Tag Archives: Securities and Exchange Commission

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$DWAC, The SPAC on Crack

Digital World Acquisition Corp (NASDAQ:DWAC) Blank Check Company aka SPAC Proposes to Merge With Trump Blank-Deck Company. Will SEC Investigate?

When “E.F. Hutton Talks”, Will SEC Chairman Gensler Read the SEC and FINRA Rules Prohibiting SPAC Sponsors from engaging with acquisition targets prior to listing??

Just when we thought that MarketsMuse coverage of Donald Trump’s financial shenanigans had taken a breather, this past week’s announcement by SPAC sponsor Digital World Acquisition Corp (NASDAQ:DWAC) rocked the stock market and created a rocket-fueled run-up in its share price after the ‘blank check’ company created in December 2020 by Florida-based Patrick Orlando, a former Deutsche Bank derivatives trader turned SPAC promoter would be merging with Florida-based Trump Media & Technology Group (aka TMTG), a blank slate “social media enterprise” with no operating history and established by the former President two months after the formation of “DWAC” (in February 2021).

The Meme of the Week. When the announcement made by the DWAC sponsors and the Trump entity TMTG hit the tapes after the close of trading Wednesday, Oct 20, the following morning, the share price of the Digital World Acquisition Corp, which became publicly listed on NASDAQ six weeks prior, soared from $10 to $75 within a matter of a few hours, and was the second most actively traded stock in America. On Friday, the shares, which cannot be borrowed for shorting other than by broker-dealers, traded as high as $175 before closing at $90 (with the last sale of $80 in Friday’s after-hour trading session).

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If the DWAC SPAC shareholders approve of the merger, and if the SEC does not raise a red flag, Trump Media & Technology Group will receive $293 million in cash that Digital World Acquisition Corp has in trust. 

So, we now have the next classic example of a “meme stock” (aka “Me-Me”) driven by so-called Reddit Bandits and tens of thousands of retail traders entering buy orders to drive up the price, believing they would force ‘hedge funds’ who might have been shorting the stock to pay even higher prices to cover their positions.  It’s a new take on the old-style “short-squeeze pump and dump.” 

OK, a slug of buyers who swamped Fidelity, Robinhood, TD Ameritrade, and other brokers are also MAGA cap wearers and anti-vaxxers who will give Trump every last penny of their unemployment checks or social security checks to keep Trump’s hate-filled and anarchy-riddled beliefs front of stage, and to the point of breaking down the doors of the nation’s capitol building.

Here’s the joke: 8 out of 9 of the largest holders of DWAC include the industry’s biggest hedge funds, whose plain-vanilla strategy is to buy SPACs at the initial offering as a means to deploy cash that is not being used by the fund, and with the upside chance the investment will make a profit. Alternatively, stakeholders can redeem or ‘put back’ their holdings to the company at their original cost and get their full investment back after a merger announcement is made. Think of it is as a money market fund that has a “knock-in provision”.

The other largest holder is Arc Global Investments and owns the right to acquire approximately 20% of the authorized shares, which is controlled by none other than Patrick Orlando. Albeit, unlike the nearly 80% of shares acquired by the hedge funds, Arc’s shares have a restriction that prohibits selling those shares for an extended period of time. At least 2 of the 8 hedge funds (SABA Capital and Lighthouse Investors) were owners of several million shares each, and they made tens of millions of dollars inside of two days by unloading their shares to the retail investors, many of whom paid between 500%-1700% more for the shares from the prior day’s price. 

The punchline to the joke: The two funds that acknowledged selling to witless retail investors as the stock was skyrocketing did so because they wanted nothing to do owning a company that might eventually enable a Trump-fueled media enterprise initiative.

Fool Me Once, Shame on You. Fool Me Twice Shame on Me. In addition to the Reddit bandits and followers of Wall Street Bets who bought into the shares of the black-check company that proposes to merge with a still non-existent operating business (other than in name only), hordes of die-hard Donald Trump fans and followers with accounts at Fidelity, Robinhood and TD Ameritrade were believed to have purchased “millions of shares” in the past two days and, according to nearly every professional trader and investment manager in the world, “they paid prices that defied any scintilla of logic; proving that the extent of their education must have been a diploma they received from Trump University.”

Click Here for another MarketsMuse most-read feature stories

EF Hutton is the underwriter for Digital World Acquisition Corp? Adding yet another comedic twist to the story, aside from rumors that Hollywood producer and former Treasury Secretary Steven Mnuchin has purportedly secured the film rights to, so that he can do a remake of the 1949 film classic and Academy Award-winning “All the Kings Men” (which ended with the assassination of corrupt politician Willy Stark by one of his cronies (to put the feature photo of this post into context), the underwriter for Digital World Acquisition Corp, was formerly known as Kingsmark Capital*, and is now going by the name EF Hutton, the once legendary stock brokerage that was best known for its tag line, “When EF Hutton talks, people listen!”

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*Kingsmark’s brief history includes underwriting “micro-cap” stocks and SPACs, and acquired the EF Hutton name from the estate of the heirs to the original EF Hutton.

A PIPE Offering is Next? Because Trump spokesperson Liz Harrington stated that “TMGT is worth $1.8 billion” (@realLizUSA­), this would infer that Digital Media Acquisition Corp would need to do a follow-on sale of shares, presumably via a PIPE offering, to raise an additional $1.5 billion in cash that would meet the valuation that Trump believes his non-operating company is worth. Per link above, a PIPE is a private investment in a public equity.

Based on Friday’s closing price, the SPAC company would need, at very least, to nearly double the amount of shares outstanding from 28 million shares to 40 million shares, and to sell those newly-created shares during the “de-SPACing process (which is unlikely to occur for at least another 2-3 months) at Friday’s closing price of $90 via the PIPE offering.

Yes, the total volume on Friday exceeded 130 million shares, and Wall Street syndicate desks managers suggested any secondary sale (2-3 months from now) could be done with no market impact if trade volumes remain the same and the price remains elevated, yet it would also dilute the existing shareholders by nearly 50%.

To the above, one trader suggested “the odds of the DWAC share price remaining at the current exorbitant price level are about equal to the chances the SPAC will be de-listed after an SEC investigation is started; a50-50 probability for either outcome.”

Why should the SEC Investigate? Will Coincidence Kill the Golden Goose and Lead to a De-listing of DWAC?

Some things for Gary Gensler to Consider Before More Retail Investors Get Completely Burned Buying this “SPAC”.

SPACs cannot identify acquisition targets prior to the closing of the IPO. If the SPAC had a specific target under consideration at the time of the IPO, detailed information regarding the target IPO registration statement, potentially including the target’s, would be required to be included in the financial statements

Under the SEC’s rules, a SPAC may not identify a specific target company prior to the closing of its IPO, and the SEC requires the SPAC to disclose in its prospectus that the SPAC does not have any specific target company under consideration, and that neither the SPAC, nor anyone acting on behalf of the SPAC, has engaged in any substantive discussions with a potential target company. In fact, if a non-binding LOI is entered into before the SPAC’s IPO, the SEC may even suggest that it is the target company that should conduct an IPO, not the SPAC, which would defeat the entire purpose of using a SPAC as an investment vehicle and an alternative to a traditional IPO for the target company.

DWAC’s Prospectus states:  “We have not selected any specific business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target.”

Suspicious Behavior? DWAC listed on NASDAQ on September 3; the merger announcement came less than six weeks later. Typically, it takes many months for a SPAC sponsor to research and perform due diligence on many companies before they bring a proposal to SPAC holders.

SPAC Sponsor and CEO of DWAC Patrick Orlando is a “good friend of Donald Trump”.  Orlando resides within a stone’s throw of Trump’s Mar-a-Lago country club and has since acknowledged to the New York Times that he is a “long-time friend of Donald Trump and speaks with him often.”

Collusion or Coincidence? So, is it just a coincidence that Orlando started and completed his due diligence inside of five weeks after the SPAC listed? Or, has there been a major violation of securities regulations, and is the offering prospectus nothing more than toilet paper?

Rule #1: Deny. Deny. Deny. To the above, a Trump spokesperson, speaking off the record (of course!) has since told at least two sources that “Mr. Trump never heard of Patrick Orlando and never communicated with him until weeks after the Digital Acquisition was listed on NASDAQ.”

Really?! At very least, Orlando has already publicly stated that he has been friends with Trump for a number of years and communicates with him ‘frequently’.?

Roma Daravi, a former Trump administration communications executive and the ‘media relations’ representative for TMTG was not available for comment, even if Liz Harrington did comment via Twitter.

Let’s play this back again; DWAC listed on NASDAQ on September 3. Five weeks later they announced proposed merger with Trump’s shell company, TMGT. In the history of SPAC offerings, DWAC has broken the land speed record for listing and then announcing a merger. Their ability to canvass opportunities, perform due diligence on various merger candidates, reach a conclusion, and then execute a merger agreement, all within 5 weeks from the date of listing the SPAC would seem implausible at best, and statistically impossible at worst when considering the average time for this process is 4-6 months.

Let’s try a different angle: The CFO for DWAC is 83 year old Brazilian national Luis Orleans-Braganza. Mr. Orleans-Braganza is a businessman and currently a self-acclaimed “right wing” member of Brazil’s National Congress. Sources say that he has been “a guest at Mar-a-Lago on several occasions” during the past two years.

How About this part of the DWAC Offering Prospectus?

Patrick Orlando’s DWAC Prospectus States “We will identify and complete business combinations with “market-leading companies”. This is identical to the boilerplate verbiage in every SPAC offering document, yet counter-intuitive to the merger announcement if Digital World’s strategy is to identify and complete business combinations with technology-focused, market-leading companies.  For more information, please visit www.dwacspac.com

BUT, TMTG has NO operating business, which would be a cause of concern for the institutional and individual investors who put money into this SPAC based on Patrick Orlando’s representations. TMTG has NO employees of record (other than Trump) and their pitch deck, which appeared on the entity’s website at the same time as the merger news hit the tape, reads as if it was written on a blank whiteboard:

Among other things, the Trump pitch deck, which, unlike any other startup pitch deck, fails to identify any management or key employees that will be executing the business strategy, yet it states: “The group plans to offer alternative media to challenge the traditional social networks like FacebookYouTube and Twitter via a social network called “Truth Social.” One of the slides states “…..envisions to eventually compete against Amazon.com’s AWS cloud service and Google Cloud.”

Other slides suggest “a social network (“Truth Social”) is set for a beta launch next month, and full rollout in the first quarter of 2022, is the first of three stages in the company’s plans, followed by a subscription video-on-demand service called TMTG+ that will feature entertainment, news and podcasts.”

So, we have a blank check company merging with a blank-deck company that is parsing jargon from an array of presentation decks that anyone can download on the internet.  

CAVEAT (EMPTOR): Mr. Orlando’s FINRA record is clean (so far) of any misdeeds. The fact that he worked at Deutsche Bank, the only bank that would extend credit to Trump, is likely a mere coincidence.

As of press time, MarketsMuse has not determined whether any DWAC officers, including CEO Patrick Orlando, spoke with or visited with Mr. Trump at Mar-a-Lago or any place else during the two months in which both Trump Media and DWAC were incorporated. We have yet to obtain evidence as to whether members of Orlando’s team communicated with Trump prior to the SPAC listing.

To the above, given Trump’s penchant for “hiding the potato” and withholding evidence, unless the SEC engages the FBI to trace any and all phone, email and/or burner phone txt communications between the interested parties, Gensler’s enforcement agents who are already overwhelmed with tens of dozens of cases, could face a challenge in their attempt to prove that Orlando and Trump discussed and negotiated a business transaction with DWAC prior to the SPAC listing.

Rudy Guiliani to Defend Trump in any securities litigation? Maybe. Then again, if Trump enlists his favorite lawyer to defend him, despite the fact the former prosecutor and former New York mayor was disbarred from practicing law in in New York (and the District of Columbia), he can still appear in a federal court, which is where any SEC prosecution, as well as any securities class action lawsuits brought by investors, would likely be filed. Sounds like a scene from HBO’s “Succession”.

Boondoggle for Class Action Securities Lawyers: This will create a boondoggle for plaintiff lawyers who specialize in class action litigation on behalf of investors that have lost money buying (and or selling) securities of companies that have blatantly run afoul of securities regulations, including disclosure requirements. Investors residing in New York, Florida, California, Colorado, Massachusetts, and other states should click here for a listing of class action securities attorneys in your state.

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Lighthouse Investment Partners shed its holdings in Digital World Acquisition after learning of the deal with Trump’s venture, the fund told CNBC. Lighthouse had owned 3.2 million shares, or 11.2% of the special purpose acquisition company, which trades on NASDAQ, according to a Sept. 30 regulatory filing. 

Saba had owned a 9.3% stake in the SPAC, or 2.4 million shares, according to a Sept. 3 filing.

Other institutional owners that represent the remaining 80% of shares owned in DWAC include Highbridge Capital Management (2 million shares); D.E. Shaw & Co (2,425,000 shares); K2 Principal Fund (1,175,000 shares); ATW SPAC Management LLC (2,425,000 shares); Boothbay Fund Management (2,425,000 shares); Radcliffe Capital Management LP (2,425,000 shares). As of press time, these funds have not yet published updates as to whether they continue to maintain or have liquidated holdings in Digital World Acquisitions Corp.

If you’ve got a hot insider tip, a bright idea, or if you’d like to get visibility for your brand through MarketsMuse via subliminal content marketing, advertorial, blatant shout-out, spotlight article, news release etc., please reach out to our Senior Editor via cmo@marketsmuse.com

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SEC Proposes System to Catch Market Manipulators

In effort to thwart the “Catch Me If You Can” crowd, the SEC has proposed a new audit system that will purportedly allow regulators to track every bid and offer submitted to stock and options exchanges in effort to catch market manipulators.

(WSJ)–U.S. market regulators on Wednesday proposed a massive data repository that will eventually allow them to sift through billions of daily trading records to detect market manipulation and probe bouts of extreme market disruption.

The Securities and Exchange Commission’s consolidated audit trail will,enable regulators to track 58 billion daily transactions submitted to stock and options exchanges, as well as private-trading venues maintained by brokerage firms. Plans for the CAT, as it is called, were spurred by the May 6, 2010, flash crash, when more than 20,000 trades were executed at clearly erroneous prices and nearly $1 trillion in equity-market value was wiped out before prices rebounded.

The project has taken years to get off the ground, as industry groups have disagreed over its scope, costs and governance. Regulators believe the system will become a powerful means of quickly investigating excessive volatility and could be harnessed for other purposes, such as detecting insider trading and whether brokers are getting the best price for their clients.

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Kara Stein

“This will help us to fully understand the trading that is occurring in our markets within a matter of days, instead of months,” SEC Commissioner Kara Stein said at a meeting where the agency unanimously approved the plan. “The need for the CAT has unfortunately been proven over and over again.”

According to one market structure expert who spoke with MarketsMuse, “Another intriguing idea brought forth by a bureaucracy that has proven it has no fluency in technology and no real ability to implement policy that might infringe on the interests of Wall Street. They’ll be talking about this pipe dream for another four years, then spend 3x the amount budgeted and then discover the system is flawed.”

The proposal also sets several deadlines to ensure the system is fully operational within four years. The SEC must take final action to approve the CAT within six months. Exchanges would have to begin reporting trading data to the system by late 2017. Large brokers would have to comply by 2018, and small brokers would have until 2019 to report their activity.

Regulators still have to choose who will build the system, a decision that could come late this year or early in 2017. A selection committee has narrowed the choice to three bidders—the Financial Industry Regulatory Authority, Fidelity National Information Services Inc. unit SunGard and Thesys Technologies LLC.

The project’s supporters say it would have been useful last August, when huge price swings triggered more than 1,000 trading halts in stocks and exchange-traded products. It took the SEC nearly six months to issue a paper explaining the factors that influenced the barrage of trading halts on Aug. 24.

For the full story from the WSJ, click here

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SEC Chair White: “I Have A Dream..”

SEC Mary Joe White has a dream, and even if she aspires to leverage the inspirational outlook of  Dr. Martin Luther King, securities industry members are debating whether her dream could prove to be a reality any sooner than the civil rights agenda expressed by Dr. King so many years ago.  In a series of comments during the past several weeks from Chairperson White regarding the SEC’s agenda for the remainder of her tenure as President Obama’s designated SEC Chairperson, Ms. White, who is operating with only 3 of 5 Commissioners until two open vacancies are filled before the Second of Never,  she is vowing one of the top three items on her list includes “better understanding exchange-traded funds aka ETFs before the SEC approves prospectuses.” That makes sense.

One only wonders why that elementary concept had never occurred to any one previously—despite repeated calls from among others, former SEC Commissioner Steve Wallman (1994-1997) who has long questioned the approval process for many of the complex exchange-traded products the SEC has rubber-stamped, including inverse and commodities-related products that even professionals often do not understand.  Since his departure from the SEC, Wallman has proven adept at doing the right things while serving at the helm as Founder/Chairman/CEO of the investment firm Foliofn.com.

Other matters of importance according to White include “the desire on part of SEC to introduce “fiduciary definitions for registered advisers and brokers..” which in plain speaks means : White’s agenda is to figure out how to completely change the culture of the securities brokerage industry by forcing people to be ethical and moral. MarketsMuse sources have indicated White is proposing to have those folks swear an oath that says:

“My first obligation is to protect my clients’ interest above all else and to make sure I never even think of trying to sell them something that might be inappropriate for their goals or possibly even toxic—despite the fact my office manager says I have to sell house product only or I’m out of a job. After I meet that first obligation, my second obligation is to then make enough money to pay for my kids college and have enough left over for that condo in Florida.”

Insiders familiar with White’s agenda have told MarketsMuse that she has acknowledged her seemingly altruistic mission is not without challenge or headwinds given that the “securities industry at large is much like the NRA when it comes to influential prowess.”

Directly and indirectly, Wall Street firms and its executives contribute hundreds of millions of dollars every year to lobby SEC Officials and members of Congress(which the SEC reports to) on behalf of their interests—which presumably includes two big drivers that have driven the investment industry since the days of Joe Kennedy Sr.: (i) selling investment vehicles that look great on paper and in marketing collateral [even if they might or might not prove to be toxic at some point and might or might not be appropriate for a specific individual given that people’s moods change a lot] (ii) how to pay the mortgage on the brokers’ first house, the $200k for each of their kids college tuition bills, the country club memberships that provides venues in which to sell those investment products,  sharpen up the golf game, and of course, pay for the second and third homes, etc etc.

Another item on White’s laundry list is to expand the  exam program for registered brokers and advisers. Currently, 10% of the nearly 12,000 advisers sit and take ‘refresher tests’ that are abridged versions of the Series 7—an exam that has approximately 40% brokers FAIL the first time and 30% fail the second time. Some could argue the test is maybe too difficult, given the national average score is 67 vs. a passing grade of 72. Or, one could argue the barrier to entry to become a registered broker or adviser is simply being a good test taker. Idiots and Muppets can get licensed, as long as they take 8 practice exams the night before the actual exam and memorize the correct answers. So, Chairperson White wants more folks taking more tests; a good thing for the SEC because this is big a revenue-generator for the Agency—which has repeatedly claimed it does not have enough money to even pay for air conditioning in its Washington DC office. Staff members have said this alone is vexing, given that SEC examiners and enforcement agents have become accustomed to keeping windows wide open five months of the year and continuously grapple with files on their desks blowing out of their windows and many of those files pertain to complaints filed by investors and updated paper notes sent by from enforcement agents in the field via courier pigeons.

Courtesy of  an admittedly more illustrious news media outlet than MarketsMuse might be, the following is ‘official coverage from InvestmentNews.com:

(InvestmentNews) Despite missing two of its five members, Securities and Exchange Commission Chairwoman Mary Jo White said Friday the agency will forge ahead on rules to raise investment-advice standards and enhance oversight of advisers.

“At the moment, as you know, we are a commission of just three members, but — as has occurred in the past — we can carry forward all of the business of the commission,” Ms. White said at the Practising Law Institute conference in Washington. “And, while we look forward to welcoming new colleagues, Commissioners Stein, [Michael] Piwowar and I are fully engaged in advancing the commission’s work.”

The Obama administration has nominated Republican Hester Peirce and Democrat Lisa Fairfax to replace two members who have departed the SEC, Republican Daniel Gallagher and Democrat Luis Aguilar, but the Senate has not yet begun the confirmation process. Continue reading

John Hancock Selects Dimensional to Manage Smart Beta ETFs

Marketsmuse updates that fund giant John Hancock Investments will partner with Dimensional Fund Advisors on six “smart-beta” exchange-traded funds, according to paperwork filed with regulators early on Monday.

Dimensional, based in Austin, Texas, is one of the earliest proponents of factor investing. They blend elements of index-based investing and active investing in order to predictably exploit market returns and minimize trading costs. Many of today’s smart beta products — from index providers including FTSE Russell, WisdomTree, Research Affiliates — are based on a similar premise.

John Hancock unveiled in its preliminary prospectuses for the factor-based ETFs that DFA, the market-beating investment firm that adheres to the academic work of Eugene Fama and Kenneth French, will be the sub-advisor for its ETFs. John Hancock has worked with DFA on mutual funds and asset-allocation strategies since 2006.

John Hancock initially filed plans for ETFs nearly four years ago, but has yet to bring an ETF to market. However, a new filing with the Securities and Exchange Commission indicates the firm is getting closer to launching its first ETFs.

The new filing provides details and expense ratios on the proposed ETFs. For example, the John Hancock Multifactor ETF, which is expected to charge 0.35% per year, will track an index comprised a subset of securities in the U.S. Universe issued by companies whose market capitalizations are larger than that of the 801st largest U.S. company at the time of reconstitution. In selecting and weighting securities in the Index, the Index Service Provider uses a rules-based process that incorporates sources of expected returns. This rules-based approach to index investing may sometimes be referred to as multifactor investing, factor-based investing, strategic beta, or smart beta.

John Hancock manages nearly $130 billion in mutual funds and money-market funds. Dimensional manages $406 billion. Dimensional already advises on John Hancock-branded mutual funds that have $3.2 billion in assets.

SEC Has Eye On ETFs

MarketsMuse ETF update profiles the inevitable: The U.S. Securities & Exchange Commission (SEC) now has their cross-hairs on the exchange-traded fund industry.

 As reported by Traders Magazine (among others), the Securities and Exchange Commission announced that it is seeking public comment to help inform its review of the listing and trading of new, novel, or complex exchange-traded products (ETPs).

 “Exchange-traded products have become an increasingly important investment vehicle to market participants ranging from individuals to large institutional investors,” said SEC Chair Mary Jo White. “As new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded, and marketed to investors, especially retail investors.”

 The request, made via its website, looks to address key issues that arise when exemptions are sought by a market participant to trade a new ETP or when a securities exchange seeks to establish standards for listing new ETPs. Due to the expansion of ETP investment strategies in recent years that has led to a significant increase in the number and complexity of these requests, the Commission determined it would be beneficial to receive public input on these issues.

To read more, click here. 

Goldman Sachs Readies ETF Launch

MarketsMuse blog update profiles Goldman Sachs preparing for a launch of its own ETFs. Goldman Sachs is the largest U.S. investment bank and they are finally going to make the move to become a huge player in the ETF industry.  The firm has completed all its necessary paperwork with the SEC as of May 4th for its six ETFs. These six new ETFs include: Goldman Sachs ActiveBeta International Equity ETF (GSIE), Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM), Goldman Sachs ActiveBeta Europe Equity ETF (GSEU), Goldman Sachs ActiveBeta Japan Equity ETF (GSJY), Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and the Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC). This MarketsMuse blog update is courtesy of ETFTrends’ Tom Lydon and his article, “Goldman ETFs Near Liftoff“, with an excerpt below. 

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Goldman Sachs (NYSE: GS), the largest U.S. investment bank, is getting closer to launching its own exchange traded funds.

In a filing with the Securities and Exchange Commission dated May 4, New York-based Goldman Sachs revealed tickers and fund managers for its six “ActiveBeta” ETFs as well as tickers for its five passively managed ETFs.

Among Goldman the managers for the ActiveBeta ETFs are “Steve Jeneste, a managing director most recently oversaw portfolio management of macro and multi-asset strategies. Another is Raj Garigipati, vice president, who most recently served as chief risk officer for Goldman’s QIS unit,” reports Chris Dieterich for Barron’s.

To continue reading about Goldman Sachs preparing  for the launch of its six “ActiveBeta” ETFs, click here.

 

Market Manipulation or Rapid Fire Trading? Regulators Eye Spoofing

MarketsMuse update courtesy of Feb 21 WSJ story by Bradley Hope

One June morning in 2012, a college dropout whom securities traders call “The Russian” logged on to his computer and began trading Brent-crude futures on a London exchange from his skyscraper office in Chicago.

Over six hours, Igor Oystacher ’s computer sent roughly 23,000 commands, including thousands of buy and sell orders, according to correspondence from the exchange to his clearing firm reviewed by The Wall Street Journal. But he canceled many of those orders milliseconds after placing them, the documents show, in what the exchange alleges was part of a trading practice designed to trick other investors into buying and selling at artificially high or low prices.

Traders call the illegal bluffing tactic “spoofing,” and they say it has long been used to manipulate prices of anything from stocks to bonds to futures. Exchanges and regulators have only recently begun clamping down.

Spoofing is rapid-fire feinting, and employs the weapons of high-frequency trading, aka “HFT”. A spoofer might dupe other traders into thinking oil prices are falling, say, by offering to sell futures contracts at $45.03 a barrel when the market price is $45.05. After other sellers join in with offers at that lower price, the spoofer quickly pivots, canceling his sell order and instead buying at the $45.03 price he set with the fake bid.

The spoofer, who has now bought at two cents under the true market price, can later sell at a higher price—perhaps by spoofing again, pretending to place a buy order at $45.04 but selling instead after tricking rivals to follow. Repeated many times, spoofing can produce big profits. Make no mistake, spoofing is not limited to the fast-paced world of futures contracts; high-frequency traders are notorious for spoofing and anti-spoofing tactics across listed equities, options and other electronic markets.

The 2010 Dodd-Frank financial-overhaul law outlawed spoofing, but the tactic is still being used to manipulate markets, traders say. “Spoofing is extremely toxic for the markets,” says Benjamin Blander, a managing member of Radix Trading LLC in Chicago. “Anything that distorts the accuracy of prices is stealing money away from the correct allocation of resources.”

For the full story from the WSJ, please click here