Market Manipulation - Part 2 - SEC and OTCBB. http://www.sec.gov/rules/concept/s72499/klaser1.txt by Kenneth Klaser
June 26, 2000
Ladies and Gentleman:
I am a private investor/trader and I am writing in response to concerns that
I have regarding short selling abuses I have witnessed in the OTCBB marketplace. Introduction
It appears that the SEC has deliberately, either through inaction or clever
manipulation of the SEC's rule structure as suggested over the years by
Brokerage's attorneys, created a two tier system of stock market exchanges
in the US. One system for the national market exchanges that has short
selling protections for the investor with pockets deep enough to afford the
several dollar and up prices for stock, and a second system of exchanges for
the "poor" investor, those investors who have determined they can only
afford stocks trading at less than 10 cents, and who has not been afforded
the same short selling protections deemed necessary solutions to the stock
market crash of 1929, namely the 1934 SEC act.
This has created a system whereby the "rich" investor is protected from
short selling abuses, while the "poor" investor is cheated by short selling
abuses (bear raids) that are allowed by self regulation of the Market
Makers. Most poor investors have been drilled by educators on the stock
market crash of 1929 in grade school, and truly believe that the protections
enacted in 1934 exist for them too, when in reality a double or multiple
standard has been deliberately contrived.
Is the SEC is implicated in a scheme to defraud OTCBB investors of their
hard earned dollars?
The SEC has allowed the structure of securities laws to favor big money
interests and "manipulation of the little guy" over and above the interests
and concern of the vast majority of the investing American public. The
current SEC rule structure has parallels similar to the character "The
Sheriff Nottingham" where the poor are robbed to pay for the rich. America
is not supposed to be this way! Discussion Bid and Ask Volume and how it relates to Technical Analysis of a Stock
It has become painfully obvious that big money Market Makers have a
stranglehold on the little guy in the OTCBB stock market. I have personally
observed many times more than a 1:2 (bid:ask) volume ratio of the trades
executing at the bid versus the ask, only to be followed by the bid and ask
ticking down in stocks that I own. A discussion of the technical mechanics
of an OTCBB investor's reality is in order here.
A comprehensive study of OTCBB time and sales reports with actual buys and
sells listed proves that certain market participants sell at the ask, and
buy at the bid. These reports were for about a year available to anyone
requesting them free of charge from https://www.otcbb.com/secure_asp/tradeact_report_request.asp?type=tands
however, recently a pricing structure was devised that makes these reports
much too expensive for many investors. Nevertheless, these reports, when
combined with other data that report the time and price level of the inside
bid and ask, do establish that some market participants are able to buy at
bid and sell at ask. Why is this noteworthy?
Because a common technical method of measuring accumulation/distribution of
a stock is to measure the volume of trades at the bid (selling), and compare
it to the volume of trades at the ask (buying), and to note the ratio of the
two. Theoretically speaking a ratio of 1:1 should represent an equilibrium
level where price neither goes up or down, since it shows that buying and
selling activity are roughly equal. If there is more trading volume at the
ask than at the bid, then price should go up, and conversely if there is
more trading volume at the bid, then price should go down.
But in the OTCBB world, it's common knowledge that a ratio of about 1:2.5 or
1:3 (volume at bid to volume at ask) is required to move the price up, and
this up move is often delayed by days and sometimes weeks. On the other
hand, for prices to move down requires only fractionally less than 1:3.
Prices commonly drop when the ratio is 1:2 or less. Why is the ratio so much greater the theoretical 1:1?
In these instances which happen everyday in most OTCBB stocks there is more
trading occurring at the ask than the bid, yet price falls! Why?
Certain market participants are allowed to routinely buy at the bid and sell
at the ask, and these participants do much more selling at the ask than
buying at the bid, in order too fool the general public that uses technical
analysis in their trading arsenal into believing more buying is taking place
than is actually occurring. Additionally the market participants doing the
majority of the selling at the ask (the Market Makers) are not the same
entities as the market participants doing the buying at the bid. It is my
contention that this is allowed by the SEC to deliberately fool the "little
guy" thereby allowing the Market Makers to conceal sells in the ticker tape
while simultaneously making them appear to be buys because they occur at the
ask. This should be considered Market Maker Manipulation, but unfortunately
under the current rules it is allowed. Has the SEC been implicated in fraud
by allowing this type of unusual buying and selling activity by certain
market specialists while at the same time other market participants, namely
the general public do not receive such favorable prices for similar trades? Volume Manipulation and the "Market Maker orchestrated Pump and Dump"
Volume Manipulation is another area where Market Maker's collude to create
the impression that there is more activity, accumulation or distribution,
then there actually is. For example, Market Maker A buys 100K from Market
Maker B, who then sells them to Market Maker C, then Market Maker D buys
them, making it appear as if there is 300K worth of volume, when all that
was happening was a "Churn" game that served to inflate volume for the day.
For a more in depth discussion of how this works, please see The Forbes
article titled "One Day Soon the Music's Going to Stop" http://www.forbes.com/forbes/072996/5803072a.htm
The core aspect of this manipulation is the structure of NASDAQ's ACT system
itself, and which can be discerned by studying the buys and sells as they
are reported in the OTCBB time and sales reports, and by studying the
reporting as it occurs in the ACT system. The major distinguishing feature
here is that Market Maker to Market Maker transactions are recorded on the
sell side only (same as an investor buy), in contrast, the ACT system
records both buys and sells by Market Makers when the trade is being made
with the general public.
Lets look at a few examples, and please note that the side of the trade is
inverted depending upon the market participants "point of view." When a
Market Maker buys from the general public, it's the same as an investor
sell, it is recorded as an ACT system buy or "B". When a Market Maker sells
to the General public, which is the same as an investor buy, it is recorded
as an ACT system sell or "S". So the Market Makers report both buys and
sells to the general public. Unfortunately here is where the rules change to
the detriment of the average investor: A Market Maker to Market Maker
transaction is recorded solely on the sell side as an "S", not on the buy
"B" side. If a Market Maker buys from another Market Maker, it is not
recorded in the ACT system as a "B", it is only the selling Market Maker
that reports it. This is the core reason that it appears in the real time
price stream for OTCBB stocks that a bid:ask ratio of greater than 1:3 is
often required in order for prices to move up, since a Market Maker to
Market Maker transaction represents no change in the supply demand
equilibrium of a stock. The excess over 1:1 is Market Makers trading with
All sorts of technical accumulation/distribution models use volume in their
calculations, and this churn game where Market Makers sell to each other can
be used to manipulate the buying and selling of many who use such technical
models in their trading. These types of churn trades are all but impossible
to discern from retail trades and to my knowledge are currently completely
impossible to discern in real-time. The Market Makers combine this "churn"
trading with artificial price walk downs and naked shorting, and you have the
potential of complete Market Maker Manipulation of the whole price and volume
chart. This would be exceedingly profitable to conspirators at critical
technical junctures such as the apex of triangles and quiet, pre-breakout
trading ranges to make it appear that the order flow is going opposite to the
"real" order flow.
Why are MarketMaker's are allowed to report these churn trades (Market Maker
to Market Maker) as volume, since supposedly a Market Maker is only
concerned with "making a market?" There is no legitimate need for volume
figures reported in real time price streams as well as end of day price
reports to include Market Maker to Market Maker transactions. After all, who
is the market being made for? Another Market Maker?
Volume manipulation is a type of "pump and dump" scheme orchestrated by and
for the benefit of the Market Makers themselves. It works like this: The
Market Makers start selling to each other to artificially inflate the volume
figure over a period of days to generate investor interest, but they do not
yet start Naked Shorting. Now after some number of investors have laid down
their hard earned money and there has been some price appreciation, Market
Makers then start to Naked Short the position, effectively capturing the
Investors Money, as price erodes due to the dilution that the creation of
the short positions cause. This capture of investors money occurs in the
event the investor has a stop loss figured into their trading strategy which
mandates them to limit their losses, so they sell due to price erosion
caused by Naked Shorting. Stop loss's are always recommended in beginner's
guides to technical analysis and automated trading strategies.
I wonder why?
In any case these stop loss strategies combined with the flawed reporting
structure of the real time price stream, line the Market Makers pockets with
huge sums of money. Naked Shorting, Sophisticated Hedging, and Price Manipulation
Thomas Jefferson once said something to the effect: "Any man has the right
to swing his arm as far as the next mans nose, but no further." Allowing
large and sophisticated portfolio holders to short against a stock I hold
long as a hedging tactic when shares of another companys shares are the
other leg of the said hedge, and further which has the effect of causing my
stock holdings to tick downwards, is a violation of Thomas Jeffersons idea.
In a similar fashion so does Naked Shorting. Namely, that sophisticated
hedging and Naked Shorting tactics "extend their arms into and through my
nose." These types of tactics should be stopped since they run counter to
the ideals of the vast majority of Americans, and the spirit, if not the
letter of the law, as envisioned by our Founding Fathers. No one should be
able to sell what they don't own, only what they do own!
To sell something before it's purchased is not a stock sale, it's a hybrid
stock/futures transaction, since the timeline is artificially reversed. It's
nothing more than a promise to purchase at some time in the future, and in
the OTCBB the suspicion is that it's often later, rather than sooner. This
contrasts with what release No. 34-42037 suggests about short selling: The
buy to cover is "usually the same day the purchase of the short sale is
executed." On the other hand, an outright stock buy carries no implication
to sell at any time in the future, and the same can be said of a normal sell
when the buy occurred first...no further obligation to buy or sell further.
The current practice of Naked Shorting and also Hedging calls into question
the entire ethics of our legal system as it relates to the purchase and sale
of a company's stock.
Why do you allow the Market Makers, when acting in their roles as "bona-fide
Market Makers," the right to short a stock without even an affirmative
determination of the existence of shares to short against?
This activity of Market Makers essentially makes counterfeit shares of a
company, then introduces them into the supply demand equilibrium of any
particular stock in order to deflate or dilute the current value of each
share held by shareholders. It's stated that this is done so that investors
aren't forced to pay artificially high prices during short and temporary
supply demand imbalances.
Why aren't Market Makers required to be responsible to the Company and it's
shareholders with respect to an accounting of the Short Interest in real
time held by Market Makers?
There is no oversight currently that insures that Market Makers are covering
their short sales when the temporary order imbalance is corrected. It appears
to many OTCBB traders that the Market Makers are keeping their short sales
many days before covering. A similar suggestion was made as documented in the
SEC Release No. 34-42037, File No. S7-24-99 in the sections C, Previous
Reviews of Short Selling, item 3, 1991 Congressional Report on Short Selling,
specifically numbered items (7) and (8). This lack of action from the SEC has
let the Market Makers dictate the supply and demand for any given stock they
make a market in and thereby they also control or "manipulate" the pricing of
each and every share, for extended periods of time.
"Section 10(a) of the Exchange Act gives the Commission plenary authority to
regulate short sales of securities registered on a national securities
exchange, as necessary to protect investors"
If this is so, why aren't the short sales of OTCBB stocks regulated by the
The SEC has allowed the OTCBB market to be self regulated by the NASDAQ, who
in turn allow Brokers for OTCBB stocks to have "run away" naked shorting. I
presume it has been convenient for the Market Makers that the SEC has not
determined that the OTCBB is a "national securities exchange." The inmates
are running the asylum, and the SEC needs to wake up. Conclusions
Current Securities Law need to be amended with respect to the OTCBB market
a.. The Brokerage practice of Naked Shorting in the OTCBB market is
stopped immediately. The number of outstanding shares of any stock should be
fixed at whatever number the issuing company has determined. Trading
entities must be prevented from "adding to the trading supply of stock
available to purchasers," and by so doing diluting the price value of
a.. Market Makers are disallowed the right to Short Sell OTCBB shares when
the Market Makers are trading for their own accounts unless the seller
personally owns the shares being sold. They should never have the right to
borrow any other entities shares for this purpose under any circumstance
whatsoever, due to their information advantage and greater flexibility
granted to them through NASDAQ self regulation over other market
participants such as the general public.
a.. When the Market Maker is acting it it's role as a "bona fide Market
Maker" the Market Makers must be forced to report the real time current
total short sales accumulation numbers in aggregate form in the real-time
price stream, available to all through many market data vendors at
reasonable cost. Computer Technology now allows this with the simple
addition of a few lines of code in publicly available price feeds. The OTCBB
already has a portion of this capability in it's ACT system, but it's not
available to the public at a reasonable cost, nor is it available in
real-time to the general public, only to other Market Makers. Market Makers
must be held responsible to companies and the shareholders for failing to
report this critical market data freely to the trading public, as a check
and balance on their own corrupt trading practices.
a.. Churn trades between Market Makers should never be reported in the
volume figure at all. This would halt Market Maker orchestrated and price
stream centered "pump and dump" schemes.
a.. Violations of these suggested changes to existing law should be
enforced with mandatory jail time, not merely monetary punishments, which
serve as little deterrent when contrasted with the huge sums of money they
are culling from investors day in and day out. The current monetary fines
imposed by the SEC for violations of SEC rules are relatively speaking
"pocket change" to the corporate firms involved. They are nothing more than
a token "slap on the wrist."
Where is Robin Hood when you need him?
United States of America