DD Support Board and Research Team

[Renee]

Here's a beaut by Big Bake:

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=91721789

It is not “prohibitive” just because of the Regulatory Requirement of Maintenance Margin of $2.50 per share, although it certainly puts a huge damper on the size of position you will take. But then there are also fees associated with it, the interest alone makes it a very short term proposition at best and the fact the broker may pull the position at anytime without your approval makes it quite risky. But the real problem is the “locate”, unlike exchange traded securities there are no “institutional accounts” to borrow against, in fact it only leaves margin accounts to borrow against and Financiers with large Block Positions that give permission to borrow against their position. Contrary to popular Ihub myth, CASH ACCOUNTS CANNOT BE BORROWED AGAINST!

Locating shares is hard, but enough shares to effectively to do so that it makes you money while your out maintenance margin tied up in the position and you are paying fees plus interest on the position makes it not worthwhile. So who can effectively short an OTC? Financiers can short against their own position as a hedge or the same financiers will allow arranged borrows against their position. Rarely done though as to shorting against their own Block Position, although conversely that is where your locates are typically for OTC securities. I have seen billion share securities that only have 1,000,000 shares for borrowing. At a triple 0 what exactly are you going to make shorting a million shares?

A good example is 1 million shares at .0007, that will cost $700 for the principle and $2.5 million in maintenance margin, depending on the broker the interest and other fees will likely run 20% of your take home if you effectively short to .0001. The gain is capped at 99.9%, wow… so a whole $699 made off of that risk and all that money tied up for days and paying fees you end up with $550 or more…. Yeah shorting is quite the lucrative business in the OTC… NOT! Oh and did I mention the losses are not limited, they are infinite.

As far as Authors, who knows if they are telling the truth, or is just poor assumption that is it even a large position taken. Without the specifics involved one can guess as to what was happening really. I mean if the OTC security is over $5 a share then Maintenance Margin requirement of $2.50 per share is no longer applied. Depending on the broker however one may still not be able to short the security even above that level.

FINRA rule 4210:

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9383

Quote:
(c) Maintenance Margin
The margin which must be maintained in all accounts of customers, except as set forth in paragraph (e), (f) or (g) and for cash accounts subject to other provisions of this Rule, shall be as follows:
(1) 25 percent of the current market value of all margin securities, as defined in Section 220.2 of Regulation T, except for security futures contracts, "long" in the account.
(2) $2.50 per share or 100 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at less than $5.00 per share; plus
(3) $5.00 per share or 30 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5.00 per share or above; plus
(4) 5 percent of the principal amount or 30 percent of the current market value, whichever amount is greater, of each bond "short" in the account.
(5) The minimum maintenance margin levels for security futures contracts, "long" and "short", shall be 20 percent of the current market value of such contract. (See paragraph (f)(10) of this Rule for other provisions pertaining to security futures contracts.)
(6) 100 percent of the current market value for each non-margin eligible equity security held "long" in the account.