Zecco

[Frank0051]

Oh, I completely agree that the ADV limit was incorrectly applied. In fact, I would argue that the Penson's incorrect application of the ADV limit actually distorted the market for fully SEC registered and fully reporting companies that were trading on the OTCBB and PinkSheets. And, I was one of the ones complaining LOUDLY about this to both Zecco, Penson, and here on the boards in September and October.

As far as the changes made: I'm not sure where you got your formula from, but I don't think it is what drove the changes at Penson. NSCC notices put out through 2011 state the following:

"OTC Bulletin Board and Pink Sheet Stocks and stocks with insufficient pricing history are margined according to a haircut rather than based on VaR methodology. The haircut, currently at 10%, will be increased to 20%, in order to achieve 99% coverage levels."

So, when the stock is illiquid and the position is open, the clearing house has to put away 20% of the trade's value to cover the risk. Furthermore, the NSCC also sent updated VaR reports to the clearing houses for an 8 week period in the summer 2011 to highlight their potential risk beyond the the above increases and the capital they would need to cover those trades. I would imagine Penson's potential loses according to the VaR reports were EXTREMELY high given the amount of pennies that are cleared via their firm, so their set-aside for the new fees likely would have been huge.

And, as far as I know, Penson is actually just passing on the illiquid cost charge (that people are complaining about) they get from the NSCC dollar for dollar. The ADV limit and the illiquid charge changes are really intermingled and I think the changes in illiquid securities risk management mandated by NSCC on Sept. 12, 2011 caused the ADV limit enforcement at Penson.

That being said, since it was first rolled out, Penson has revised the ADV restriction - in fact, within about a month of the roll-out - and it now, as far as I'm aware, generally only applies to non-SEC registered/reporting securities.

That being said, how this relates to the conversation we have been having, I have absolutely no idea other than to demonstrate that Penson is a poor vendor for clearing. I have suggested to Zecco in my communications - for what it's worth - that they look into getting another clearing house. But that still doesn't change the fact that Zecco/TradeKing combined do not have the economy of scale to start clearing their own trades (as you have suggested).