STRC's 100$ stability mechanism has a design flaw

Like many people, I've been watching STRC struggle to hold its $100 level.

I believe the mechanism intended to drive the price back to $100 has a design flaw that's causing it to fail to return to $100 target.

There are two types of people in the STRC market — short term dividend arbitragers, and longer-term holders.

The problem is that dividend arbitragers have been driving up supply of STRC to levels higher than the longer-term holders can consume.

Each time an ex-dividend date occurs, dividend arbitragers buy STRC, hold it until the ex-dividend date, and sell it, with the aim of selling for price difference less than the amount they gain from collecting the dividend. They can do this with leverage using their broker's margin, and it has also been possible to double up on monthly dividends by also doing the same trade on SATA (another preferred stock much like STRC) as their ex-dividend dates are different.

Unlike a normal stock, STRC issues new shares directly to buyers at the $100 level, so these dividend arbitragers are causing new shares to be issued in large numbers as they buy in. When they sell on the ex-dividend day, the extra share issuance becomes too much for longer-term buyers to absorb, so the price drives down.

Because new shares are issued at $100, the price never goes over $100, and so there's no market mechanism to destroy demand from arbitragers — they can always buy at $100 as much as they like. In a normal stock, arbitragers would push up the price, making the arb unprofitable, but this doesn't occur in STRC.

Many of these dividend arbitragers will be failing to sell at a profitable price, so they'll be trapped holding shares and trying to sell into buyers entering for the next ex-dividend date to get out of their losing trade. These trapped dividend arb traders make it even harder for the price to return to $100.

The other problem is, Strategy's mechanism for pushing the market back to $100 is likely to make this worse. They can increase the dividend amount to incentivise buyers, but increasing the dividend may incentivise dividend arbitragers more than long-term buyers, as a larger dividend is more appealing and easier to arb, because of the larger spread between $100 and the sale price.

The recent drop in BTC to ~$60k has likely hit sentiment amongst longer-term holders, leading to reduced demand to absorb the excess supply caused by dividend arbitragers triggering ATM issuance of shares.

The current design has the effect of issuing more STRC than the market can bear. Increasing the yield may help temporarily, but as the price returns to $100, dividend arbers are likely to drive up supply again until the $100 level cannot be maintained.

I think Strategy needs to:

• Change the issuance policy to not issue at $100, but at a higher level. This will make dividend arbing harder, as people will be buying high and selling low, making the arb less likely to be profitable. At the moment buyers can always buy at <= $100, which makes the arb much more appealing.
  • Could be graduated, e.g. some issuance at $100 up to a limit, then only at higher levels. As well as disincentivising dividend arbing, this would add value for MSTR holders, as shares of STRC would be selling at a premium (lower yield).
• Increase the dividend rate to daily, like SATA has, which will further reduce the incentive to arb
• Buy back shares to reduce supply to bearable levels, otherwise it seems likely that there will be insufficient demand to return to $100 until a bull market returns