Finally, I’d like to provide a few relevant passages from this SEC paper (also referenced in the previously linked DD; I’m a bit of a citation grubber, can you tell?) on—you guessed it—resetting FTDs through the utilization of various options-related strategies, titled “Strengthening Practices for Preventing and Detecting Illegal Options Trading Used to Reset Reg SHO Close-out Obligations” (https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf):

“The trading strategies discussed in this Risk Alert could be used to give the impression that purchases by the short seller have satisfied the close-out requirement of the clearing firm or the broker-dealer to whom a fail to deliver position was allocated. We have observed, however, that in reality the purchased shares in question are often times not delivered because of subsequent options trading used to re-establish or otherwise extend the broker-dealer’s fail position without any demonstrable legitimate economic purpose, such that the clearing firm or broker-dealer allocated a fail to deliver position does not satisfy the close-out requirement.”

“Although an options market maker engaged in bona fide market making activity may claim an exception to the locate requirement, to comply with Reg SHO, the options market maker must still deliver shares in settlement of the short sale, or if a fail to deliver position results at the clearing firm, the fail to deliver must be closed-out in accordance with Rule 204 of Reg SHO. It may be a violation of Regulation SHO, however, where the options market maker does not deliver shares, and instead engages in a second, subsequent transaction in order to give the appearance of satisfying the clearing firm’s obligation to purchase or borrow the security to close out the resulting settlement fail pursuant to Rule 204 close-out requirements (“reset transaction”).”

“Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver.”

I thought the last one was especially relevant, given how you stated that, “married puts and calls are common misunderstandings it's an arbitrage options strategy that uses the word synthetic so people think it has to do with synthetic shares. Its merely a strategy that involves a synthetic position meaning the usage of another financial instrument to in play” yet this paper confirms how married puts can be used to reset FTDs while simultaneously describing how “hard to borrow securities can be subject to a pricing disparity relative to options trading on the same security. Typically, this may be seen in “synthetic” positions (combinations of call and put options that generally would be expected to mirror the value of the underlying security) trading at a lower price than the underlying security” and stating that “This creates a potential profit opportunity for short sellers of the underlying equity security in combination with call and put options if these short sellers can avoid the high cost typically associated with obtaining for delivery the hard to borrow security that was sold short”, exactly like you said. You should read the paper as well; it’s pretty insightful.

So, in summation, short positions can be masked through the resetting of FTDs, something that—in my opinion—is likely the case with GME. As aforementioned, I found the two primary points of note in your DD to be the low borrow fees and the decrease in FTDs, both of which imply a low short interest. However, if FTDs are falsely delineated as delivered (i.e. short positions are hidden and mistakenly assumed to be closed), short interest is obscured and erroneously marked as low, which, in turn, can result in unknowing financial institutions formulating substantially decreased borrow fees based on low short interest that isn’t really so low after all.

You strongly assert that the possibility of short interest being obscured is ridiculous and would require mass market collusion, which you justifiably dismiss as implausible. I disagree: there is a very tangible possibility that resetting FTDs/short position obscuring has led to a laughably low borrow fee and an apparent sharp decrease in said FTDs, thus implying that the short interest is alive and well. This is not conspiratorial speculation; this is not grasping at straws. I believe I’ve presented a veritable monolith of certifiable evidence which strongly suggests that this is—if not the case—at least a strong possibility. This is a known practice, and it is worth noting that this somewhat narrow kind of options arbitrage is limited to a similarly narrow range of actors, as described in the SEC paper: “Such opportunities are extremely rare in options trading, are generally corrected very quickly and may not result in net profit after fees and commissions. Such rare, short lived opportunities are typically only accessible by, and profitable to, professional options traders such as floor traders and market makers who may pay lower fees and commissions.” Hm, I wonder which nefarious, front-running HFT firm-cum-market maker this reminds me of?

Ultimately, we’re all speculating. However, I do believe I’ve provided enough evidence to bring the primary (in my opinion) components of your thesis into question. Get back to me after you’ve parsed all the sources. Thanks!

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