Read this before and it's a valuable read, but it does not cover the trading action of NASD players: NASDAQ, OTC:BB and Pink Sheets. For those trading venues the customer A and customer B is not direct line from A to B with the broker in the middle. In NASD platforms, the broker is represented by a market maker and the transaction takes place in 2 parts: a buy and a theoretical corresponding sell, or a sell and a theoretical corresponding buy. I call it theoretical because most often the two actions--the buy and the sell--are completely separate events and actions.
If I want to sell 100 shares of XYZA, a market maker can choose to buy those 100 shares. It becomes a part of that MM's inventory, until a corresponding buyer comes along. That buyer then picks up the 100 shares XYZA at the MM's cost and sometimes higher. The MM pockets any profit on the two correlated trades.
However, and this is where it gets really fishy really fast, If I want to bid for 100 shares XYZA, the market maker can choose to fill that bid. The MM does not have to have any XYZA in his inventory. If the MM fills a bid, then an open position is created until shares are found to fill that open position. The MM can purchase shares from those offered or can borrow shares, or simply leave the position open legally for 3 trading days. Under NASD trading rules an open position not filled by the end of the 3rd trading day is in default and the MM is "obligated" to fill the position.
And, here is the best part, an open position is only considered an illegal naked short trade if there was no intent to fill the open position or no attempt to fill it. Even better, The OTC short sales counted by FINRA every 2 weeks only counts those open positions that are reported as closed through the use of borrowed shares. So, the short count does not include the daily "floating" number of shares included in open positions within the 3 day period. Better than that, in counting daily short actions, all sold shares to MMs are considered short sales and all shares bought from MMs are considered normal trades. So, in normal daily trading short sales to trades are near or at a zero sum: short trades equal the number of all other trades.
Are you confused yet? Don't be. Just keep in mind the last higher than normal price peak you witnessed and know that most of the selling at the top was done through open positions that did not have to close for 3 days following the spike. Counterfeit shares? You have no idea. I have no idea.
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