Market Manipulation 101

Leveraged ETFs and Stock Price Suppression: Unraveling the GameStop and Meme Stock Controversy

The world of finance is no stranger to controversy, and in recent years, the rise of meme stocks like GameStop (GME), MicroStrategy (MSTR), NVIDIA (NVDA), Tesla (TSLA), and Upstart (UPST) has sparked heated debates about market dynamics. Among the most contentious issues is the role of leveraged and inverse exchange-traded funds (ETFs) in potentially suppressing the stock prices of these high-profile names. ETFs like GMEU (T-REX 2X Long GME Daily Target ETF), MSTZ (T-REX 2X Inverse MSTR Daily Target ETF), NVDX (T-REX 2X Long NVIDIA Daily Target ETF), and TSLZ (T-REX 2X Inverse Tesla Daily Target ETF) have drawn scrutiny from retail investors, particularly on platforms like X, where sentiment suggests these instruments may be used to manipulate stock prices. But how exactly could ETFs contribute to price suppression, and what does the evidence say? Let’s dive into the mechanics, the accusations, and the broader implications.

Understanding Leveraged and Inverse ETFs

Before exploring the allegations of price suppression, it’s crucial to understand what leveraged and inverse ETFs are. These financial instruments are designed to amplify or inversely track the daily performance of an underlying asset, such as a single stock or an index, by a specific multiple (e.g., 2x or -2x). For example:

• GMEU aims to deliver 200% of GameStop’s daily stock price movement.
• MSTZ seeks -200% of MicroStrategy’s daily performance, profiting when MSTR declines.
• NVDX targets 200% of NVIDIA’s daily gains or losses.
• TSLZ aims for -200% of Tesla’s daily performance, benefiting from price drops.

These ETFs achieve their objectives through derivatives like swap agreements or options, and they rebalance daily to maintain their leverage ratio. This daily rebalancing can lead to significant deviations from the underlying stock’s performance over longer periods due to compounding effects, making them high-risk tools primarily suited for short-term trading by sophisticated investors.

The Accusation: ETFs as Tools for Price Suppression

Retail investors, particularly those active in meme stock communities, have voiced concerns that ETFs like GMEU, XRT (SPDR S&P Retail ETF), and others are being used by market makers and hedge funds to suppress stock prices. The theory, widely discussed on platforms like X, centers on the idea that these ETFs enable short-selling strategies that artificially depress the prices of stocks like GameStop. Here’s how the mechanism is alleged to work:

1. ETF Arbitrage and Shorting: ETFs like XRT, which include GameStop as a component, are traded as baskets of stocks. Market makers, who facilitate ETF trading, can arbitrage between the ETF’s price and the value of its underlying stocks. If the ETF trades at a premium, market makers might short the underlying stocks (e.g., GME) while going long on the ETF, profiting from the price discrepancy. This shorting can exert downward pressure on the stock’s price.
2. Failures-to-Deliver (FTDs) and Regulation SHO: Stocks or ETFs appearing on the SEC’s Regulation SHO Threshold Securities List, like XRT and GMEU, indicate significant failures-to-deliver (FTDs), where shares sold short are not delivered within the required settlement period. For instance, XRT has been on the list for multiple days, with short interest reportedly exceeding 100% at times. This fuels speculation that market makers are using ETFs to short stocks without locating shares, potentially engaging in practices like naked shorting to suppress prices.
3. Dark Pool Trading: Some investors allege that market makers route buy orders for stocks like GME to dark pools (private exchanges that don’t impact public market prices) while routing sell orders to lit exchanges, creating an imbalance that suppresses demand and lowers prices. ETFs, as liquid vehicles, can facilitate this by providing market makers with flexibility to manage short positions without directly impacting the stock’s price on public exchanges.
4. Leveraged ETF Mechanics: Leveraged ETFs like GMEU or MSTZ rely on derivatives, such as swaps or options, to achieve their daily targets. If demand for these derivatives outstrips supply (e.g., not enough swaps available), funds may struggle to track their underlying stocks accurately, leading to tracking errors. For example, the T-REX 2X Long MSTR Daily Target ETF (MSTU) and Defiance’s equivalent (MSTX) have shown significant deviations from their 2x target, sometimes underperforming or overperforming, which can exacerbate volatility or create opportunities for market makers to influence prices.

The GameStop Case: A Focal Point

GameStop has been at the heart of this controversy since the 2021 meme stock frenzy, when its stock soared from $20 to $400 due to a Reddit-fueled short squeeze. During that period, GME was on the Regulation SHO Threshold List for 39 consecutive days, signaling high FTDs and raising suspicions of manipulation through short-selling practices. Recent posts on X highlight that XRT and GMEU have again appeared on the Regulation SHO list, with XRT on for eight days and GMEU for 11 days as of August 2025, suggesting ongoing issues with share delivery.

The theory among retail investors is that ETFs like XRT, which includes GameStop among other retail stocks, allow market makers to short GME indirectly. By redeeming ETF shares for the underlying basket, market makers can access GME shares to close short positions without buying them on the open market, thus avoiding upward price pressure. This practice, while legal, can create the perception of suppression when short interest remains high and FTDs persist.

Other Stocks: MicroStrategy, NVIDIA, Tesla, and Upstart

The same logic extends to other stocks with leveraged ETFs:

• MicroStrategy (MSTR): As a major Bitcoin proxy, MSTR’s stock has seen explosive growth, but its leveraged ETFs (MSTU and MSTZ) have struggled with tracking errors due to limited swap availability, leading to performance deviations. Some investors speculate that inverse ETFs like MSTZ are used to cap MSTR’s upside, especially given its high volatility and correlation with Bitcoin.
• NVIDIA (NVDA): The T-REX 2X Long NVIDIA Daily Target ETF (NVDX) has attracted over $5 billion in assets, reflecting its popularity amid NVIDIA’s dominance in AI. However, high trading volumes and shorting through ETFs could theoretically dampen price surges, though NVIDIA’s strong fundamentals make this less evident.
• Tesla (TSLA): The T-REX 2X Inverse Tesla Daily Target ETF (TSLZ) bets against Tesla’s daily performance. With Tesla’s stock subject to intense retail and institutional interest, inverse ETFs could amplify downward pressure during sell-offs, particularly if market makers use them to hedge or arbitrage.
• Upstart (UPST): Upstart’s high short interest (36% of float) and presence on the Regulation SHO list in early 2023 suggest similar dynamics. The Tradr 2X Long UPST Daily ETF (UPSX) could be used to facilitate shorting, though its smaller size limits its impact compared to GME or MSTR.

The Evidence: Fact or Speculation?

While the sentiment on X is strong, with users like @ReesePolitics and @trvsrdrgz2 pointing to Regulation SHO listings and ETF shorting as evidence of manipulation, the reality is more nuanced. Here’s a critical look:

• Regulation SHO and FTDs: Stocks and ETFs on the Regulation SHO Threshold List, like XRT and GMEU, indicate FTDs for five or more consecutive trading days. While this can signal potential manipulation (e.g., naked shorting), FTDs can also result from operational issues, such as settlement delays or human error. The SEC notes that there’s no direct correlation between FTDs and price suppression, but prolonged listings fuel suspicion.
• ETF Mechanics: Leveraged ETFs’ daily rebalancing and reliance on derivatives can create market distortions, but these are typically short-term and tied to volatility rather than deliberate suppression. The tracking errors in MSTR ETFs, for instance, stem from supply constraints in the swaps market, not necessarily malicious intent.
• Dark Pools and Arbitrage: The use of dark pools to route buy orders is a known practice, but it’s not unique to ETFs or meme stocks. Market makers like Citadel, which operates both as a market maker and a hedge fund, face accusations of conflicts of interest, but no definitive evidence confirms systematic price suppression through ETFs.
• Regulatory Oversight: The SEC has tightened ETF rules to prevent manipulation, focusing on liquidity and index composition to ensure fair markets. However, critics argue that enforcement is lax, and penalties for violations (e.g., naked shorting) are often minimal compared to profits.

The Broader Implications

The controversy around ETFs and price suppression highlights deeper issues in market structure:

1. Retail vs. Institutional Power: Meme stock investors see themselves as battling institutional players who use complex financial instruments like ETFs to maintain control. The 2021 GameStop saga, where retail-driven buying overwhelmed short sellers, showed that collective action can disrupt these dynamics, but ETFs provide institutions with tools to adapt.
2. Market Transparency: The opacity of dark pool trading and ETF arbitrage fuels distrust. Retail investors demand greater visibility into short interest and FTDs, especially for stocks like GME and MSTR, which are heavily shorted or volatile.
3. Regulatory Gaps: While the SEC’s Regulation SHO aims to curb short-selling abuses, its effectiveness is debated. The persistence of FTDs in ETFs like XRT suggests that current rules may not fully address the complexities of modern trading.

What Can Investors Do?

If you’re concerned about ETF-driven price suppression, consider these steps:

• Monitor Regulation SHO: Check the SEC’s Threshold Securities List for stocks and ETFs of interest. Persistent FTDs may indicate unusual activity, though not necessarily manipulation.
• Track Short Interest: Platforms like Yahoo Finance or Nasdaq provide short interest data. High short interest, as seen with Upstart (36%) or XRT (often over 100%), can signal potential squeeze opportunities but also suppression risks.
• Understand ETF Risks: Leveraged ETFs like GMEU, NVDX, or TSLZ are not designed for long-term holding. Their daily rebalancing can lead to significant losses, especially in volatile markets.
• Stay Informed: Follow reputable sources and regulatory filings for evidence of manipulation. X posts can reflect sentiment but often lack conclusive proof, so cross-reference with SEC reports or FINRA data.

Conclusion: A Complex Puzzle

The idea that leveraged ETFs like GMEU, MSTZ, NVDX, and TSLZ are used to suppress stock prices is a compelling narrative, especially among retail investors who feel outgunned by Wall Street. While mechanisms like ETF arbitrage, FTDs, and dark pool trading could theoretically enable suppression, hard evidence of systematic manipulation remains elusive. The SEC’s Regulation SHO and other rules aim to maintain fair markets, but gaps in enforcement and the complexity of modern trading leave room for skepticism.

For now, the debate rages on platforms like X, where users point to Regulation SHO listings and high short interest as red flags. Whether these ETFs are truly weapons of price suppression or simply tools caught in the crossfire of volatile markets, one thing is clear: the battle between retail and institutional investors is far from over. Stay vigilant, do your research, and approach high-risk instruments like leveraged ETFs with caution.

Disclaimer: This article is for informational purposes only and not investment advice. Always conduct your own due diligence before making investment decisions.