Are you talking about fail to delivers, or fails to close out that conveniently turn into shorts or intentional naked shorts per 4320 that are flagged and the timing that they give you a whopping 13 days to cover? I mean that's more compliance and/or trade desk supervision, but if so yes it's fing ridiculous. short covering and other REGSHO issues (such as ex-clearning which I think ex clearing was a big REGSHO screw up in lawmaking as ex clearing trades actually bypass flagging from my understanding and open up entirely new issues...these bypass flagging, by bypassing settlement and in my opinion allow market makers to collude and do things that may not get caught or show up on focus reports at all. It also creates net capital and FOCUS filing risks and industry risks through the possibility of not properly reflecting what's not caught through standard security settlements that run through DTC etc... I mean I think many things in the thinly traded OTC markets are ridiculous, a friend told me about this stock after I was burnt on a few, personally I'm more of a technical analysis/momentum/sentiment/pattern based stock/foreign exchange trader, a friend told me about this so I bought a thousand shares for the heck of it...but I haven't been in pennies since I was burnt on MEDI, REVI, and TNEN... but relating to flagging I think they should treat those covers the same way other closeouts are required to be fixed/closed.. within 5 days per 204...Many of those things are handled on trade desk supervision, I was more concerned with accounting, haircuts, focus reports, ensuring net capital was sufficient. The shop I was with dealt in many markets, but mainly traded OTC stocks and ADRs on those OTC stocks (they did triangular arbitrage on Brazilian BDR/ADR arbitrage in thinly traded markets on a prop basis..it's weird they would make a market in the stock but have a prop position in a proxy such as an ADR/BDR, some stuff was convoluted... which I didn't think you could do but again I wasn't in trade supervision or compliance, but accounting)...My concern was two fold: internally it was financial accounting, monthly closes and ad hoc analyses and forecasts on budgets and traders ridiculous bonus pools on the market making, investment banking, muni underwriting, and swaps/derivatives divisions. From a regulatory point of view it was combing through an insane amount of positions across multiple divisions and taking proper haircuts per asset class, risk, amount of market makers (more thinly traded the larger the haircut to value to reflect the worst case volatility swing scenario), etc. Many OTC securities they made markets in they were the only market maker or one of two and thus FINRA many times required almost and in some cases a 100% haircut on that value...this was because in a worst case scenario there would be no market to salvage that value...Anyway, it's been a few years and i'm happy to be out and on the retail side, i'm an investment advisory and have a boutique family practice, I focus on professional asset management for wealthy, advanced markets and retirees and my family member is a CFP and focuses on estate planning, complex buy/sells and financial planning aspects. I rather help people than corporations bottom lines ripping people off in their wake.
