The Securities and Exchange Commission (SEC) really has been on our
TEAM all along. For years we thought as investors that we were out
there all alone in the market because of years and years of many
people being on the losing end from stocks being manipulated.
I received a very important phone call from the SEC that was very
powerful. The info is so powerful that I deemed it would be selfish
for me to not share such with those in here since our goals have
always been to help each other as much as possible. What I am about
to share might be known by some, but I am sure that it is not
understood by most. This is concerning the true power and intentions
behind Regulation Sho. There is more that I have not heard discussed
by people and I think there are some things we are not seeing
correctly by normally seeing the SEC unsuccessful attempts so often
in the past.
What you are about to read are not my opinions. It is what I was
told by the SEC and was given permission to share this information
with you for a better understanding. I was told that they want our
feedback so they will want to know if it worked or not in fixing
what they knew was broke for years, but just recently discovered how
to resolve.
The pressure is on the Market Makers (MMs) to do what is right
because all eyes will be placed on them. There will be many key
Federal Authorities, Economists, Mathematicians, etc. that are
already lined up to be performing certain studies for historical
purposes. All the MMs have to do to not make matters worse is to do
what is right and fix what they had broken for years with any fully
reporting company that's a threshold security as soon as possible.
Let me explain a bit further to show you how this will work.
First understand that the SEC always wanted to help us shareholders,
but never knew how to do so. They had always received many
complaints, but never knew how they could trap the MMs to simply do
what was right. The shorting and naked shorting had gotten out of
hand as I will explain both.
The Naked Shorting
With the implementation of Regulation Sho, the MMs will be forced to
close out their open naked short position on all stocks that meet
the Regulation Sho requirements for coverage. They will have to do
this everyday by midnight beginning on 3 Jan 05.
This leads us to talk about the requirements as some are already
familiar. A stock must be fully reporting and considered a threshold
security. A threshold security is one where .5% of its outstanding
shares (OS) have been proven to have been naked shorted for 5
consecutive trading days and where the MMs have failed to close out
those positions for five consecutive trading days.
Example: If stock ABCD had 2,000,000 shares outstanding and was a
fully reporting company as of 3 Jan 05, the MMs would need to fail
to close out the open naked shorted position of .5% of 2,000,000
shares which would equate to 10,000 shares not being "completely"
covered for 5 consecutive trading days. This means that the MMs
would need to make sure they don't allow 5 consecutive days to
happen where they leave any balance remaining of the 10,000 naked
shorted shares as an open account of stock ABCD. They
must "completely" close all open accounts of naked shorted
positions.
For proper accountability of all of this to work, the SEC will have
to have a coordinated TEAM effort from key entities within the
market as authorities. The SEC, Depository Trust Company (DTC),
brokerage companies, all market exchanges, the fully reporting
companies, and their transfer agents will all be working together to
make sure all the proper coordination take place for Regulation Sho
to work.
Coordination will take place with the fully reporting company (and
their transfer agent if they have one) to make sure there is a full
accountability of what's their OS. The facts will be reflected in
the company's SEC filing which is why it is essential for them to be
a fully reporting company.
The DTC will be responsible for informing the SEC where the open
sales exist as in the amount of shares existing that have transacted
through them that they placed into our brokerage accounts. This was
a problem before because many relied on the DTC to give them more
than this information to help resolve this issue sooner.
This is where the brokerage companies come in along with the help
from the exchanges. The SEC will be further detailing and defining
their information of transacted shares from the DTC by having
revealed to them the guilty MM that have transacted the naked short
position from information received from the brokerage companies and
all of the market exchanges. This is proving to be something bigger
than what many of us had realized. Let me explain why.
All of this brings us back to something I discussed earlier. When
the supply of shares of a stock is zero, the supply is zero. It
doesn't matter how you get there, be it by a naked short position or
by the float being absorbed. This is where it all starts as a short
squeeze will now be formed and grows as demand to purchase shares
increase. This is where the misperception exists with Regulation
Sho. People think that a new naked short position has to be created
as of 3 Jan 05 in order for a stock to be eligible for protection
and rectification under Regulation Sho. This is not true. It's even
better. All naked short positions of the past will not go away and
must be dealt with. The clock begins ticking for covering on 3 Jan
05 for fully reporting companies. PERIOD!!! This means that any
stock that has been naked shorted will automatically start out in a
forced short squeeze mode that will only escalate the longer the MMs
wait to cover.
Any buying pressure will cause the increase of the naked shorted
position to grow to begin approaching the 5 day consecutive window
of not getting covered by the MMs. After the 5 days transpire where
the MMs have failed to deliver and close the open naked shorted
position, that stock in which they failed to deliver will be placed
on a Threshold Security List for the public to view. This is where
it starts to get awesome.
Example: Let's say stock ABCD, a fully reporting company, was
trading at .01 cent and had an OS of 1,000,000 shares. Let's say
that stock ABCD have been naked shorted by 1,000,000 shares over the
OS/float of 1,000,000 shares. Come 3 Jan 05 the MMs will not be
forced to "possibly" immediately cover the 1,000,000 naked shorted
shares. Here's the beauty of this and where the MMs are currently
mad at everyone about. Don't worry, they will make money, but in a
different way as we might talk about later.
With no buying pressure, they won't have to cover as soon as one
might have hoped as shares are sold exceeding the amount of shares
being bought for stock ABCD. Still, if they don't cover the "entire"
1,000,000 naked short position for 5 consecutive days, stock ABCD
will show up on the Threshold Security List for the public to view
on 10 Jan 05. After such, the MMs have 13 days to close out
the "entire" naked shorted position or face being suspended and/or
shut down from that security and other penalties to possibly put
that MM out of business. The end result will still be the supply
being zero and the stock would be forced to be traded correctly
based on supply and demand with an already dried up supply. This
means the creation of an instant short squeeze!
What I anticipate happening, and the SEC, is that in the above
example with stock ABCD, the MMs will need to get the 1,000,000
naked shorted shares out of circulation by increasing the bid to
entice shareholders to sell. The problem comes when they allow for
the buying to outweigh the selling due to increased demand for the
stock. As orders are placed to buy shares, they must be filled by
the MMs. This will worsen their problem when nobody is selling. As
the MMs make the mistake and allow for any stock to be placed on the
Threshold Security List, it will publicly reveal where the MMs are
already having a problem in covering. Us as shareholders will see
this list and contribute with forcing the short squeezes for every
stock on the list.
If they raised stock ABCD to .50 cents and there was more buying
than selling than no ground would have been gained by the MMs. They
only gain ground when there is more selling than buying that exists.
IMPORTANT: So where is the "Threshold Security List" that we all
will be looking for? This is how we all get a chance to help the MMs
reap what they sowed. Go to…
www.nasdaq.com
… to see the Threshold Security list beginning on 10 Jan 05 and
review it daily. Any stock that you see on that list "should"
immediately present a wonderful buying opportunity by being in an
instant short squeeze scenario. The MM guilty of the naked shorting
will have a hard time from not generating enough selling by enticing
the bid high enough for shareholders to sell to out weigh the buying
to allow for a covering to transpire.
Again, I do not believe that all MMs are bad and I am not posting
this to lead some type of crusade against the MMs. Remember, all we
ever wanted was for the MMs to trade the stocks we invest into
fairly as investor/traders in the market. Without the MMs, there
would not be a market and all the SEC is doing is making sure the
MMs create and maintain an orderly market, fairly. This Regulation
Sho is something that is long over due.
The Shorting
The shorting of stocks are referring to the Pilot Program that was
delayed to begin on 2 May 05 and will last for one year through 2
May 06. This is where they will be selecting 1,000 stocks to use for
an SEC experiment that they call the "Tick Test."
Example: Imagine stock ABCD trading at $10.00 per share. Let's say
you now decide to short stock ABCD at $10.00 per share by buying
through shorting 1,000 shares. You really just borrowed $10,000 to
short stock ABCD to buy 1,000 shares. Two days later, let's say
stock ABCD drops to trade at $8.00 per share. You now decide to
cover your short in stock ABCD and sell your 1,000 shares back to
the market to have them delivered at $8.00 per share for a total of
$8,000. You cover by paying back the 1,000 shares you borrowed, but
since the price dropped down to $8.00 per share, your cost for
paying back the 1,000 shares of stock ABCD will be $8,000. Since
it's mostly all about the share amount and not the dollar amount for
covering in the eyes of the MM, you would profit the $2,000
difference from using the proper timing for delivery of the 1,000
shares.
The SEC will be doing a study on 1,000 stocks while examining these
stocks to see how and why certain problems have existed throughout
the market with the delivery of the shorted positions. What they
have come to find out is that there is a problem that exists with
somebody shorting a stock as reflected above and never delivering
the funds to cover the shorted position whether the stock goes up or
down. They have come to find out that somewhere and somehow the
intentions to later deliver never existed. The Pilot program is
being designed to get to the bottom of this.
The opportunity that we have here with the rectification of the
naked shorting and shorting of stocks is something that will go down
in history for the better in fixing something that was broke for a
long time. The primary objective is to have an orderly and fair
market for those stocks that are legitimate and trying to actually
grow to trade fairly on its own merit of supply and demand
principles and not on manipulation of choice.
Bottom line, any stock falling under the protection umbrella of
Regulation Sho will automatically begin trading under a short
squeeze scenario due to its supply of shares immediately being zero.
How huge the short squeeze materializes is predicated upon how soon
or how long the MM that is guilty of naked shorting decides to take
for covering. Whenever the "demand for buying" exceeds the "demand
for selling" within that naked shorted security, the MM will have a
very difficult time in covering by the mandated time frames
allocated. Added buying pressure will only compound the dilemma for
the MM.
I am expecting Jan 05 to be the best month in the history of the
market for opportunities for prosperity because of Regulation Sho.
We are about to be part of a positive piece of history. I hope the
above info have helped many to see what is the importance of making
sure you are positioned and well planned for strategic moves to be
made in the market to capture the opportunity for prosperity. We all
must prepare and plan now if we can afford to do so. People don't
plan on failing, they fail to plan. May we all become prosperous!
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