you would think its obvious that second market is going to buy up the lot if possible..
SecondMarket did not bid for themselves on the previous auctions. In both cases, they only formed syndicates (assaciations) of small bidders who would not bid for a whole 2000 or 3000 BTC lot, and merged their bids into full-lot bids. On the first auction they did not get a satoshi, Tim Draper took all the ~30'000 BTC. On the second auction they got 48'000 of the 50'000 BTC, and Tim took the other 2000. SecondMarket promptly distributed the 48'000 BTC to the small bidders, after taking a 1% service fee from them.
Their BIT fund only buys BTC when investos buy BIT shares. BIT now has ~135'000 BTC in their possession, but it has not grown since May/2014, except for a 10 M USD "freak" investment in November. Only a few investors had the opportunity to withdraw; redemptions have been disbled since October, and it is not clear whether they will ever be re-enabled.
BIT investors have been barred from selling their shares to other people since the beginning. The listing on OTCQX and the possibility OTC trading of the shares (only those older than 12 months) does not directly cause buying or selling of BTC by the fund. However, if the BIT shares get traded at significantly more than their nominal value (the market price of 0.1 BTC), BIT may buy more BTC and issue more shares to sell to the brokers. Conversely, if the BIT shares get traded at significantly less than their nominal value, BIT may buy back those shares from the brokers and sell the corresponding BTC.
The last paragraph is incorrect. You are right that BIT is taking advantage of an exemption that allows unregistered shares to be sold without restriction (i.e. to the "public") after they have been held for a year. But this means that the arbitrage method you mention by BIT cannot work. If they buy more bitcoin and issue shares, whether to brokers or otherwise, those shares will not qualify for the 12 month exception, and cannot be sold to the "public." (They could potentially be sold to other accredited investors if permitted by the fund.)
The BIT fund will be more comparable to a closed end fund, than a mutual fund or ETF. Mutual funds and ETFs have mechanisms to expand or contract their assets based on supply and demand of shares, meaning the NAV and the public price are usually quite tight. Closed end funds do not, shares are issued in one or more transactions, and then resold in the public market. They can therefore trade at material discounts or premiums to their NAVs.
