Paychest Inc (PYCT)

[lloydm]

As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting, and very difficult to prove. It’s illegal when regular people do it.

Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.

The thing about naked short sales is they can’t stay naked forever. Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.


Where Naked Shorts Go to Die
Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock. Those trades can sit in the Obligation Warehouse forever, in theory. Since Paychest never completed its planned stock split or reverse merger the naked shorts (age Fails) cannot be buried forever. Becasue of changes to SEC rules like (15C2-11) this I believe needs to be cleaned up within a certain period of time.