Replies to post #990 on The Real DTCC Discussion

[Nebuchadnezzar]

thank you BigBake1

i will have to go over that a couple times

[MacFly]

Fascinating read...thanks for the education.

[Howzitgoing]

Re: Short Volume

That is all MMs do here quote customer orders and that is all.

Lotsa questions about your post, but are you saying that MM's don't trade for their own accounts?

[Cassandra]

Outstanding post BigBake and worth the long explanation!

[RoadLessTraveled]

Many thanks for this detailed explanation, BigBake. I have bookmarked it and will use it as a reference for those who are truly interested in understanding what FINRA's Short data really means.

Unfortunately, there will always be those who need to cling to their misinterpretations rather than take the responsibility for their own bad investments.

Education can cause some short term pain but is the only solution for true personal growth.

[BigBake1]

Short Volume Part II

I decided to add another part to the short volume post, this will go deeper into the actual trade transaction and reporting process. It seems some believe that the words “Non Tape Transaction” means to hide an execution, far from it, everything is reported and must be balanced and reconciled in this case FINRA balances and reconciles trade reporting. Balance and reconciliation is paramount in the clearing and settlement process and all trades at the end of the day are in fact balanced and reconciled.

FINRA only looks at the “Initial Leg” of a trade transaction and that is all, they do not go back at the end of the day and provide a reconciled report as to how each trade was settled on the legs after the initial trade transaction was executed. Thus the Daily Reg SHO Report only provides a tiny piece of the information as to full trade transaction. One cannot look at the data and claim shares that are short at the end of the trading day, sorry but the data only reports how it was initially executed and nothing more. The SEC claims a 98% settlement rate at T+1. Due to this extraordinary settlement rate the SEC has in fact proposed to reduce the settlement period to T+1 in the future. It is currently under review by various participants.

So now that we know what is not reconciled at the end of the day let us look at what is reconciled by FINRA each and every day. In such “Riskless Principle” trades in which a neutral party is used to execute a trade without having ownership of the actual shares as per SEC Rule 200 there are two specific volume reports. One that is often used by traders is the “Consolidated Tape” which shows each and every trade transaction throughout the day including before open and after the market closes. On the OTC this information is all fed through the NASDAQ and is publicly disseminated for all to see and use.

The other volume report is the “Non Tape Transaction”, this is also reported to FINRA each and every day and contains all trade executions through the day including before open and after market close. FINRA takes this data and balances and reconciles with all trades reported on the consolidated tape. For every single trade on the “Non Tape Transaction” report there is an exact trade on the consolidated tape. Due to riskless principle requirements FINRA requires the use of non tape transaction to prevent the duplicate reporting of a single trade transaction.

I give you FINRA Rule 6622, in it you will find Riskless Principle Transactions along with some great examples of trade transaction and their reporting requirements. In the OTC you are mainly dealing with Examples 2A and 2B.

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4410

(3) Reporting Principal and Riskless Principal Transactions


(A) For principal transactions, except as provided in subparagraph (B) hereof, report each purchase and sale transaction separately and report the number of shares and the price. For principal transactions that are executed at a price that includes a mark-up, mark-down or service charge, the price reported shall exclude the mark-up, mark-down or service charge. Such reported price shall be reasonably related to the prevailing market, taking into consideration all relevant circumstances including, but not limited to, market conditions with respect to the OTC Equity Security, the number of shares involved in the transaction, the published bids and offers with size displayed in any inter-dealer quotation system at the time of the execution (including the reporting firm's own quotation), the cost of execution and the expenses involved in clearing the transaction.


(B) Exception: A "riskless" principal transaction in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell, shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down, commission-equivalent, or other fee. Alternatively, a member may report a riskless principal transaction by submitting the following report(s) to the OTC Reporting Facility:


(i) The member with the obligation to report the transaction pursuant to paragraph (b) above must submit a last sale report for the initial leg of the transaction.


(ii) Regardless of whether a member has a reporting obligation pursuant to paragraph (b) above, the firm must submit, for the offsetting, "riskless" portion of the transaction, either:


a. a clearing-only report with a capacity indicator of "riskless principal," if a clearing report is necessary to clear the transaction; or


b. a non-tape, non-clearing report with a capacity indicator of "riskless principal," if a clearing report is not necessary to clear the transaction.


Example:


SELL as a principal 100 shares to another member at 40 to fill an existing order;
BUY as principal 100 shares from a customer at 40 minus a mark-down of $12.50;
REPORT 100 shares at 40 by submitting to the OTC Reporting Facility either a single trade report marked with a "riskless principal" capacity indicator or by submitting the following reports:
(1) where required by this Rule, a tape report marked with a "principal" capacity indicator; and
(2) either a non-tape, non-clearing report or a clearing-only report marked with a "riskless principal" capacity indicator.


(4) Identification of Other Members for Agency and Riskless Principal Transactions
Any member that has a reporting obligation pursuant to paragraph (b) above and is acting in a riskless principal or agency capacity on behalf of one or more other members shall submit to FINRA one or more non-tape (either non-tape, clearing-only or non-tape, non-clearing) report(s) identifying such other member(s) as a party to the transaction, if such other member(s) is not identified on the initial trade report submitted to FINRA or a report submitted to FINRA pursuant to Rule 6622(d)(3)(B) for the offsetting leg of a riskless principal transaction. Nothing in this Rule 6622(d)(4) shall negate or modify the riskless principal transaction reporting requirements set forth in Rule 6622(d)(3)(B).


Example #1:
Member A, as agent or riskless principal on behalf of Member B, BUYS 100 shares from Member C at 40 (no mark-down included)
Member A has the reporting obligation under Rule 6622(b)
TAPE REPORT 100 shares at 40 By Member A between Member A and Member C
NON-TAPE REPORT 100 shares at 40 By Member A identifying Member B


Example #2A:
Member A MATCHES, as agent, the orders of Member B and Member C for 100 shares at 40
Member A has the reporting obligation under Rule 6622(b)
TAPE REPORT 100 shares at 40 By Member A between Member A and Member B (or Member C)
NON-TAPE REPORT 100 shares at 40 By Member A identifying Member C (or Member B)


Example #2B:
Member A MATCHES, as agent, the orders of Member B and Member C for 100 shares at 40
Member A has the reporting obligation under Rule 6622(b)
TAPE REPORT a CROSS of 100 shares at 40 By Member A
NON-TAPE REPORT 100 shares at 40 By Member A identifying Member B and
NON-TAPE REPORT 100 shares at 40 By Member A identifying Member C


Example #3:
Member A, as agent or riskless principal on behalf of Member B, BUYS 100 shares on a foreign exchange at 40
DO NOT TAPE REPORT this leg if reported to foreign exchange
NO NON-TAPE REPORT required; however, Member A may submit a NON-TAPE REPORT as between Member A and Member B

As you can see FINRA is pretty clear as to what will be reported to the tape and what is reported to the non tape reports. Both reports are in fact sent to FINRA daily and balanced and reconciled to ensure each non tape transaction has a corresponding consolidated tape transaction.

Reconciliation of the Daily Reg SHO cannot occur until T+4, as by SEC Rules a trade has 3 days after trade inception to be settled. There are many factors that prevent trade settlement on T+1 and are not specific to any one cause. Either way with the SEC claim of 98% settlement of trades on T+1 one can in fact bet that most if not all reported on the Daily Reg SHO has already been settled on the very same day, especially on a CNS eligible security. At T+4 if a trade is in fact not settled due to share delivery it becomes an FTD (Fails To Deliver) and is not attributed a singular cause as to why there has been a failure to deliver.

http://www.sec.gov/foia/docs/failsdata.htm

Please note that fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or “naked” short selling.

Pretty clear that short volume that becomes an FTD at T+4 cannot be attributed to a cause, as the causes can be for multiple reasons not related to position nor are evidence of short selling or “naked” short selling. Anyone touting short volume as such is simply misleading others as to it having any bearing on current trading. The simple fact of the matter is without showing what was already balanced and reconciled that same day at the end of trading day it is irrelevant information. It can only be represented to it’s impact after the T+3 period has lapsed and only when the FTD report discloses the actual aggregate of unsettled trades for that reporting period.

The presentation of short volume data is providing only a sliver of the entire trade transaction as it only represents the “INITIAL LEG” and nothing more. Providing such information as proof of short positions or NSS is like supplying a 1 X 1 inch square of an 8 X 10 picture and drawing a conclusion based upon it. You might guess that it is a specific trade but that is just it, a guess and cannot be proven by the data provided. If the SEC tells you that you cannot conclude anything from the FTD data at T+4 then how can anyone conclude at T+1 the short volume and it’s cause?

It is clear one cannot draw a confident conclusion based on the tiny information provided. The data is simply a tracking tool for the regulators and nothing more. It is provided to the public as a way to provide confidence in the market that the regulators are tracking each trade. This transparency is a PR tool and nothing more, it is not information to base trading decisions on despite the many websites that have popped up claiming to be providing crucial trade information. Many claim the Non Tape Transaction report should also be provided to the public.. lol.. If the trading public cannot read and interpret the already provided short volume report then what exactly is there to be gained reading the Non Tape Transactions?

Other than wasting ones time to ensure each Non Tape Transaction has a Consolidated Tape Transaction, which is already being performed by FINRA each and every trading day, not much else can be reasoned. Amazingly the numbers provided are somehow regarded as accurate to some and inaccurate by others, often wording provided about under inclusive or under reported is used to provide doubt. The reality is that data for the Daily Reg SHO is only collected during open market hours, therefore any T-Trades before OTC Market opening or after it closes is not included in the Daily Reg SHO Report. Thus causing the data for that day to not include such T-Trades, being under inclusive and under reported for that specific day. But rest assured what is not going to be under inclusive and under reported is the FTD report at T+4. There are no stipulations for market hours, it is strictly driven by failure to deliver shares by T+3.

So even if the T=Trades contained such “riskless principle” transactions it still does not get by the FTD report in the end if there were no shares delivered for the transaction. That is the final disposition after T+3 of the short volume, either shares were delivered or they were not. So not much is really provided by reading the short volume reports posted by FINRA, the end game is the FTD report if one was concerned that share delivery is an issue and even then they cannot confidently claim a cause as the SEC states clearly there is no specific cause for FTDs.

FINRA also has their Threshold lists and flags a security if there are delivery issues:

Regulation SHO defines threshold securities as any equity security of an issuer that is registered under Section 12, or that is required to file reports pursuant to Section 15(d) and 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; AND
? the level of fails is equal to at least one-half of one percent of the issuer's total shares outstanding
FINRA Rule 4320 defines threshold securities as any equity security of an issuer that is not an SEC reporting security and, for five consecutive settlement days, has:
? aggregate fails to deliver at a registered clearing agency of 10,000 shares or more; AND
? a reported last sale during normal market hours (9:30 a.m. to 4 p.m., ET) for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more.

So FINRA is reporting Short volume of 100% and yet somehow it must be a result of shares not being delivered or “air shares” yet FINRA is not reporting a threshold problem too? How could such a conflict be occurring in the same regulatory agency? It is not a conflict and it is result of ignorance on the data provided and expectation that it represents something that it does not. Better investor education is needed to prevent such poorly formed conclusions based upon their provided data.

So as you can see balance and reconciliation occurs everyday from multiple sources involving many reports beyond just Book Entry at the DTCC for trade clearing and settlement.

[Monroe1]

Thanks Big Bake I read this a few times to understand it....more or less!

So is there any way to know the volume of short positions taken by the retail trader?


Another question.. in either Finra or SEC I have seen a list.. what you referred to in your article here I believe... and so what does it mean by "days to cover"? thanks, best regards, monroe