Impact Fusion International Inc (IFUS): Why some call Broker to buy RRLB…...

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stervc

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Wednesday, 02/20/2008 5:56:12 AM

Wednesday, February 20, 2008 5:56:12 AM

Why some call Broker to buy RRLB…

In order to buy shares of RRLB through some brokerage companies such as TD Ameritrade and some other brokerage companies, you have to call in to get your order filled. It's not as bad as it sounds or as bad as I had originally thought. Normally I just move on to another stock if I ever have to do such, but I've learned to exercise patience to do such when I think a stock is really worth it as I have missed out on huge runs from not doing such.

I had researched this reason why for having to call in to place your order when not allowed to place your order online years ago. Yesterday, I confirmed what I had performed through my due diligence (DD) years ago.

Below are some very similar thoughts I shared with another stock, but I am sharing these thoughts here as a very similar situation exist here with RRLB that I think needs the same consideration.

Someone I spoke to at Ameritrade recently and in the past (Schwab in the past), again kind of let the cat out of the bag unexpectedly as to why they sometime stop online trading to force you to have to call in to place a buy order. Although I am not sure, but I think Schwab currently has no restriction on RRLB as they usually don't have restrictions on many stocks compared to TD Ameritrade and others. Still, here's the beef of it.

There exists what is known as the "Custodian of Accounts" on the side of the brokerage companies and on the side of the Market Makers (MMs). They are responsible for verifying and coordinating the electronic inventory of shares as transactions are monitored for buying and selling.

Whenever there is a shortage of shares or an extremely low inventory of shares available for the public to buy, the level of coordination for the dissemination of those shares have to be monitored that much more closely to make sure there is not an issue during the settlement time frame of T+3 days from the Clearing Houses. This means that the "legitimate" inventory of RRLB shares is either at zero or about to hit zero. With the inventory being zero to negative, this means that a log of shares sold to an investor must be kept that contributed towards the MMs trying to create or maintain an orderly market and must be tracked for a known amount to be covered in the future. That's why we see the huge spreads too on low volume with some stocks.

Since there is a known shortage within the inventory of shares for RRLB as confirmed by TD Ameritrade, imagine what would happen if I put in an order to buy 1 million shares through TD Ameritrade and at the same time you put in an order to buy 1 million shares of RRLB through Schwab. Now imagine that only 1 million shares are remaining in the complete or total "inventory of shares" within the MMs "Custodian of Accounts" to disseminate from their inventory of RRLB shares.

Since the MMs inventory of RRLB shares is so small, having transactions happening all at once could cause an imbalance or negative balance of shares to never be "officially" covered. They need to keep track of the shortage to make sure it doesn’t get out of hand. Forcing investors to call in creates a more in depth and finite way of streamlining the control of ordering shares from the inventory to one at a time to make sure the inventory issue does not get out of hand.

Imagine in the example above what would happen if they authorized electronic purchasing as usual and allowed the 1 million share buy to go through at both Ameritrade and Schwab. That would be a total of 2 million shares bought of RRLB, but keep in mind that the MMs only had an inventory of RRLB shares from their "Custodian of Accounts" of 1 million shares. When T+3 days come around, whose account do the Clearing Houses credit from transactions allowed to take place between the Brokerage companies and the MMs to allow for the 1 million shares of RRLB to cover one of the Brokerage companies; Ameritrade or Schwab? This could create an issue at the Clearing Houses as all trades have to be settled. There would be a 1 million share imbalance of RRLB shares unsettled in one or the other account.

The wheat example below within Investopedia might help to better understand too:
http://www.investopedia.com/terms/c/clearinghouse.asp

This shows me that if significant "buying" volume comes into RRLB, there might be a major problem for the brokerage companies and the MMs for having a shortage of shares to create an orderly market for RRLB. To fix the problem, the MMs would have to seriously increase the bid to entice enough selling until they capture enough shares out of the open market to maintain order. This could cause some serious price increases if RRLB drops some serious news to generate much more buying. We should be heading up in a huge way if I had to guess as more and more people realize all of RRLB's potential.

v/r
Sterling

Sterling's Trading & Investing Strategies:
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