then I'm not an owner and then I'm an owner 
again, then I'm not an owner. So if there's so  
essentially if there's shares available they would 
uh or or if they had the reason to believe they  
would press the F3 button or how exactly did that 
work? You you know by well it's I mean anyone can  
go read the SEC's allegations against Goldman in 
that case and so Goldman like all brokers had this  
problem of short sale orders are coming in and 
they need to establish that they have a reasonable  
basis that they can borrow. So what they did was 
they at the beginning of every day they had and  
this is all automated computerized they would have 
an inventory list for each ticker. How many shares  
do we know that we have in inventory that can be 
borrowed against for short sale. So fine you've  
got 10,000 shares of whatever ticker. But then 
when during over the course of the day if short  
sales came in that exceeded that then they had to 
go to a manual process to determine whether oh we  
need to maybe call a customer to see if we have 
additional shares we can borrow beyond what was  
on the beginning of day list. And over time that 
was really cumbersome and and at least the way the  
SEC alleged it against Goldman. They eventually 
created this F3 key solution where traders who had  
short sales coming in could hit the F3 key which 
sort of shortcircuited the inventory issue and  
gave the brokers the answer that they wanted 
which was yes. I have a reasonable basis to  
believe we have shares that they can borrow. 
And the SEC said no you really don't. the F3  
key was an illusion that gave the brokers uh the 
belief that they could borrow shares when in fact  
uh in many cases they did not have sufficient 
inventory. So the F3 key is just a reference  
to Goldman's solution to the same problem that 
every broker has which is how do you satisfy  
customers who want to do short sales and satisfy 
your regulatory obligation to identify or have a  
reasonable basis that you can borrow shares to 
satisfy those short sales. Interesting. And so  
then if you had a dozen or so brokers all working 
on that same beginning of day inventory and also  
just sort of going on the assumption that 
maybe they could get more shares somewhere,  
right? Then all of those brokers could sell 
short in theory. Yes. And if they all did that,  
you would have many multiples of the total shares 
outstanding now short. That's right. On the open  
market. That's right. Yeah. That's right. And so 
that's the problem. That's the sort of overbooking  
the seats on the airplane because you're all 
looking you're all booking against the same  
you know hundred seats on the airplane and and 
by the end of the day you've exceeded it. So you  
know that would result in a fail to deliver and uh 
and that would get resolved in other ways but uh  
that is the problem. So then what is the what is 
the real impact then in the market when you have  
10x number of shares being sold? you've you've 
got artificial selling essentially like phantom  
shares. Yeah, that's exactly right. These these 
are now shares that have been sold by the short  
seller uh that don't exist. Uh and so particularly 
in micro cap stocks that are thinly traded,  
this can have a big impact on the share price just 
like normal selling can and just like regular non-  
naked short selling can. But this adds sort of 
accelerant to that where you're you're selling  
shares that don't exist. So these these are in 
fact like phantom shares. Now they short, they  
buy back the shares inside of a day as day trade. 
It's all covered and you know all is kind of well  
and done. Uh they didn't get squeezed whatever 
whatever except that the broker you know yes they  
make their commission and they're happy about that 
but they've now engaged in naked shortselling. So,  
a lot of these brokers that offer guaranteed 
borrows, automatic locates, or offer discounted  
or free borrowing rates for big money traders 
and/or big affiliates, to me, that's a red  
flag. It doesn't mean necessarily that they're 
naked shortselling, but that's a red flag because  
you have to ask yourself, where are they getting 
those shares to borrow? And how are they offering  
free borrowing or discounted borrowing when you 
still have to pay interest to whoever you borrow  
the shares from. So all of this whole scheme 
with naked shortselling has resulted in more  
affiliate marketing. All right. So we shouldn't 
be surprised about that. More affiliates promoting  
promoting system shortselling. And again it's 
it's short selling because that's there are more  
opportunities to trade these to the short side 
in the market because the market is fundamentally  
long biased. The big P&L screenshots making it 
look easy. The links to the affiliates at the  
brokers. There's more system short sellers. broker 
makes more money and more uh selling suppresses  
the price of the stock. So now we're seeing bigger 
rejections and bigger profits for shorts. So now  
let's do another scenario. Let's pretend we've 
got a stock with a 1 million share float. So that  
means there's a total of only 1 million shares 
available in the entire market. And then you  
have the broker here and then you have system 
short sellers. And let's just say the system  
short sellers cumulatively have asked to borrow 2 
million shares across, you know, 10,000 accounts  
or whatever it is, and they sell 2 million shares. 
Well, wait a second. You're selling more shares  
than actually exist in the float. So, of course, 
you're going to suppress the price of the stock.  
There's not enough shares in the float of people 
that own it to buy and and and to hold it up. So,  
what happens to the price? It goes down. 
Perhaps in spite even of a good news catalyst,  
the price declines. This should not be possible. 
It should not be possible to be able to take a  
short position in excess of the float except when 
naked shortselling is involved, which again is  
illegal. So this is the feedback loop where naked 
shortelling has become more and more popular. But  
as I said, there were two problems. The first 
was too many short sellers meant the broker was  
running out of shares to borrow and was increasing 
the cost to borrow for everyone. They solved that  
when they could short selling. But the second is 
the short squeeze. Because what happens if you  
do get a stock that just keeps going higher and 
higher and higher? Then all of these system short  
sellers with 2 million shares to the short side 
and the stock goes up a,000%. Who's in trouble?  
Well, sure. The system short sellers, their 
accounts are gone and now it's on the broker. You  
know that that's the expression. If if you owe the 
if you owe the bank $1,000, that's your problem.  
If you owe the bank, you know, $10 billion, that's 
the bank's problem. So, when you got this big of  
a position and they're deep in the red, now the 
broker is the one who's getting scared because  
they could be stuck holding the bag. So, big short 
squeezes, blowups, and margin calls are bad for  
traders. Sure, they're bad for brokers, though, 
and they're bad for business. But how do you stop  
short squeezes from happening? And that gives 
us this brand new short ALGO that we saw launch  
earlier this year, selling a seemingly unlimited 
number of shares run at an institutional broker  
level. And this is where we saw it right on the 
level two. MX, we would see this big seller. Now,  
this one right here is for um it shows 114 shares, 
but there's two zeros. So, it's 11,400 shares. And  
what we would see is that this this ALGO would pop 
up as soon as the stock was up more than 50%, we  
would see the ALGO come out and it would suppress 
the price and it's it's like it was allowing the  
system short sellers to have an easy layup because 
it was just selling and selling and selling. At  
a certain point, you create enough weakness just 
through all of that selling, the chart is ruined.  
Everyone gives up on it. And at a certain point, 
sentiment becomes so poor because people just say,  
"This is ridiculous. What are we doing here?" You 
know, I'm not going to keep I'm not going to keep  
uh trading this type of stock because every 
time I try, I just end up getting smoked. And  
so the result was that this MEMX MEX ALGO created 
such bearish sentiment in the market. Every time  
something would pop up, it would reverse. People 
stopped trusting it. They weren't feeling safe  
trading these. And so what you ultimately had was 
a period where the market got very cold. Stocks,  
even with seemingly good news, were popping up 
and failing dramatically. Nothing was able to  
go up 500%. The system shorts were winning. 
Now, I actually have a video that I'm going  
to share with you. I'm going to put it up on my 
screen and I'm going to walk you through what it  
actually looked like to see this algorithm in real 
time. All right. So, we've got a live archive here  
where you're going to see this MEMX algo at work. 
Now, this is an interesting one because the stock  
is not up more than 50% here. However, versus the 
previous uh two days, it's holding right at a very  
critical level, and $5 is the breakout spot. So, 
now we're coming up to 8:15 in the morning, 8:20  
in the morning, and we see MEMX is sitting there 
at $5 with 50,000 shares. That's a big sell order.  
So, let's keep an eye on that sell order. Let's 
watch how it moves. Okay. So, currently stock's  
up 181 19%. The order starts to get bought up a 
little bit. It's It was 50, now it's 49,300400.
The order disappears. It gets cancelled and moved 
up to 526. You see that? Now it's at 27. Now  
the order is at 40. Do you see how it moves? The 
fluidity of how it moves is indicative of an algo.  
It's not like cancel and slowly replace. It's 
instantaneously moving. So, let's just back that  
up. What we of we saw two there were two behaviors 
that we saw with this algo. One behavior that we  
saw with this algo was that um the it it would 
keep sell orders just slightly above the current  
market to almost put a ceiling on how much the 
stock could go up. almost it like just it was  
always like 10 15 20 cents just slightly above the 
current market to create this impression of upside  
resistance and so when you constantly have a big 
sell order hanging right over the ask people get  
nervous to buy and so that creates an impression 
of weakness. Now, this order was moving up and  
then moving down and then it was very fluid as you 
could see right there. And so that was the first  
um form of order spoofing and manipulation that 
we saw from this short algo where they would  
put out this order to what feels like create the 
impression of weakness but not with the intention  
of the order executing because soon as the order 
starts to execute they pull it back up. So that  
feels like order spoofing which is also illegal. 
So then we have um the second uh instance which  
is so in that first instance they're not really 
selling that many shares. They're just using big  
order size to scare other traders and to create 
this kind of area of resistance. And then in the  
second instance we're actually seeing it um 
executing and selling shares. So let's watch  
this again. So we're at 50 here. Someone buys 
like 700 shares. All right. So, a little bit  
gets bought and if they're trying to create the 
impression of weakness, but they don't actually  
want to short that position, then they cancel 
the order and they move it. Cancelled order,  
move to 526. Now, someone who genuinely wanted 
to sell the stock doesn't cancel the order. You  
you sell the stock anyway. So, it goes to 27 
in an instant. Then it goes to 40 and then it  
comes back down to 16. Do you see that? So they 
took the ceiling off giving the impression that  
okay maybe we can go for a second and then they 
come right back down. Now it's up at 21 22 21.
This is now it's at 37 and it's gone up to 
39,000 shares. Now it's gone. So where is  
it? Is it gone? This ALGO is now are we clear? 
you know, could I take a trade on this now for  
a a squeeze up to six or seven? I mean, what's 
going on here? And you can't really tell. So,  
it to me, the amount of times that we saw this 
unfold, I I couldn't possibly count them. And so,  
you guys who are uh tuning in, watching this, 
who have been, you know, trading for the last  
6 months, you've seen this price action. And 
what I kept saying was, look, this will end  
in one of two ways. One way is whoever's doing 
this is gonna get in trouble. Sadly, you know,  
because of all the I mean, look, it just the 
current state of the government and all the staff  
layoffs and everything that's happened in the 
past couple years, I don't know that someone  
doing this is going to get picked up. You know, 
I really don't know. And if they're being enabled  
by an institution, uh, you know, a big broker, 
their their clearing firm, whatever, then yeah,  
we might not see it go anywhere for a while. So 
then the second scenario is this will go away when  
you get a big squeeze. If you get a big squeeze 
where this where someone puts out that 50,000  
share order and they get filled because traders 
realize well this stock actually has a really  
good catalyst. It's got a really good catalyst and 
this thing is going to go higher. Then suddenly  
uh uh oh they're short 50,000 shares. And I'll 
just give you an example of a stock today. Um, we  
had a stock just today, and I'm not kidding, this 
is unbelievable. Um, where the stock in 10 seconds  
went, you could see right here, from $1 to a high 
of 18. You do a move like that with 50,000 shares,  
you're losing $50,000 each point. So you're down 
5 10 15 20 25 30 35 40 4550 55 60 65 70 75 80 85  
90 nearly a million dollars gone in 10 seconds. 
Now the price came back down. But if you you know  
what if it kept going higher, you know, then 
all of a sudden you know you're really smoked.  
You're you're in a real pickle. So as you as you 
see that type of behavior of the way that order  
moves around, what what does that make you think 
in sort of putting on your regulator hat? So my  
regulator hat requires me to be cynical and assume 
there's a a bad motive going on there. But so  
um one thing that it could be is an instance 
of spoofing. Um which is where someone places  
an order they never intend to fill. uh which is 
intended to send a signal to the market that that  
there is interest in uh purchasing or or selling 
in another context at a certain level that doesn't  
actually exist. Um so that happens a lot and with 
automated trading it can happen on an automated  
basis. I mean with an algorithm for example. So 
we know this occurs every once in a while the SEC  
brings a spoofing case there. I will say from the 
SEC's perspective, very hard to prove because you  
need to prove that there's something deceptive 
or manipulative about the order you placed. So,  
an innocent trader could say, "Yeah, I'll 
put an order out there, X number of shares  
at such and such a price, and then I change 
my mind for for perfectly innocuous reasons,  
right? That's the that's the defense explanation 
for why that happens." So the SEC has to prove  
that if they're going to bring a manipulation 
case around spoofing that the person did not  
have the intent that was expressed by the order 
that was placed and then rescended. That's hard  
to do unless you have like contemporaneous emails 
or chats or something where the person saying,  
"I don't really intend to fill this order." So 
So that's one possible explanation for this is  
that this is spoofing intended to manipulate 
the price of the stock. we know that happens.  
That that could be um what's going on here. Um 
you know, alternatively, it could be someone or  
a number of people who are putting in orders and 
and changing their minds, but uh the pattern you  
just described, that doesn't look like that to me. 
So, this behavior um was very prevalent earlier in  
the year. And what was very interesting was that 
suddenly it um suddenly it stopped and we were we  
were like what what just happened? Uh and it was 
crazy because even stocks was seemingly good news  
you know because of this algo we're going red on 
the day and it was beyond frustrating you know I  
mean we were sitting here trading and it was like 
man I I don't even know what to trust right now  
and so naturally I was trading less during those 
um couple of months. I wasn't trading to the short  
side. I wasn't, you know, I wasn't that depressed, 
but I was trading less and I was just like, well,  
it's we're in a slow period, but when this thing 
blows up, and eventually it will. I mean, think,  
look, GameStop blew up, $7 billion loss from 
Melvin Capital. The Volkswagen short squeeze  
of 2008, $30 billion losses for hedge funds short 
selling. So, it's only a matter of time before you  
get a black swan that really squeezes this thing. 
Um, and and you know, when that happens, then all  
of a sudden, sentiment and momentum is going to 
shift really quickly. But in in the meantime,  
I've just got to wait. So, you know, they were 
winning. The affiliate marketers were winning.  
They were getting paid. The brokers were getting 
paid. You know, the big short sellers were making  
money. So, everyone was winning. But at whose 
expense? Well, of course, from my perspective,  
uh I mean it was at my expense, right? Long 
biased traders like me, we certainly were  
making less money because of this short ALGO. 
So, uh, day traders, but also active traders,  
certainly, uh, even if you're not a day trader, 
we we it was at our expense without a doubt. Uh,  
we were accustomed to stocks with news increasing 
in value, not with news and declining. Uh,  
but take it a step higher. What about longbiased 
investors? Imagine for a second, um, you know,  
that you're not in the stock market, but, um, 
you know, you're whatever. You're, let's just say  
you're a doctor. You're a doctor and you know, you 
you work with patients all the time. you're a GI  
doctor and you've been um you know as part of the 
work you do you learn about these new medicines  
and you find out that there's this company 
developing a new medication for you know Crohn's  
disease or something like that and you're like 
you know what man if this if this thing works it's  
going to be a really big deal um you know what I'm 
going to buy 5,000 shares of this company and and  
let's see you know maybe I'm wrong but but I think 
it's probably going to work and then uh you know  
few months later whatever it is they come out with 
news of positive clinical clinical trials and so  
as a physician you're like this is exactly This is 
awesome. This is so great. Soon this is going to  
really help patients and yet the stock declines. 
So you've got clinical trials, maybe it's phase  
one, maybe it's phase two, and they're positive. 
They're good results and yet the price declines.  
Now, you would be probably quite confused if you 
were a physician or, you know, a novice investor.  
You're not a sophisticated investor. You're not 
a Wall Street professional, but you're investing  
what you know, which is, of course, what Warren 
Buffett and many others have always said you  
should do. and you're following that rule and yet 
the price is declining because of an artificial  
level of selling created by naked shortselling. 
That's not fair. That hurts the integrity of the  
market. That means that investor, that physician 
is probably going to say, you know what, this is  
just I'm I'm done. I'm never putting my money in 
the market again because, you know, I just had  
this bad experience. And and I wouldn't blame 
them for feeling that way. And so, of course,  
there's no question that I was very frustrated 
dealing with this naked shortselling. I mean,  
it's been going on. And so it's it's frustrating 
when I see it. I am still left with the belief  
that eventually they get squeezed and we have seen 
a number of squeezes. So I just have to stay tuned  
for those and then trade them when they happen. Um 
but then for an investor who's only in the market  
periodically, it's extremely disappointing. But 
imagine a step further. Um what about the actual  
companies, right? Can you imagine how frustrating 
it must be to be sitting at the conference table,  
you're the CEO of a company and you're like, "All 
right, guys. This is this is a great week for us.  
we just put out, you know, the the Q Q1 earnings. 
They were 500% year-over-year increase. This is  
phenomenal. And you know, your junior guy intern 
is like, "Um, sir, [clears throat and cough] so  
have you looked at our stock price?" And the 
CEO is like, "Yeah, what is it up like 3 400%."  
I mean, you would figure it would be because if 
earnings are up three 400%, you know, then that  
would that would track. Uh, well, no, the price is 
down 33% today. And the CEO is like, "What? What's  
happening, Phyllis? Where's Phyllis? Can someone 
get Phyllis in here now?" Phyllis is sharp as  
attack. You get her in there because she's the 
one you need when things are getting tough and  
she's smoking a cereal. What's going on? And you 
explain the whole thing to her. So, here's here's  
the reality. Jokes aside, here's the reality for 
these companies. If you sell enough shares, any  
stock will break. What happens if you're selling 
more shares on any particular day than there are  
buyers? It's going to suppress the stock. What if 
you sell more shares than the entire float? Well,  
that's what happened with GameStop. And it would 
have worked except in that one instance enough,  
you know, retail traders caught on. But for that 
one instance that retail traders caught on, how  
many other companies do you think got forced into 
delisting, forced into bankruptcy because their  
stock price kept going lower and lower and lower? 
So here's the deal. When you list on the NASDAQ,  
you have to maintain a minimum stock price of a 
dollar a share even after you've become listed.  
So if you can keep short selling to push a stock 
below a dollar a share and keep it below a dollar  
a share, they're out of compliance with NASDAQ. 
Now um Historically, NASDAQ will give about 188  
day grace period uh time to regain compliance 
and there's an appeals process and it can drag on  
for a while. So, realistically through this long 
process and through reverse splits, most companies  
don't end up actually getting delisted because 
they're below the minimum price. NASDAQ has been,  
you know, pretty accommodating in that regard. 
But, you know what's interesting is um NASDAQ  
proposed a rule change and this is brand new. They 
proposed a rule change that if the company has a  
market cap less than $5 million for 30 consecutive 
trading days that the company's automatically  
delisted and there is no um there's no cure for 
it. There's no, you know, pausing while we do  
an appeal. It's you're automatically delisted. 
And uh their reason for it was that they said  
if if a stock has a market cap of less than $5 
million, it's just not going to recover. it it's  
not possible. It's going to go to the OTC market 
anyways. So, we're just going to kind of speed up  
this process because when you have a stock with a 
one, two, three, four million dollar market cap,  
these are companies that are very desperate. Those 
stocks might be more prone to manipulation. They  
might be more subject to fraud and then that we're 
we're going to protect investors by just saying if  
it's below 5 million for 30 days, just get it out 
of here. So, so Nick, what do you think about the  
general approach that regulators and maybe even 
the exchanges take um when it comes to protecting  
investors, retail traders and investors? Well, 
I do think there's a tendency for regulators to  
be paternalistic and so regulators sometimes do 
things that in their view protect investors from  
themselves for example and it's a phenomenon 
we call protection through prohibition. So  
um for example, you might see a trading halt in 
a situation where there's unexplained activity in  
the market and the trading halt is designed either 
by uh one of the exchanges or by the SEC itself.  
The trading halt is designed to protect investors 
from this uh inexplicable information conduct  
in in the marketplace. um that is a I think good 
sentiment, a good idea, but in fact a trading halt  
can have the opposite effect on the people who are 
holding those shares and be extremely harmful. Um  
so I do think it's important to uh be on the 
lookout for regulators who want to protect you  
either from yourself or from a situation that may 
do more harm. In other words, the cure may do more  
harm than the thing that's the regulator is trying 
to cure. And they submitted that rule change to  
the SEC and a division of the SEC approved it. And 
so in July it went into effect that any stock with  
a market cap of less than $5 million for 30 days 
would automatically be delisted. Now, um the small  
public company coalition, the SPCC, filed a um 
filed a uh what was it? Um let me just pull up the  
article here. Um uh they filed a petition um with 
the SEC requesting a full review. And so now, as  
of July 22nd, uh this rule change has been paused. 
So, it's no longer in effect pending a full review  
by the commission. And so, this full review is is 
now going to take uh months, certainly six months,  
nine months, might maybe a year longer. And and 
we don't know what the result will be. But I think  
it's very interesting uh that this would happen 
because it this again feels like I I know when you  
know when Robin Hood took away the buy button, 
people felt like, wow, they're capitulating to  
short sellers. you know, those big hedge funds 
must have cried to daddy and daddy told Robin Hood  
to, you know, take away the buy button. And while 
we know now that it was actually an issue related  
to collateral obligations with the clearing firms, 
um, it it it didn't feel good. It felt yucky. And  
to be honest, the SEC just sort of rubber stamping 
or greenlighting this $5 million market cap rule  
feels a bit yucky because it feels like now these 
naked short sellers that are running rampant and  
have for a long time now have this extra um sort 
of u weapon that they can hold a stock hostage. if  
they can just keep it below that $5 million market 
cap for 30 days, then it'll force the company to  
be delisted to the OTC market. And when stocks 
trade on the OTC market, they trade for fractions  
of a penny versus the NASDAQ or the NY or the 
MX exchanges because investors, real investors,  
don't really want to buy OTC companies. They they 
just don't. And so uh so what what I found really  
interesting was that as part of the petition 
um the small public company coalition uh did  
some research on this to question the belief 
that NASDAQ had that companies that are below  
a $5 million market cap um you know inherently 
don't recover. And so they actually found that  
um over the past 20 years there were 816 companies 
that would have been delisted to the OTC market.  
Dell listed it because of this rule change. 
And of that 640 of those companies actually  
later went on to regain a $5 million market cap. 
That's over the past 20 years. And of those, 212  
companies were still above a $5 million market cap 
as of the end of last year. And of those, several  
have become multibillion market cap companies. And 
of these, you're talking about tens of thousands  
of employees. These are real employees. 
Now, with this $5 million market cap rule,  
they're basically the exchange was saying, "You 
know what? Just get rid of all of these companies  
and forget about the ones that might have survived 
and all their employees because in the eyes of the  
exchange, some of these companies were destined 
to get delisted to the OTC market anyways. That  
was already going to happen. And the moment that 
happens, investors are harmed. And NASDAQ doesn't  
want harm to come to investors on their exchange 
whenever it's avoidable. And that's commendable.  
I understand that and I think that that makes 
a lot of sense, but I would ask how many of the  
companies they look at as being examples of 
companies that declined in value, you know,  
month over month and eventually all the way to 
getting delisted to the OTC market that ultimately  
caused harm to investors. How many of those 
companies were subject and victim to a campaign of  
naked shortselling? And I don't know the answer to 
that, but it can be found out because if they were  
victims of naked shortselling, then the company's 
share price was artificially suppressed in order  
for the shortselling brokers and the shortelling 
firms and even the hedge funds or the big traders  
to profit from that company's demise. And that 
should that is not allowed. And yet because  
naked shortselling doesn't seem to be enforced 
uh adequately, it happens. It was happening in  
2001 with GameStop. Now GameStop was just the 
black swan. It was working really, really well.  
And these funds were making billions of dollars 
suppressing and burying stocks until they just  
capitulated and were gone. They made billions of 
dollars with that business practice until finally  
some of them got squeezed on GameStop. But then 
that was just the one black swan and then they  
regain control for many other companies and these 
are not just small cap companies by the way that  
be can become a victim of naked shortselling. So 
this report on the 816 companies was prepared by  
uh the small public company coalition and also 
Craig Lewis. Craig Lewis is a professor at  
Vanderbilt. More interestingly he was the chief 
economist at the SEC. He was also the director of  
the SEC's division of economic and risk analysis. 
This is someone who knows a lot about the public  
markets. And my view from reading and listening to 
what they've talked about with this proposed rule  
change is that this proposed rule change would be 
an absolute slam dunk for the market participants  
certainly engaging in naked shortselling and 
even legal shortelling because if they could  
just hold the stock below a $5 million market cap 
for 30 days, it's a slam dunk win. So, if you had  
a group of hedge funds that all said, "We're all 
short bias on this. You're short. We're short,  
too. Hey, that's great. Keep it below five million 
for 30 days. Dellisted. It's an instant win." So,  
can you just describe where reggg show came from, 
what it is, and and where what in what environment  
was it? So, regow is an SEC regulation. 
It applies to brokers. So, for example,  
it does not prohibit traders from shorting 
or even naked shorting. If you're a trader,  
you probably don't even know if you're naked 
shorting. Um, but it comes from the concern  
that we've just been talking about, the practice 
by brokers of putting through their customer  
short sales without having a corresponding long 
position they can borrow against. And so really,  
it was a a regulation created by the SEC in 2004, 
2005 that was meant to address that underlying  
problem. Interesting. Okay. And then the failure 
to deliver list, um, which was discussed quite  
a bit during the GameStop short squeeze, 
keeps a record of the companies that exceed  
a certain threshold of trades that did not settle, 
indicating perhaps that there was a short, right?  
Yeah. [clears throat] Massive failures to deliver 
suggests that the brokers may not have had their  
their belief that they could borrow the shares 
may not have been reasonable. Um, so certainly  
massive failures to deliver are good evidence of 
a problem in the system. There's a big mismatch  
between the short orders that went through and the 
actual shares that were available to cover those  
uh short sales. So this this is all of the context 
around this naked shortselling scheme. The naked  
shortselling scheme is sort of separate from this 
$5 million market cap rule. It just so happened  
that this came up right at like the perfect 
time for it to be topical because it came up  
just after a lawsuit was filed against allegedly 
firms and traders engaging in naked shortselling.  
So now let's talk about that lawsuit. The lawsuit 
was filed by one company. One company decided to  
defend itself. LN AI. They said they said they 
were frustrated. And I've seen this before. I've  
seen other companies that have tried to file 
lawsuits against naked shortselling against  
brokers, against individual traders, and they 
accuse them of naked shortselling, but they're  
I've never seen, and I could be wrong, but I've 
never actually seen one of these cases succeed.  
Ultimately, the company just spends a lot of money 
on litigation. They don't get anywhere. Nothing  
happens. and they're just, you know, they're 
just they're doing what they feel they have  
to do and to, you know, represent shareholders 
and defend themselves, but nothing happens. So,  
um, LNAI, um, alleges that naked shortselling 
artificially suppressed the price of the stock.  
And they were able to identify naked shortselling 
from elevated failure to deliver rates. Now, every  
time a short closes, that's fine. But if a short 
fails to clear because there was not an original  
match from a borrower, then it's considered a 
failure to deliver. And failure to delivers are  
reported on reggg show 203. They're reported 
because the regulators are trying to monitor  
for potential naked shortselling. And stocks can 
go onto a threshold list if there's been enough  
failure to delivers. Stocks on threshold list you 
cannot short. They also name in their allegations,  
they're naming um John Doe's one through 100 
and individual brokers and uh traders that they  
think were responsible for naked short selling. 
Interestingly, they even named a trader who is  
only short 17,000 shares, a 17,000 share position, 
which is obviously negligible, but this is a a  
probably a regular trader who just may not have 
even known. They may not have even known that the  
broker that they were using was enabling them to 
short naked. I mean, if you short 17,000 shares,  
you have no idea, right? I don't know. And I think 
that's a fair argument that when I'm trading,  
I have no idea if my how my broker is getting 
the shares. So, I don't know why I would be  
liable as the trader if my broker was allowing or 
enabled naked shortselling. But if you knew it was  
happening and then there was like an email chain 
and you know whatever text chain between you and  
the broker being like, "I don't care how you got 
the shares. Just get them." And the broker's like,  
"Well, they're definitely naked." And you're 
like, "I don't care if they're naked." Then they  
introduce that as evidence. Then that's obviously 
going to be a little bit of a different situation.  
So in their lawsuit, they allege that on March 
18th, 6.6 million shares failed to deliver. The  
following day, another 2.7 million shares failed 
to deliver. And then on March 27th, an additional  
5.6 million shares failed to deliver. So these are 
millions and millions of shares. Think about those  
big sell orders, that 100,000 share sell order. 
This is like a hundred of those sell orders just  
sitting there pushing the price down, suppressing 
the price. It has a real effect. If you've got 10  
million extra shares that are sold on the market 
that weren't borrowed from an actual shareholder,  
you're creating an artificial level of supply, 
additional supply affects the supply, demand, and  
balance. And so you can have a company in theory 
that's putting out great news and yet there's  
people just dumping shares. Now, this is obviously 
why naked short selling is illegal um because it  
does have a negative effect on the integrity 
of the market. You know, look, the market is  
fundamentally long biased. Companies IPO, they 
sell shares on the open market to raise money  
to fund the work that the company's doing. If it's 
McDonald's, it's to buy more buy more real estate,  
build more McDonald's stores and expand. And 
they need all that money to do that. Now, you're  
an investor in McDonald's, and you benefit as the 
price goes up as their profitability improves over  
time. everyone's 401ks and IRA and you know all 
these pension funds are invested in the market.  
We need integrity in the market where you don't 
have naked shortselling. Some would argue that  
shortselling, you know, by itself is quite opposed 
to kind of this American dream of working for 30  
years and putting your money in the market and 
then being able to retire. On the other hand,  
um you know, economists like um Alan Greenspan 
would say that it the market is self-correcting.  
You don't need prices will go high and then short 
sellers will bring it back down. The prices will  
go low, buyers will bring it back up and at the 
end of the day it will all equal out to the exact  
pricing to perfection. And so you don't need to 
overregulate it. You don't need to, you know,  
restrict short selling whatever. But naked short 
selling clearly is um a function of an electronic  
market. I don't think you could have done naked 
shortselling on the floor of the exchange in,  
you know, 1950. But in today's electronic 
market, there's a lot of different ways that  
uh unfortunately we've seen these schemes operate 
that put companies at a disadvantage and this  
is certainly one of them. And you wouldn't 
normally have like pull the victim card on,  
you know, a company. It's a publicly traded 
company. And yet in this case, they're one of  
um what have been many companies that have alleged 
this. Millions of shares being borrowed and sold  
into the market but failed to deliver. meaning 
they were not properly borrowed in the first  
place is a sure sign of naked shortselling. So, 
we're in a position now where we heard all about  
naked shortselling during GameStop. We've 
heard about it after the dot bubble. I mean,  
it's not new. It continues to come up today with 
this most recent lawsuit. Why do you think it's  
been so difficult to rein in this problem? Well, 
it goes back to the the DTCC shares and the the  
ambiguity around who owns what share at what point 
in time, that's that's the problem that needs to  
be solved. So, unless [clears throat] you're 
going to ban shortselling outright, which I  
don't think there's any regulatory appetite for 
that to happen, uh, or you're going to require  
actual locates to borrow, not just a reasonable 
belief, um, then that you're always going to be  
stuck with these two things. A requirement 
that you have a reasonable belief to borrow  
against an ambiguous pool of shares that may 
or may not be available to borrow. [snorts] Um,  
so our view at I can is that this probably needs 
to be solved on a more structural level. There  
will continue to be private lawsuits like the 
one that you described. Those occur, you know,  
with some regularity and that seems to stop 
the behavior at least temporarily. The SEC,  
the most egregious, the most egregious ones. 
Yeah. And the SEC will continue to bring reggg  
show cases against brokers whose bookkeeping 
whose uh tracking of reasonable basis to borrow  
um is not what the SEC thinks it should be. So 
you'll continue to see those. But it's really this  
dynamic of brokers wanting to give their customers 
what they've asked for, which is a short sale,  
and some uh short sellers who are motivated by um 
uh a desire to drive a stock price in a certain  
direction. So until you solve for that underlying 
structural problem, I think you're just going to  
continue to see what's been happening for the more 
than 20 years that ra has been in place. Um this  
dynamic just continues to to occur. So this is 
filed on May 11th. That's interesting. May 11th.  
And now they named all the um the defendants as 
like John Doe, you know, one through whatever  
um and corporations, whatever. But suddenly the 
shortselling algo disappeared. You guys noticed  
that, right? All of a sudden it was gone. Without 
naked shortselling, stocks began going up 500%  
a,000% on breaking news. This was ASTC. This one 
ended up continuing higher. This one this one went  
uh let's see, it started at like $45 a share, 
went all the way up to a high of $26 a share,  
which is unbelievable that I mean, we we weren't 
accustomed to seeing something like that. Even  
today, it's still holding up over $9 a share. STI. 
This one squeezed from about $89 a share to $56 a  
share. The cost to borrow began going up, making 
short selling more expensive or even impossible.  
Trading bots lost money. They had to stop trading. 
They that further reduces selling pressure. Here's  
a stock that went from a dollar up to $6.50 
in, you know, one day. This one went from $4 to  
$18 in one day. This one went from $3 to $24 
in one day. These are huge moves. And you might  
argue these moves are overdone. These this is 
too far. Well, again, a self-correcting market,  
these will come back down and through organic 
short selling, that's fine. If you want to  
take a short position on this and you want to 
use a Martin Gale strategy on it and add ad,  
that's fine. And you might catch the one that goes 
to $75 or $100 a share, and we've seen several of  
them now since uh after May 11th essentially. Uh, 
and that's that's the risk that you play or you  
take when you're trading a counter trend strategy. 
So, one of two things always happens with naked  
shortselling. Number one, they get caught and 
shut down. Number two, they blow up. Number two is  
more common because unfortunately the regulators 
have been slow to I've I you know yes there have  
been fines and stuff like that but it feels like 
giving you know one of these giant institutions  
a $15 million fine is the equivalent of putting a 
parking ticket on the FedEx truck. They're going  
to keep delivering in New York City. They're not 
going to stop delivering. They're just going to  
pay the parking ticket and go on with business. 
Right. So unfortunately our better bet is probably  
the blowup. But in this case it is an interesting 
maybe it's a coincidence that just shortly after  
that May lawsuit was filed that we saw um that 
algo disappear. Maybe that's a coincidence. Maybe  
that just happened to happen at the same time. 
I guess I don't really know. But for right now  
balance has been restored. System short sellers 
are giving up because stocks with news are holding  
their gains. They don't have this algo that's 
creating this artificial level of supply that's  
holding everything back. Long bias traders are 
feeling safe trading again. The companies and  
existing shareholders are benefiting from the 
increased value. Beginning in June on June 7th,  
um I had no idea about the lawsuit. I did notice 
that the market had improved. I decided to start  
a small account challenge June 8th with a goal 
of making donations to 50 children's hospitals  
in the United States. I grew the account from two 
grand to $65,000 over the course of 30 days. And  
I wouldn't have been able to do that, grow that 
account that quickly if the naked shortselling  
scheme had continued. So now I've donated to 
42 children's hospitals. Out of the 50, donate  
a total of $435,000 um as part of these small 
account challenges. So here's the deal. Naked  
shortselling will come back. There will continue 
to be affiliate marketing on social media,  
you know, Reddit, Twitter, Facebook, whatever. 
And you'll continue to see people saying,  
"This is the broker to use. zero autolocates, no 
borrowing, super cheap borrowing. Some of them  
may be legitimate. Some of them maybe they've just 
got a great deal on borrowing, but inevitably they  
become popular enough. What's going to happen? 
Same thing. Cost to borrow goes up, availability  
declines, so now people just can't get shares. 
People get frustrated and they either leave to  
go to the next broker or, you know, that broker 
decides, well, we don't want to lose business,  
so what are we going to do? H just give them 
the shares. Give them the shares. Whatever.  
What's the worst? What are we going to do? Pay 
a penalty? Maybe in a few years? We'll just  
let's do the business now. And uh unfortunately, 
we're going to continue to see that happen. So,  
you know, every few months there'll be new brokers 
that open. There'll be other brokers that close  
because that's the cycle of these illegal naked 
shortselling schemes, but they always blow up for  
one of two reasons. Number one, they get shut down 
by regulators, the broker or the hedge fund or the  
traders engaging in naked shortselling. Or number 
two, we have an epic short squeeze where we have a  
stock that suddenly goes up and just in spite of 
all of that selling, it doesn't stop rising. The  
circumstances that create an epic short squeeze 
like this, obviously GameStop was very unique.  
What seems to happen more commonly is that shorts 
will underestimate a particular stock and the fact  
that the company is closely held by insiders. 
And this is especially true with foreign listed  
securities that those insiders really are capable 
of controlling the price even more than the naked  
short sellers can. And that's when they get 
squeezed. And when they start buying back those  
shares, the move is epic. And although you may 
not have heard of all of those short squeezes on,  
you know, the news, they might not make it to 
the news the way GameStop did. Some of them are  
actually even far bigger in terms of percentage 
gains. In fact, just since May, I can't even count  
the number of stocks that have gone up over a,000% 
in one day. And I think it's because at least  
temporarily, the degree of naked shortselling 
has been reduced as a result of this lawsuit,  
which is a good thing uh for now. But again, it's 
only a matter of time most likely before it comes  
back and then until the next short squeeze and 
the cycle repeats. Now, I have this clip up from  
uh Gaming Wall Street, the HBO documentary, and 
I want to play it again. Um I'm going to play  
a little bit longer this time so you can hear a 
little bit more of the insight from someone on,  
you know, the other side of the desk from an 
actual institutional trader. So, let's hear what  
he has to say again, uh about naked shortselling. 
And he's going to give us a little more detail.  
You know, I would, you know, I would illegally 
naked short sell stocks every day, every day,  
as long as I was collecting commissions. So, that 
was what we heard before, that he would illegally  
naked short sell stocks every day. But did the 
bank care and the bank did not care? In fact,  
they did not care. The client will send you an 
order electronically. All you do is you click  
on the order, you go to execute, it'll pull up 
a little box, you type in anything you want,  
and you just hit okay. That's to me just 
what's totally crazy about this. You don't  
ask questions. [music] You appreciate the order. 
And if that involves shorting a stock naked,  
you do it anyway [music] because management 
essentially tells you just create the business.  
So now you can see this motivation that we 
talked about before. You've got a good client  
who wants to short a stock or in the case of 
these brokers enabling system short sellers.  
You've got an army of traders that all want to 
short the stock. They want to pay you, you know,  
the fee, the borrowing fee, which is like the 
commission. They want to pay you to borrow these  
shares. And so now the broker is like in in this 
situation where if if there's no shares available,  
they can't make money. So now they're motivated 
to create the shares. Anything on the backside  
we will deal with. And I think this speaks to what 
we saw earlier also from the GameStop documentary  
about how these, you know, multi-billion dollar 
investment banks are paying penalties that are a  
couple million dollars. So that's not at all 
demotivating them to stop doing what they're  
doing. So you're collecting money on the front. 
You collect money on the back and you actually  
have zero risk. That's pretty insane. So, it's a 
system that's set up so the individual employees  
have zero risk. If something happens, then 
management says, "Oh, we didn't know what  
was happening." They get a slap on the wrist, 
they move on, and then it just starts all over  
again. Clients never see that. all the prime 
lenders, they all do it consistently. What  
would you propose if if you were going to come up 
with a possible solution? What structural change  
would you make? Would it be that you require a 
locate in order to borrow like a confirmed actual  
share and then that share gets taken or would 
you do something else? Well, I I think some of  
the responsibility probably sits with uh retail 
uh traders. So, when you sign up with a broker,  
um, you may not know this until you go because 
who reads the terms of service in the agreement  
with the brokerage firm, but every every brokerage 
agreement allows the broker to loan your shares.  
Um and so one possible solution and we're actually 
working with a particular company on this is to  
uh the require shareholders to opt into a program 
where they say yes you broker you may loan my  
shares. Um I don't know that it's a panacea but I 
it's we're trying to get at the underlying problem  
which is the ambiguity around who owns what when 
and who can loan which shares at what point in  
time. So, um, it would be like if you had, 
to continue the airline air airplane analogy,  
if you had a seat on an airplane, the airplane 
would have to get your consent before it agreed  
to give that seat to someone else. Um, a possible 
objection to what we're trying to do is that um,  
it could slow down settlement. uh because remember 
this pool of shares at the DTCC exists to allow  
very quick settlement. So if brokers need to get 
consent from the owners of the shares that may  
slow down settlement. Um some of that problem 
may be addressed technologically uh because  
we live in a much more digital world than we 
did when the DCC was uh DTCC was created. Um  
yeah so but I do think that's where the solution 
lies. It's in the structural um uh makeup of the  
markets that allow quick settlement. Um but if we 
can identify who owns what shares at what time,  
we won't the brokers will not be able to loan 
shares that they don't have permission to loan.  
Interesting. So there's really no question about 
it that naked shortselling is fundamentally bad  
for the market. It erodess public trust in the 
market, reduces um the integrity of our markets.  
It subjects stocks to potential bear raids where 
naked short sellers can artificially suppress the  
price either so someone can acquire the stock at 
a particular price that they want for the purpose  
of options expirations or in the case of midcap 
and small cap stocks potentially to drive the  
companies all the way into delisting which then 
causes further harm to investors, shareholders,  
insiders and employees of the company. you know, 
in this particular naked shortselling scheme,  
um, you know, the strategy of using affiliate 
marketing to bring in retail traders to  
participate in this scheme potentially, you know, 
without even exactly knowing that they're naked  
shortselling, you know, because they funded one of 
these accounts, they set up their trading bot or  
their system short strategy. And even if they're 
doing it in a discretionary way, if the broker  
that they're using is allowing the naked shorts, 
then suddenly, you know, they're they're part of  
the scheme without even realizing it, you know, 
which so and this is the thing where you you guys  
we have to look out for each other and make sure 
when we see this stuff that we steer clear of it  
and warn other people of it because, you know, we 
don't want to be the one who falls for the bait,  
funds an account, account then gets our money 
tied up with a broker that ends up getting shut  
down or the account gets frozen because they're 
participating in this naked shortselling scheme.  
That's the last thing that you would want. And 
so it's important that you know I put out this  
type of content to make sure you guys are aware 
of these schemes. And to the extent that you say,  
well geez, you know, maybe I shouldn't even trade 
small caps at all. You know, maybe I should trade  
large cap stocks or something like that. You know, 
my issue with large caps has always been that,  
you know, you got a large cap stock that's $150 
a share. You know, you jump in um you know,  
to profit on a move from 100 to $151. Let's just 
say you buy a 100 shares to make a profit of  
$100. Well, the thing is you're putting $15,000 of 
capital on the line for that $100 profit. And so  
the way I'm typically trading is I'm looking for 
stocks that are priced around, you know, three or  
four or $5 a share. And geez, you know, I could 
buy 3,000 shares, 3,000 shares for $15,000 worth.  
And if this thing goes up just 20 cents a share, 
I'm up 600 bucks. So the return on my investment  
I've always felt and this just as a matter of fact 
is higher in small cap stocks even in spite of uh  
the risks that they face. Now you know even this 
year this year has been a little bit tough because  
of the extent of uh naked shortselling that we had 
certainly at the beginning of the year the first  
whole half of the year really. Um but if you look 
at my metrics um for this uh calendar year, let's  
see, we'll go to this is my audit of my small 
account challenge which gets updated at the end  
of each year. But if we look at uh just my 2026 
earnings, I funded my account at the beginning  
of the year with uh $96,000 only trading small 
caps. Well, with the exception of like SpaceX  
and a couple big IPOs, things like that. And as 
of the end of July, my account was at uh just  
under $2 million. I didn't make any contributions. 
That was just from actively day trading small cap  
stocks. And I wouldn't have been able to achieve 
that type of growth certainly if I was trading  
day trading large caps unless I started getting 
into trading options which you know presents a  
whole additional layer of complexity and risk 
because it's derivative and you know they can  
expire worthless and so on and so forth. And not 
to mention the fact that I don't actually know  
that you would really escape naked shortselling uh 
with large caps. I know you would certainly have  
more highfrequency trading algorithms which are 
predatory in their own right. Uh although those  
are um legal uh that creates a whole different 
challenge with large caps. But to the extent that  
naked short selling is used to suppress the price 
around options expiration because there's always a  
battle around the the expirations, especially the 
big ones like quadruple witching and things like  
that, then you know you're still going to deal 
with it there. Or some big, you know, firm out  
there wants to push the price down for whatever 
reason, try to get someone else to capitulate. You  
know, then you're just playing the tugof-war. And 
it's almost like in that in that market, you're  
trading against forces that are so big that you're 
almost like trying to play chess against the  
computer. I mean, so that doesn't feel like it's 
a good solution to me. So, you know, my conclusion  
is that even in spite of naked shortselling, I 
keep showing up every single day. I keep trading  
volatility where we find it. Whether it's a 
SpaceX IPO, which happens to be large cap, or more  
traditionally, it's looking at the leading gainers 
each day that are moving up. And typically, these  
leading gainers are small cap stocks. In order 
for a stock to be up 75, 80%, 100% in the day,  
you know, for the most part, these are small 
cap stocks. So, I'm going to log into the chat  
room here um just real quickly and I'll show 
you I'm going to put in my username, password,  
and I'll just show you the u leading gainers just 
from today just so you can get a sense of the type  
of percentage gains that we see in the small cap 
world. But it's exactly these big percentage gains  
um that also attract the interest of naked short 
sellers because let's just look um here at Wetto,  
which just happened to be today's biggest move. It 
was the stock I also made the most money on today.  
Well, you know, this stock went uh literally from 
uh $3.78 a share to a high of 13 bucks. That's a  
240% gain. Now, I didn't see any of the naked 
shortselling algos on it. Uh the ones that we  
were obviously seeing earlier in the year. Um so, 
that's a that's obviously a good thing. Uh but,  
you know, this is no doubt the type of stock that 
I want to trade. And even if those algos come  
back, and eventually they probably will, um, you 
know, then it's only so it's only going to be how  
long before we end up having one of those stocks 
that just does something absolutely unbelievable  
and all those naked shorts get smoked. A a great 
example of this is actually um the stock ticker  
uh ZJ L. So I'm going to search for this ticker 
here in my um classes. So, this was ZJY LL. Um,  
this stock um sold off and we don't know if 
this was a victim of naked short selling,  
but it dropped from $27 a share down to about 
10 bucks. It's a Chinese stock and it ends up  
squeezing up and halting. It then opens at 25 and 
halts a second time in a row and then it remained  
halted. And you want to know what price it opened 
at? It opened at $500 a share right there. If  
you were doing a system short strategy and just 
shorting because it hit your volatility scanner  
is squeezing up there. Holy smokes, you could have 
lost, you know, in this case, uh, an unbelievable  
amount of money, $2.5 million on even a position 
as small as 5,000 shares. So, you know, the and  
then so of course this is a great reminder of why 
I don't engage in short selling. Not just because  
of naked shortselling and I don't want anything 
to do with that, but because of the fact that  
these stocks can be completely irrational. And if 
I'm in a position and it goes to zero, then yes,  
I lose what I put in it. But if I'm short a 
stock at $5 and it goes to 500, I am losing  
far more than I ever stood to gain, which is the 
inherent flaw with shortselling. Which is why,  
in my opinion, this naked shortselling algo 
was deployed to essentially put a cap on how  
much these stocks could go up. Except for cases 
like this where you have a small company closely  
held not a not many shares are in the float and 
so all of a sudden you know shorts get squeezed  
and that's what happens and that's I mean we that 
that one was particularly impressive this one same  
thing went from $20 a share and spiked all the way 
up to $220 a share and then we had socket uh last  
no it was earlier this week we had socket this one 
in one candle if you were shorting and averaging  
into every candle that popped up. It went from 
50 cents to over $4 a share right there. So,  
you know, again, right now we're not seeing 
as much of the naked short selling suppressing  
uh the price action on these stocks. We're not 
seeing that algo aggressively holding them down,  
but eventually it'll come back and then all of a 
sudden you'll get something like this that just  
absolutely explodes and that can begin a whole 
cycle of momentum. as now suddenly uh shorts  
either shut off their algo their uh trading bots 
andor naked shorts get completely smoked their  
accounts are blown and now long biased traders 
feel confident stepping up to the plate. But it's  
a real shame when you have a market due to that 
due to illegal naked shortselling has long biased  
traders that are on the sidelines because they're 
afraid to put their money in these stocks. You  
know, the whole idea of the public markets is that 
these companies list, they put out their shares,  
they try to produce good earnings, they try to 
generate profitability, and they want their share  
price to increase. obviously all the shareholders 
and investors do too. I want to buy into these  
stocks that on this day are moving that they're 
obvious. They're the leading gainer. They've got  
a catalyst, ideally a strong catalyst. And so when 
we're in a position where even stocks with good  
news are getting buried, that's a broken market. 
That's not a good thing. It's not healthy for the  
market. So this now puts you certainly on notice. 
If you see any of those affiliate marketers, just  
ignore them completely. take it all with a grain 
of salt because as good as that system looks,  
that martingale strategy, it has an Achilles heel 
and when you get bit, it hurts really badly. And  
I've seen, I can't tell you the number of traders 
I've seen who grew accounts and then boom,  
grew accounts and then boom, and they keep 
going back because every time they have a  
nice stretch like this, they think they've 
got it. This time will be different. But then  
this always happens. You always get that day. 
Now, in my trading, you know, full disclosure,  
I have red days, in case you didn't know. So, I 
make profit, I give back some. I make more profit,  
I give back some. So, from $96,000 on the year 
to at this point in August over $2 million, yeah,  
I'm I'm doing pretty well. Do I have some red days 
here and there? I certainly do. Are some periods  
a little slower because of naked shortselling, 
regular short selling, bearish market sentiment?  
Sure. It's not a straight equity curve. It never 
will be. But the discretionary strategy that I  
trade involving buying pullbacks on stocks already 
exhibiting momentum is the only consistent way  
that I've found to make money in the market. 
And I funded my first account in 2001. That's  
25 years ago. So I put my money where my mouth 
is. I trade this strategy every day. And look,  
I'm not going to say it's the only way to make 
money. And I'm not going to say that there aren't  
short sellers out there that are able to make 
money and do it legally and avoid by not naked  
shortselling and avoid getting caught in huge draw 
downs because they manage their risk. However,  
they are the exception, not the norm. So, please 
manage your risk. And I'll end this episode with  
my disclaimer. That's as always trading in the 
market is risky. My results are not typical. And  
there's no guarantee you'll find success whether 
you trade on your own or you learn from me. So,  
your best bet as a beginner trader is to 
practice in a simulator and prove you can  
make money in a simulator before you ever put 
real money on the line. If I had done that,  
it would have saved me years of frustration 
and disappointment as I was losing hardearned  
money through trial and error. There is a 
better way. So, please take it slow. And hey,  
if you enjoyed this episode, I hope you hit the 
thumbs up or consider subscribing to the channel.