Strategic Global Investments, Inc. (STBV)

[lucky, mydog]

Short Volume, Daily Reg SHO, created under SEC Rule 200 is simply "Ownership" and "Physical Possession" Marking and that is it. It only records the "Initial leg" transaction of a trade and doesnt include settlement due to settlement period being Trade Date Plus 3 days. The final Reg SHO report known as the Fails to Deliver report provided by the SEC shows the actual settlement of every trade transaction in an aggregate.

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 Principle 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.”

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.

We will keep this to the OTC Market as what I am going to describe is specific to the OTC Markets. The OTC is a two tier market, you have brokers and then you have broker dealers, brokers represent their customers accounts, broker dealers represent brokers. Brokers on their own do not make a market, they are in fact confined to their own brokerage system as to the limited market they can provide. The broker dealers on the other hand are the market, the CENTRALIZED market. Their quotation is what makes the centralized 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. The SEC provides a quick explanation of marking here:

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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.

So in the above example where 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+1, this is currently under a pilot program to see the risk and benefits associated with T+1 settlement.

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 principle 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 website or unaware "investor" has no problem trying to make something out of such meaningless data. They fail to recognize the very thing they believe in (the Issuer/Security) or the very transaction they initiated are driving those meaningless numbers.

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