Response to THall: Margin Accounts, Borrowing, and the Naked Short Problem
Good point, THall. You’re correct that most OTC stocks aren’t marginable and that OTC brokers typically don’t offer margin accounts because of the inherent risk. That’s true, and it’s an important clarification for anyone following the mechanics of short selling in the OTC markets.
But—and it’s a big but—this fact doesn’t actually solve the core problem. It highlights it.
---
1. If OTC Stocks Aren’t Marginable, Where Did the Shorts Come From?
You’ve just made the point that legitimate short selling infrastructure doesn’t really exist in the OTC space.
There’s a limited (if any) lending pool for genuine short sales.
So if brokers aren’t holding shares in margin accounts, and there’s no real borrowing market, how did millions (or even billions) of shares in stocks like DBMM or ERHC get sold short?
Answer: They weren’t properly borrowed. Naked short selling.
Your argument actually underscores the likelihood of naked short positions—phantom shares that exist outside of legitimate lending and borrowing frameworks.
---
2. Cash Accounts Don’t Prevent Shorting Abuse
It’s true that most cash accounts are supposed to safeguard against shorting, because there’s no borrowing mechanism. But fails to deliver (FTDs) can still occur when:
Brokers execute unsettled trades that never get delivered.
Market makers sell shares they don’t actually have under the guise of providing liquidity, especially in illiquid OTC environments.
Trades get reset or rolled, pushing settlement out indefinitely without delivering real shares.
So while it’s technically harder to short OTC stocks by the book, naked shorting thrives in this environment precisely because of the lack of oversight, low liquidity, and reduced reporting requirements.
---
3. The Lack of Margin Makes the Risk for Shorts Even Worse
Because there’s no margin environment:
Shorts can’t hedge easily or borrow more shares to cover.
If they get caught in a forced buy-in situation, their brokers have fewer tools to manage the crisis.
And if a preferred share dividend exposes undelivered shares, they won’t be able to make good without buying real shares at any price.
No margin? That’s not a lifeline for shorts. It’s quick sand, because it makes covering harder, not easier.
---
4. The Preferred Share Dividend Backstop Still Traps Shorts
Even in a cash-only OTC environment, a preferred share dividend is devastating for shorts because:
It forces delivery of a new security tied to existing shares.
If they didn’t have the shares to begin with, they can’t deliver the dividend.
No margin accounts, no borrowing? That’s exactly why shorts are exposed. There’s no legitimate lending mechanism to cover up the naked positions.
---
Conclusion: You’re Arguing Against Yourself, My Friend
So, THall, by pointing out that OTC stocks aren’t marginable and brokers don’t offer margin accounts, you’re not disproving the naked short problem—you’re proving it.
This is the kind of structural deficiency that made Overstock such a nightmare for shorts once they issued their dividend.
And it’s why DBMM has the power, if they choose to use it, to create the same trap.
Shorts in non-marginable OTC stocks can’t squirm out of this by claiming “there’s no mechanism to short.” If they sold what they didn’t have—and they did—then they’re stuck.
And a preferred share dividend exposes all of that.
---
—Krombacher
P.S. Feels like your AI is playing checkers while ours is playing chess. But I’m happy to keep moving the pieces.
Market Data 
Markets 
AI
