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Sunday, January 02, 2005, 5:39:00 PM EST
News Briefs
Jim Sinclair’s Commentary:
Thank you Monty for the heads up!
Illegal short selling, long a problem in small cap gold shares, may well become problematic for short sellers. Many small cap Canadian gold shares have suffered from this long ignored yet illegal problem.
Three rules have been broken regularly: One is the short sale rule where you can only short on an "up tick;" the second is the naked (no borrowed shares to make delivery) short sale; and the third is with no money in the trade as the sale creates a false credit recognized by some crooked brokers.
There is a fourth in some instances and that is the illegal short since it is made as if it were a long sale so it never shows up in the short figures. The last two are most common in the small cap Canadian gold shares.
Regulation SHO, the new rule will take effect on Monday.
Bloomberg - Quotes excerpted from article
"Market participants are still trying to gauge the full implication of Regulation SHO SHO, but a new Merrill Lynch report already identifies several companies whose stock could be boosted by the new rule. In a short sale, a security not owned by the seller is sold in anticipation of a decrease in the stock price. Under existing NASD and NYSE rules, firms generally have to locate securities before accepting a short sale, a process known as affirmative determination. Brokerage firms also have to borrow a security or be able to provide it for delivery on demand on settlement date, three days after the transaction. If a firm cannot deliver the securities by settlement, a failed trade is entered into the Continuous Net Settlement (CNS), a system administered by the National Securities Clearing Corp., or NSCC.
Regulation SHO SHO, among other things, aims to have these failed trades settled, mostly by clearly identifying securities with a high threshold of failed deliveries. "You're supposed to clear up your fails. But because the industry hasn't had the best practice, the SEC has given us rules, guidelines and potential trading penalties," says Mary Ann Bartels, global equity trading strategist at Merrill Lynch. Under Regulation SHO SHO, threshold securities are defined by two criteria: There are at least 10,000 shares in aggregate failed deliveries for the security for five consecutive settlement days and these fails constitute 0.5% or more of outstanding shares.
Under Regulation SHO SHO, brokers who fail to deliver a security for 13 consecutive settlement days will have to execute mandatory buy-in to clean the fails. If the broker cannot buy-in the security; it and its clients will be restricted from further selling short the security without a "pre-borrow agreement." All of this could result in higher borrowing costs and put upward pressure on these stocks, says Merrill Lynch's Bartels.
"Short interest as a percentage of float should become the more important ratio measure to determining stock potentially at risk of moving on to the threshold list," Bartels writes in her report which was published on Dec. 21.
"A market impact could happen earlier than expected as potential threshold securities stocks could become more attractively traded in the beginning of the year as the market begins to anticipate future movements in these stocks," the strategist adds.
According to Bartels, small and mid-cap stocks are most likely to be affected, in part because they tend to be less liquid. Bartels identifies 12 stocks with high short interest to float ratios which are difficult to borrow as potential gainers from the application of Regulation SHO SHO. These stocks include: TravelZoo Inc. (TZOO); American Pharmaceutical Partners Inc. (APPX); Delta Air Lines Inc. (DAL), Biosite Inc. (BSTE), Netflix (NFLX) and Krispy Kreme Doughnuts Inc. (KKD). Bartels says that the potential upward pressure on these stocks and others in similar positions could last until the fails are cleared.
"It depends on the backlog. How quickly you can clear the fails and get a borrow," she says. Failures to deliver prior to Jan. 10 will not be counted initially."
(Carol S. Remond is an award-winning columnist and one of four who write the "In The Money" feature. Most recently, she shared a 2003 Best of Business Award from the Society of Business Editors and Writers for her role in Dow Jones' team coverage of the Canary Capital mutual fund trading scandal.)
By Carol S. Remond, Dow Jones Newswires; 201-938-2074.
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