This is a post By: "E0046_no_uname" on RB That basically explains how it works and why transparency is needed across the board.
Nice to see Clemmer addressing the problem, but IMHO the big brokerage houses render this strategy useless in the short term (months). Doesn't mean he shouldn't of sent out the letter - it still has a positive effect - but anything you or I do is futile. Your broker has seen to this.
The reason this stock is UPC'd so often is that buy orders can be filled by your broker on paper with shares that don't exist. The brokers themselves (if they choose) short into your order and merely record the *intent* to eventually go out into the market and actually borrow or buy the shares to cover. Usually not a problem for stocks with normal buying and selling activity - another customer eventally sells and the broker covers their internal short with those shares.
The problem arises when the brokers (through their investment, market makeing or whatever arms - never the trading desk) exploit this perfectly resonable rule and simply let the IOUs pile up for weeks or months on end - they intentionally drag their feet clearing the trades, i.e., 'covering' and in effect can hold a large short position against their own customers. They know precisely what their net balance of **** (or any other stock) is at any given moment - it's quite intentional on their part if they decide to do it.
Against the rules? In spirit, but a perfect case of having the fox guard the henhouse. NASD Regulation (NASDR) can detetect this condition (the stock promptly get's UPCd), but by that time *millions* of ulcleared broker IOUs have been piled up for weeks on end. There's now way NASDR can enforce this real-time - they just issue a UPC on the stock 'reminding' brokers that they should be following the clearing rules by actually buying or borrowing the shares. I never recall seeing NASDR 'punishing' any broker for it either - it's not worth their time and they don't have the manpower anyway. Sometimes they issue follow-on warnings, "Hey...we *really* mean it, guys. Follow the rules!" Can't imagine many brokers shaking in there boots about a rule they know NASDR can't or won't enforce.
Moving your loanable shares (from margin accounts) to a cash or 401k account is ineffective in the short-term for the same reason. If they have every last share in your margin account loaned out (which they probably are doing right now) and you move them to a cash or 401k account, they use the same accounting tricks. Your account get's credited, but the shares remain floating around in clearing limbo as long as your broker chooses.
If you already have all your **** in a cash or 401k account then your broker can't possibly loan them out, right? Well, that's the rule *if* the shares are actually in there to begin with. If you bought **** into a cash or 401k account in the last few months, the shares probably never made it there. Your trade hasn't cleared behind the scenes yet even though it looks like they're in your account. Not true? Try moving a 401k with a few hundred thousand shares of **** to another broker - it will take them *months* because they have to actually buy real shares somewhere. Yeah, I know - they're still using the 'paperwork' excuse. Except the other broker won't accept a 401k transfer without 'real' shares; the 'paperwork' is to go out and 'clear' your initial purchase.
I'm sure there are dozens of less obvious ways this stock is shorted in the trading pipeline. Not much the little guy can do about it - take the 'rules' about shorting cash or 401k accounts with a grain of salt. It's a NASD feel-good rule to give the impression of fairness. If you see this stock UPCd, then your broker is the biggest short out there.
P2bAAAT & DSAS |
