Here is an article written by Dr. Decosta, an authority on how the market really works.
ABUSIVE SHORT SELLING’S “ENTER-BREAK-CURE-REWARD” CYCLE ON WALL STREET
There is a cyclical nature to this crime wave known as abusive legal short selling (ALSS) and abusive naked short selling (ANSS). Firstly you enter into a contract to deliver the securities that you are selling by T+3. Then you intentionally break this contract by refusing (not “forgetting”) to deliver that which you sold. This results in a failure to deliver (FTD) at the NSCC. This FTD is then easily “cured” by the NSCC management’s borrowing of shares from the NSCC’s self-replenishing “automated stock borrow program” or “SBP”. This “borrow” results in the issuance of a readily sellable share price depressing “security entitlement” which is credited to the account of the unknowing shareholder whose shares were borrowed. This increase in the “supply” of that which must be treated as being readily sellable automatically causes the share price to tick down a notch.
Meanwhile the brokerage firm of the purchaser of the recently “borrowed” shares walks off with the “legal ownership” title to the shares its client purchased which gives it all of the right in the world to re-donate that very same parcel of impossible to identify shares right back into the very same SBP lending pool of shares it left AS IF IT NEVER LEFT IN THE FIRST PLACE.
The “reward” phase has three parts to it. Firstly the short selling party that intentionally broke the contract it entered into is “rewarded” by the issuance of that “security entitlement” because it is readily sellable and therefore forces the share price of the corporation targeted for an attack to drop a notch. This rewards him by creating value for his short position which he established by breaking the contract he just entered into.
The second part of the “reward” phase is that the broker of the new buyer of the recently purchased “borrowed” shares gets the cash value of those shares when they are chosen from the SBP to “cure” the next intentional breaking of a contract recently entered into. This incentivises all of Wall Street to keep that SBP lending pool full no matter how illegal it is to place certain types of shares into it. The third phase of the reward is that the pump is now primed to “cure” yet the next intentional breaking of a contract which will result in the share price dropping yet another notch.
Since abusive naked short selling is nearly 100% in the purview of Wall Street insiders and their hedge fund “guests” then the net effect of this cycle is the predictable transfer of wealth from Main Street to Wall Street via the rewarding of criminal behavior perpetrated by the co-owners/”participants” of the NSCC subdivision of the DTCC by their employees the NSCC management that administers the SBP.
When called on the carpet to change the corrupt nature of the SBP the DTCC had three comments. Firstly they claimed that they couldn’t change it because it is “automated”; an interesting defense for sure. Secondly they correctly asserted that the SEC approved of the concept of an SBP many years ago. Thirdly they claimed that if it really was corrupt and it not only facilitated but also rewarded criminal behavior then the SEC would obviously make us shut it down.
The creation of the SBP was predicated on what is referred to as Addendum C to the rules and regulations of the DTCC. The stated purpose of the SBP is “to increase the likelihood that the purchasers of shares will receive that which they purchased on settlement date”. If not for the human pain endured by all of these thefts that statement would be comical. Just what are the purchasers of shares receiving when the SBP “cures” a delivery failure? Since the SBP financially encourages recently borrowed shares to be re-donated right back into the very same lending pool from whence they just left as if they never left in the first place what the buyers of shares are receiving are counterfeit version of shares.
Due to the “anonymous pooling” of shares at the NSCC the same parcel of impossible to identify shares can cure dozens of delivery failures. Until recently borrowed shares are forbidden from being re-donated right back into the same lending pool that they just came out of then abusive naked short selling will be not only encouraged but handsomely rewarded. In order to effect this reform obviously each specific parcel of shares needs to be made readily identifiable no matter what the costs or untoward effects on the speed of clearing and settling trades becomes. The clearance and settlement system should go as fast as it can without encouraging and facilitating Wall Street insiders to siphon away the investment funds of those on Main Street.
Make no mistake the Wall Street insiders in favor of the corrupt status quo while benefiting from this illegal transfer of wealth from Main Street will and have been vociferously arguing that it would be too costly, less efficient, more time consuming, etc. to maintain a system with integrity. The solution: pass along any added costs to the investment community.
It is important for you in Congress to realize that due to the system wide abuses the SBP fosters this is why SBP reform ranks #1 of the 38 suggestions we are making. Now that Reg SHO’s “permanent” version of 242.204 mandates that a “purchase or borrow” be performed before the commencement of trading on T+4 (T+6 for bona fide MMs) for FTDs our concern is that “bogus borrows” from these self-replenishing lending pools at the SBP will be abused to feign compliance with the new law. The design of the SBP fosters what are referred to as “intra-settlement period” abuses. The detection of and dealing with these “intra-settlement period” abuses is our #2 highest ranked priority. This is why we view SBP reform as being of an emergent nature for you in Congress to undertake since the SEC and the SROs obviously won’t.
It’s funny how all of these complex innovations that Wall Street has come up with over the years like credit default swaps, dark pools, high velocity trading, low latency trading, auction rate securities, etc. have the common denominator involving the creation of leverage on the part of the Wall Street insiders over the Main Street clients they have a fiduciary duty to provide investor protection to. Yet when it comes to implementing a simple measure to enhance transparency all of a sudden Wall Street cites the technical difficulties and possible unintended consequences associated with such a risk-laden challenge to the current “enter-break-cure-reward” cycle.
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