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Replies to post #118060 on Paychest Inc (PYCT)
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.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
Obligation Warehouse leverages NSCC's existing systems and enhances its current fail clearance system, known as the Reconfirmation and Pricing Service (RECAPS), to automate the matching and confirmation of broker-to-broker ex-clearing trades, replacing the highly manual and error-prone processes, including phone calls and faxes, currently used by financial firms to manage these transactions.
In addition, OW will track, store and maintain certain unsettled obligations in a central location, and make these obligations available for RECAPS processing until they are settled, cancelled or otherwise closed in the system.
Transactions eligible to be tracked, stored and maintained in OW include failed or unsettled broker-to-broker obligations that are compared through OW and obligations forwarded to OW from other NSCC services, including securities exited from NSCC's Continuous Net Settlement (CNS), Non-CNS Automated Customer Account Transfer Service (ACATS) items and NSCC Balance Order transactions.
09/30/16 5:03 PM
