Replies to post #180 on Worthless Securities DTCC Non-Transferable list (PENSON)

[Yosako]

Le2, the NSCC illiquid deposit requirement is calculated for stocks selling at $0.01 and below as (($0.01*number_of_shares)-trade_value).
The NSCC imposes that deposit requirement to clearing firms when a trade size exceeds 25% of 20-day ADV, "as a way to limit settlement risks" (whaaaat?), however the NSCC itself doesn't limit tradeable order sizes.
The deposit is then wired by clearing firms to the NSCC and the money is returned back to the clearing firm when the trade settles at T+3.

The amount of the requirement on subbies pretty much gets out of whack: here are a couple examples:

120,000 share trade @ $0.008 => NSCC deposit requirement of (($0.01x120,000)-($0.008x120_000)) => $1200-$960 = $240. Not much at all, right? Here comes the funny stuff...

10,000,000 share trade @ $0.0001 => NSCC deposit requirement of (($0.01x10,000,000)-($0.0001*10,000,000)) => $100,000-$1,000 = $99,000. The pain!!!

That is, $99,000 has to be wired by the clearing firm to be able to settle a trade worth $1,000! Since those funds are tied for 3 days (T+3) the chunk the brokerage misses on interest revenue of the funds they wire can be considerable. In the above example, at a 10% interest rate, they'd miss (3/365)*0.1*$99,000 = $81.

However Penson, rather than skipping those costs (like eTrade, Scotty and Fidelity do) or charging 'em as an extra fee to customers, they opted by limiting trade size to 10%-20 day ADV and rejecting online orders whose size is greater than that. They also imposed also a buy-in rule where if the NSCC deposit requirement exceeded $50,000, the shares would be bought in at T+1 in the customer account at the current market price of the stock (wouldn't that be unauthorized trading??!!, SEC where are you??!!)

[Yosako]

(reply to PM)

20-day ADV stands for 20-day Average Daily Volume; just sum the volume of the 20 previous days then divide it by 20. OTCs move in bursts of small/no-activity then explode out of thin air on high volume, whereas the 20-day average increases/decreases very slowly as it's based on the volume of previous days.

Penson-clearing brokerages such as Zecco will limit order sizes to 10% of that, which means that if the stock traded small volume before, then you're pretty much screwed since the 10% of already small volume is almost nothing. To place an order whose size is greater than 10% 20-day ADV you'd have to call 'em via phone.

BTW I've checked CBYI and it's on their NON-DTC eligible list; that means the stock has been chilled by the DTC (more often than not, it's usually due to unregistered shares roaming around in the market) and trades take place in certificates instead of electronically; transaction costs are ridiculous and can get as high as $700 per trade. That can exceed the sale proceeds! (although brokerages such as eTrade, Scotty and Fidelity absorb those costs rather to passing them to customers due to the extremely low odds of having someone trade a non-DTC stock).

Since CBYI is at $0.0001 and you haven't much money on it I guess the only way to get rid of those shares would be to use Zecco's "Non-transferable Security Removal Request" as it doesn't incur in sale costs (at least that's what a Zecco rep told me when I asked).

PD: Please use public replies, I can't PM on a free luncher account! :-D
PD2: Good weekend to you too!