In response to your question: Yes, MM's can borrow, short, NSS shares in excess of the O/S. It is legal to do so due to the illiquid nature of penny stocks. When a penny breaks out unexpectedly, usually MM's do NOT have the neccessary frontload of real shares on hand, they must borrow, short, etc, in order to provide liquidity and eventually buy these shares from market at a later time, within T+3 days to be exact without triggering a FTD. If a security meets the requirements of a "threshold security" which I believe happened to HESG, one or more of the below situations is currently in affect. This would explain why the buy halt was initiated by some brokerage houses:
REG SHO OverviewAs defined in Rule 203(c)(6) of Regulation SHO, a “threshold security” is any equity security of any issuer that is registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act (commonly referred to as reporting securities), where, for five consecutive settlement days:
•There are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security; •The level of fails is equal to at least one-half of one percent of the issuer’s total shares outstanding; and •The security is included on a list published by a self-regulatory organization (SRO). A security ceases to be a threshold security if it does not exceed the specified level of fails for five consecutive settlement days.
I might add that this has been one hell of a learning experience for me thus far as I did not know all of these exacting details prior to this, just bits and pieces.
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