Zerify Inc (ZRFY)

[BettingAngles]

While we are on the subject. Here is something I ran across a while back about that "short" thingy:

The SEC did not see abusive naked short sales as a massive problem in fact the direct quote was they are not an issue within our markets. Turns out that was false, there were an alarming number of shares sold without delivery and in some cases there were securities severely impacted by large numbers of abusive naked short sales. So as we know the regulators imposed new Rules and came up with new reports to reign in the process and provide transparency to the entire trade transaction. In particular two points in time are what are concentrated on, the initial execution of a trade and then of course the final settlement of the trade.

Now that we have that out of the way, we can move on to the OTC, the OTC is a Market, not an exchange as many try to claim. The OTC is a quotation service and it requires MMs to quote securities to provide a centralized place for Bids and Offers. Without MMs you have a grey market and well there is no order flow and no liquidity in that market. So each broker has an MM contracted to work for them to aid in execution of trades here in the OTC. As long a security has either a Form 15 and or is an exempted unsolicited quote security the MMs can quote for customers their offers. That is all MMs do here quote customer orders and that is all.

The entire OTC market is electronic from initial trade execution to settlement and requires no human intervention in doing so. Only two reasons humans get involved, you phoning an order in and specializing that order or the other reason a trading error occurs, which requires manual reconciliation. The clearing and settlement process requires no human intervention either as long as a security is in CNS, thus why DTC eligibility is important as the booking is completely hands free. We will deal with quoted and CNS eligible securities in this response.

So back to the regulators and the created reports, the SEC has rules in the 200 series that cover short sales, in particular 200, 201, 202T and 203. The main two here for us are 200 and 203, 200 in particular defines short sales and defines ownership.

Quote: Since the new marking requirements apply to all equity securities, not just exchange-listed securities, we are removing them from current Rule 10a-1. The new order-marking requirements differentiate between "long," "short," and "short exempt" orders for all exchange-listed and over-the-counter equity securities.



So here they added OTC securities into the marking requirements, marking a trade “short” is simply defining ownership of the security, in the case of MMs working the OTC none of them own the shares when making a market here.

Quote: Under the former marking requirements in Rule 10a-1(d), a broker-dealer could only mark an order to sell a security "long" if the security was carried in the account for which the sale is to be effected, or the broker-dealer is informed that the seller owns the security to be sold, and will deliver the security to the account for which the sale is effected as soon as possible without undue inconvenience or expense.35 We had proposed changing the marking requirement so that a sale could only be marked "long" if the seller owns the security being sold and either the security to be delivered is in the physical possession or control of the broker-dealer, or will be in the physical possession or control of the broker-dealer prior to settlement of the transaction.



You can find everything concerning SEC Rules 200-203 here:

http://www.sec.gov/rules/final/34-50103.htm

So lets get to the meat of it, I will provide a couple of examples of trades that require being marked short. I will use generic trading symbol XXXX for these examples:

Typical everyday trade, I have 20,000 shares of XXXX for sale on the Ask, you however want to purchase 10,000 of the shares at my price. So you enter your order and it is sent to your broker to execute. First thing is a broker electronically checks to see if there are current sell orders that match your request, if not it is off to the ECN. As I stated earlier each broker has an MM working for them to execute trades, the MM for your broker sees your order and knows I have 20,000 shares for trade. Here is where MMs “create” liquidity and order flow, the ECN matches perfect blocks like trade for trade, size and price are automatic initiated trades. In this case you only want 10,000 shares, so immediately the MM sells your broker 10,000 shares short and marks the trade as “short” although you are long in the trade, this gets reported to the Daily Reg SHO report and also on the consolidated tape.

Now nearly simultaneously on a separate leg of the very same trade transaction the MM is buying the cover from my 20,000 share block, and purchases 10,000 shares from me. This gets reported in the Non Tape Transactions Report and both Non tape and consolidated tape are both sent to FINRA for balancing and reconciliation.

The Daily Reg SHO only reports how the trade was initially executed and it does not reconcile based upon the fact the trade was covered as that will be taken care of in another report. Regulators only want to know exactly how the trade was initially executed and that is it. The trade goes off to the DTC and NSCC for clearing and settlement since it is a CNS security and is cleared and settled. According to SEC reports 98% of all trades are cleared and settled within the same day of trade or T+0. Of course regulators give T+3 for settlement, that is trade day plus 3 days for settlement, once it exceeds that it becomes an FTD (Fails to Deliver).

This report is the end of the entire trade transaction, and once a trade goes T+4 it gets placed on the FTD report. Now many will tell you that if it is on the FTD it means it was either shorted or abusively naked shorted. Both are in fact wrong and the SEC provides clarity as to what the data does not imply:

Quote:Please note that fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or “naked” short selling.



http://www.sec.gov/foia/docs/failsdata.htm

So here it is clear as day that the data does not imply anything towards what happened to fail on settlement there are multiple reasons that cause FTDs including error trades and so forth. But there are also trades enacted by financiers in these securities that cause FTDs and even threshold flags to occur, that is covered by SEC Rule 203:

Quote: Rule 203(b)(1) for situations where a broker-dealer effects a sale on behalf of a customer that is deemed to own the security pursuant to Rule 200, although, through no fault of the customer or the broker-dealer, it is not reasonably expected that the security will be in the physical possession or control of the broker-dealer by settlement date, and is thus a "short" sale under the marking requirements of Rule 200(g) as adopted.70 Such circumstances could include the situation where a convertible security, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by settlement date.71 Rule 203(b)(2)(ii) as adopted provides that in all situations, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event no later than 35 days after trade date, at which time the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity.



So convertible debts for example create “marked short sales” and FTDs if they are not delivered right away. This is the cause for huge numbers in Daily Reg SHO and also FTDs. You commonly see these massive T-Trades at the end of the day in some securities which are a good sign of dilution but trades executed throughout the day from the debt conversion will all be marked short in accordance with SEC Rule 203. This is to protect the MM due to the possible restriction still being in place during settlement. In fact it is not uncommon for debt holders to sell their shares while still being restricted, they have their letters for conversion to act on.

This commonly creates huge FTDs and trips threshold flags for days leading to speculation that there is a massive short squeeze coming. Sorry to say that no in fact it is 99% of the time due to financiers selling shares before their restricted legend is removed and they have up to 35 days to cover those trades as you can see. During normal market making if there is a trade that becomes an FTD the MM has 13 days to cover the trade and is forced to buy in at that point.

There is another type of trade that causes a “marked” short designation and that is an internalized order. This is caused by someone using a “market order” rather than a limit order. When such an order is placed an MM gets to make money on the spread here, and typically what happens causes some L2 watchers to cry. It is imperative that people use limit orders for this reason because market orders can really create money for MMs on huge spreads. The MM has an order to buy shares at the best Ask, it also sees the market order, it immediately sells shares to the Ask short and buys the market order at bid to cover. This often causes shock on both sides as somebody that was best Bid and Ask did not get filled on either order.

This is the only time MMs make money on the spread here in the OTC, otherwise it is all additional fees charged by your broker to pay for the transactions.

This is what short sales are, they are not actual short positions and they are not Abusive Naked Short Sales, they are simply trades marked short for temporary moment in time. Unfortunately the information is often touted and manipulated to make stupid conclusions of shorting against a security. In fact websites have sprung up providing this information as some type of trading knowledge to be used in making trade decisions. Unfortunately it is all fodder and is of no use to anyone other then regulators to track settlement of trades from initial execution to final settlement. I have seen it all including adding everyday totals to come up with fantastic claims that “OH MY GAWD 320% of the float has been shorted on XXXX!!!!!!!!!!!!!”

Sorry but no it hasn’t and no there will not be a short squeeze either. To answer your question in your other post on the specific board, 999,999 trades are indicative to the broker Schwab, they use USBB as a MM. Each time you see a 999,999 trade it is certain it was Schwab retail buyer. So you have answered your question, it is not specific to MM or broker and is totally dependant on the trade transaction as to whether it will be marked short or not.

Cellar boxing is myth perpetuated from back in the days, unfortunately you have people lingering around these boards that used to work the industry back in the 80s and they like to talk about how things used to be. Well we no longer sell shares by 1/8s, people buy and sell using online full service brokers for $7 as opposed to $300 a trade, and most do not hold shares in stocks for years like they used to. It is great that back in the day people used such techniques to get their ass out of trouble but they no longer apply in the electronic trading age. Did it happen, sure it was part of the environment of that trading period, but it no longer applies here in the electronic market place.

So here is the best answer.

*****

Well lets go over Short Volume, first one needs to understand what governs Short Volume and that would be SEC Rule 200. If you read through Rule 200 you will find out what information is being delivered to the public. Contrary to popular belief Short Volume is not Short Interest, although it may contain Short Interest potentially. In fact the data provided in Short Volume cannot be pointed to specific cause, although we know the overwhelming majority of it is in fact caused by Riskless Principal transactions.

So lets look at Rule 200, this is the brief synopsis provided by the SEC:

Quote:Rule 200 – Definitions and Marking Requirements. Rule 200 incorporates and amends Rules 3b-3, 10a-1(d) and 10a-1(e)(13). It defines ownership for short sale purposes, and clarifies the requirement to determine a short seller’s net aggregate position. It also incorporates requirements to mark sales in all equity securities “long,” “short,” or “short exempt.”



Quote:Rule 200(g) of Regulation SHO requires a broker-dealer to mark sell orders in any equity security as "long" or "short." Rule 200(a) defines a short sale as "any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." Rule 200(g)(1) provides that "[a]n order to sell shall be marked "long" only if the seller is deemed to own the security being sold pursuant to paragraphs (a) through (f) of this section and either: (i) The security to be delivered is in the physical possession or control of the broker or dealer; or (ii) It is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than the settlement of the transaction." Rule 200(c) of Regulation SHO provides that a person shall be deemed to own securities only to the extent that he has a net long position in such securities. In addition, to determine its own net position, Rule 200(f) requires a broker-dealer to aggregate all of its positions in a security unless it qualifies for independent trading unit aggregation.



Because this security trades on a quotation market any trade that cannot be completed by the customers broker and requires completion through a broker dealer will in fact be marked short despite being a long position transaction. This is due to SEC Rule 200 and the requirement to either OWN or have PHYSICAL POSSESSION of the security. Broker Dealers do not OWN the security nor do they have PHYSICAL POSSESSION, you and your contracted broker however do. This is why the OTC markets is referred to as a TWO TIER MARKET. If an order cannot be completed by your broker and meets the MINIMUM SIZE for display it will be executed at the centralized market place of broker dealers.

The key to this all for the OTC Markets is the word OWNERSHIP, who is the actual Beneficial Owner of the security. Remember stock has rights that come with it, it is not only the share value but the rights that come with that security. When you buy stock you become the beneficial owner of that security, you can buy and sell stock, and the certificate is transferred in ownership to the acquiring beneficial owner. Now it is a little difficult to buy and sell on your own, we set up accounts with brokers that represent us in our transactions. When you buy and sell securities your broker is representing your ownership directly because you signed an agreement that they could represent you in the market.

The basic transaction of the OTC Market is an internalized order, this where your broker can take your order and complete the entire transaction within their own broker system with another customers order.

Now go back to SEC Rule 200 and the fact that your broker is legally able to represent you and your order as an “owner” of the security. This transaction is LONG as ownership is established by you and your broker agreement. This gets “MARKED” as long and goes to the consolidated tape, no further action required, just a custody change occurs at the broker regarding the exact customer ID, all of this electronic, no human intervention from trade inception to trade settlement. This is the basis of low cost trading commissions, because nobody has to handle physical paper and it requires no manual underwriting of the transaction.

Marking is a process and once you understand what marking is all about these reports become crystal clear. To be clear, if any portion of an order this includes partial fills is done through a broker dealer the entire transaction if recorded as one transaction on the tape will be marked SHORT, no matter how many shares can legally be marked LONG. For example 100,000 shares of MRIB, 70,000 shares within the same brokerage and 30,000 sold by a broker dealer, to the tape 100,000 shares and all marked SHORT in accordance with SEC Rule 200:

Quote: Question 2.4(A): As an alternative, when the seller is net long for only part of the order, may the broker-dealer mark the entire order "short" if the broker-dealer maintains books and records that identify the portion of the order that was a long sale and the portion of the order that was a short sale?

Answer: Yes. As an alternative, the entire order may be marked "short" when the seller is net long for only part of the order as long as the broker-dealer's books and records under Rules 17a-3 and 17a-4 identify the portion of the order that was a long sale and the portion of the order that was a short sale. For example, if a seller is net long 500 shares and wants to sell 600 shares, the broker-dealer may mark the sell order for 600 shares "short" if the broker-dealer's books and records identify that the seller sold 500 shares "long" and 100 shares "short." In addition, broker-dealers are reminded that, as a result of marking the entire order "short," all of Regulation SHO's requirements for short sale orders will apply to the full order (i.e., all 600 shares). Further, a broker-dealer may not mark the entire sell order "long."



An order internalized within your own brokers system the marking is a “LONG” mark on the transaction. The first tier of the OTC Market was able to process the entire order without going external of it’s tier to complete the customers transaction. So nothing too crazy about this process and really it doesn’t get complicated at all. So what about an order your broker cannot process within their own system? That is where the centralized market comes into play, the second tier, a network of broker dealers who quote for brokers their customers orders. Each broker has contracted Broker Dealers (MM) who will represent their customers orders into this centralized market.

When you place an order to your broker that is the first and last time a human will be involved in the order process. Your brokers system is electronic, it checks within micro seconds for other order within the system if not off to the MM or an ECN. ECN are like MM’s but the execution is a little different and comes with additional costs and the customer must request such execution through their broker. Now the MM is repping your order in the market, another customer wants to purchase your shares for sale on the Ask for example. Because the MM does not “own” the securities involved in this transaction as beneficial ownership is established to you and your own broker for those shares, the execution of the trade is going to be marked “SHORT” in accordance with SEC Rule.

It doesn’t matter that you are long and the buyer is long on the position, the trade is short because of OWNERSHIP. The MM sells an open position on the initial leg and on a separate leg of the same transaction within seconds buys the close of that position of your shares on the Ask to complete the transaction. That initial leg is all that is recorded in Short Volume, that trade is marked Short no matter the fact that it is already reconciled with actual shares. Because the MM doesn’t OWN those shares the entire transaction is short, this is a typical Riskless Principal transaction on the OTC.

Short Volume is recorded, although the position is already closed with actual shares, that initial leg is all that regulators are concerned with, how the trade was initially conceived. Trade settlement is Trade Date plus 3 days, the regulators have no care in the world during that period of time, as long as the trade is settled with shares on that T+3 schedule there is no additional requirements. How efficient is the OTC Markets in settlement? The OTC Markets achieve a 98-99% settlement on TRADE DAY, this is due to the complete electronic process from trade inception to clearing/settlement. This has in fact led to proposals of reducing trade settlement to T+2, this is currently under build and likely to be in place by the end of the year or beginning of next year.

Short Volume in the OTC is primarily Riskless Principal transactions on any given day. Another typical transaction is in fact dilution from a Block Position, that order is processed in a manner to have the least effect on share price by selling to market volume through the trade day and then it is settled under one large transaction with an average price minus commission costs, that is called a Weighted Average Price transaction. All of the small transactions are in fact marked SHORT through the day, while the covering transaction for all those sales is a LONG marked trade. Some brokers will in fact trade at market and then post their fee transaction right behind it for each transaction or in some cases in front of the reporting party for the transaction. Some cases the entire transaction is reported after market hours in a Form T.

A good document from a FINRA representative to the SEC describes Short Volume and it’s impact to the public:

http://www.sec.gov/comments/sr-finra-2009-064/finra2009064-1.pdf

In short, the data is meaningless as one cannot determine anything from it, the data isn’t broken down to separate columns of Short Interest, Riskless Principal Transactions, Short Exempt and Block Position Transactions. All the data is lumped as one piece of information as just VOLUME and that is it. The data is also not reconciled to the 98-99% settlement that already occurred on that day. So what is it exactly that the SEC is achieving by providing such information to the public? It all comes down to the perception that regulators are monitoring the markets…. That is it.

The single greatest statement in that document I provided by the FINRA Rep to the SEC regarding Short Volume is the fact that BROKER DEALERS (MMs) GENERALLY DO NOT MAINTAIN A POSITION, the only reason they ever have a position is if the security becomes delisted from an exchange or they are stuck with a position due to fluctuations in market liquidity. I can tell you they in fact do not buy and sell on their own principal accounts these junk securities and they have in fact distanced their risk by using Riskless Principal, but have also gotten rid of "sponsorship" requirements to be the initial FLOAT of a security. They handed that all off to the DTCC if the security gains DTC Eligibility in the vetting process, the DTC becomes the custodian of the FLOAT.

One more thing about dilution and short volume, SEC rule 203 provides an exception for Short Interest, An MM can sell shares all day long from a Block Position mark them short, yet it can be up to 35 days before the actual shares maybe required to be delivered for those conversion transactions:

Quote:
Rule 203(b)(2)(ii) provides an exception from the uniform locate requirement for situations in which a broker-dealer effects a sale on behalf of a customer that is deemed to “own” the security although, through no fault of the customer or the broker-dealer, it is not reasonably expected that the security will be in the physical possession or control of the broker-dealer by the settlement date. Footnote 71 of the Adopting Release states that one such situation is where a customer owns stock that was formerly restricted, but presently may be sold pursuant to the provisions of Rule 144 under the Securities Act of 1933 (17 CFR 230.144). Rule 144 securities may not be capable of being delivered on settlement date due to processing to remove the restricted legend. In such situation, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event within 35 days after trade date. If delivery is not made within 35 days after the trade date, the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity.




It is possible to see 100% Short Volume on a security for many consecutive days, resulting in FTDs and even becoming THRESHOLD or FINRA Rule 4320 Flagged.. and yet those of us that understand the reports can sit there and say WHOOPTY FREAKING DOOOOO! Has nothing to do with Abusive Naked Short Selling, not even Naked Short Selling or even short sales, most of it is an actual long position transaction. the SEC makes this very clear on their FTD page:

Quote:
Please note that fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or “naked” short selling. For more information on short selling and fails-to-deliver, see http://www.sec.gov/spotlight/keyregshoissues.htm, http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm, and http://www.sec.gov/rules/final/34-50103.htm.




Not as scary when all the information is laid out there, but you can bet some TOUT, website or unaware "investor" has no problem trying to make something out of such meaningless data.

Riskless Principal FINRA:

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p004191.pdf

The promotional websites are bullshit, they are typically hired by CEOs, CFO's, other directors and Debt Holders. They display a report of the FINRA data and draw a conclusion on trade date data. Well that is great but settlement is Trade Date plus 3 days, how any entity outside of FINRA can arrive at what is actually open positions based upon short volume is truly amazing. Let us consider what both the SEC and FINRA have to say, one cannot determine the actual position and cause even when a trade exceeds Trade Date Plus 3. yet these websites have already concluded that the data points to short positions.... lol.. yeah ok.

Foreign trades are routed through US REGULATED SROs, all trades that occur on the OTC Markets are routed through these SROs. But I really find the reference to CANADA extremely hilarious, considering that CANADA adopted the same exact regulations from the US and it is a FACT that Reg T for CANADA is exactly the same requirements from the US..... DAMN the conspiracy just got blown out of the water.

The fact is insiders typically create these boogeymen to sell this worthless paper, and that is a FACT backed by countless SEC and FINRA Actions along with the thousands of Suspensions issued in the last couple of years on the OTC.

Feel free to copy and paste when the short topic arises, (only on sub pennies). Have a wonderful weekend!!