The Real DTCC Discussion

[BigBake1]

I always love the limited presentation of FTD information, the first thing cited is 13 days to cover the open position. Certainly if a trade has issues for delivery it is 13 days for delivery of shares or else it becomes a required buy from the market, the SEC cites the following causes of such FTDs:

Many times the member will experience a problem that is either unanticipated or is out of its control, such as:
(1) delays in customer delivery of shares to the broker-dealer;
(2) an inability to borrow shares in time for settlement;
(3) delays in obtaining transfer of title;
(4) an inability to obtain transfer of title; and
(5) deliberate failure to produce stock at settlement which may result in a broker-dealer not receiving shares it had purchased to fulfill its deliver obligations.

In addition, market makers may maintain temporary short positions in CNS until such time as there is sufficient trading to flatten out their position.

None of these however are ever presented in such “professional authority”, of course there is another thing missing from such self proclaimed knowledge of FTD data, the fact that in most OTC cases delivery can be up to 35 days on debt conversions expecting free trading status of such newly issued shares. I have yet to see citation of SEC Rule 203:

Pursuant to the suggestions of other commenters, we are including an additional exception from the uniform locate requirement of 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.

There also trade rejections that end up short due to amateur traders who round trip purchases and sales of securities before they settle, of course that is never discussed either. But what really puts a fine point on it all is the fact that there is a failure to understand FTD reporting and Threshold data as presented, none of which even point to NSS or Abusive NSS and yet it is definitively posted as proof in some cases. I often ask if the SEC has to make statement on such data that there is nothing definitive about the cause for such data then how is it that non regulatory entities can make a case from it saying it is in fact NSS? The SEC statement is pretty clear:

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.

How did one determine the FTDs are not “long’ position trades? How did one determine they are a result of short selling or abusive short selling or naked short selling? The SEC spells it out clearly, there is nothing to be certain about the data, however the presence of FTD is not enough, even on threshold doesn’t mean a naked short position exists. In fact the common cause of such large short positions revolve around debt conversions in the first place.

NTEK was incorrectly reported on Reg SHO, it is not an SEC Filer therefore it should have never been on that list. It falls under FINRA non reporting standards of Rule 4320. Some postulated that even though it isn’t correct that there still exists a non delivery issue of shares, that is also false. The FTD data doesn’t represent a continuous aggregate sitting out there of delivery, although one could make a case for 200,000 shares using the last reporting period of FTD data, it would fall back on what was presented in SEC Rule 203.

Market Makers do not buy for their principle account in the OTC, they make their money on each transaction as contracted by brokers in Riskless Principle transactions. They may also make money on Market Orders, but one of the largest money makers is simply selling newly issued shares for block positioners dumping their shares. Unfortunately the myth of MMs profiting by driving price is taken from exchange traded securities, where they do in fact buy and sell based on their own principle accounts. They also make a lot of money on “price improvement” on such listed securities.

I am not a fan of price improvement, it is quite the seedy business of taking advantage of the 4 positions after the decimal point of price, not to be confused with taking advantage of the “spread”. You may enter an order for $10 a share and yet the broker presents you this awesome transaction at a lower price of $9.9999 a share on say a 10,000 share purchase… wow you saved $1 on the transaction. On the other hand they purchased the shares at $9.9990, they banked $99 on the transaction. This creation of a spread based upon the 4th digit is completely legal as they are acting on your best behalf of the purchase of shares. They got you a deal of saving $1.

The point of what I presented above is where manipulation occurs NOW, but it cannot be done here in the OTC since it requires buying and selling from ones own principle account and hoping for the liquidity needed to get back out of the position. Such arbitrage is rarely discussed in the forums, instead old methods employed back in the day before strict Reg SHO requirements and reporting came about are discussed. Certainly many MMs wrote off bad trades in OTC securities, there was nothing to track them accurately, and they were in fact Grandfathered by the SEC for such transaction back in 2008.

Simple facts are the OTC is not a liquid enough environment for such shenanigans any longer, nor does it present an opportunity to hide such transaction due to regulatory over sight. FINRA gets a report for each and every transaction that occurs on the consolidated tape, such NON TAPE TRANSACTIONS are regulatory reports detailing the entire transaction. The non tape transaction report and the consolidated tape are a form of check and balance. This is no different than credit and debit transactions for accounting and in fact once a trade is confirmed it is in fact reported upline to the NSCC who does their own credit and debit function for each trade transaction.

The bottom line is that market makers do not buy this junk any longer, the OTC is not manipulated by MMs dumping non existent shares, it is simply manipulated by insiders, affiliates and debt holders. If one wants to see manipulation they need to experience the exchanges where it is performed daily and in many different forms where it is difficult to spot it or in some cases completely legal under regulatory rules.