This information i have reported came from a senior level executive of FINRA in market regulations. He put another on the line in a conference call and we discussed trade reporting, "legs" of a trade, and a "Media" report vs. the non-Media report.
Lets say you own 100,000 shares of XYZ in a Morgan Stanley account. You want to sell them all at $1.00/share. Morgan Stanley does not make a market in XYZ so they route the trade to NITE.
NITE goes into the market and on that day can only execute 90,000 shares at $1.00 in 9 blocks of 10,000 shares each.
What the market sees ("media") are 9 separate occasions of sales of 10,000 shares taking place at $1.00. That is NITE selling into a buyer stock they do not actually own. Because they don't own it they must mark that specific trade a "short exempt" trade. exempt because they are executing under a riskless principle trade.
After each trade is executed NITE immediately turns to Morgan Stanley (off-market) and buys those same 10,000 shares to close out their "technical" short position using the shares they just bought to deliver to the buyer. this second trade is not reported to the tape because the trade was already reported once.
Now...the reason this process exists is because of those remaining 10,000 shares that NITE could not get executed. To report this as a long sale NITE would have had to buy the 100,000 shares from Morgan Stanley first before selling to any potential buyers. but since they could only sell 90,000 at the price you wanted, they would be stuck with the extra shares that they never wanted as an investment. that puts them at capital risk as this reduces their net capital and it exposes them to investment risk since it may never trade above the $1.00 they had to buy it for. considering the volume of trades market makers execute as routed trades every day, imagine how risky such a prospect this is. Hence, the riskless principle exemption created.
why is it reported as short? because technically it meets the criteria of a short (sale of something not owned). It also allows the regulators to review how these trades are executed because they are tagged as short exempt and will be audited to verify order flow.
AI
