Re: 2/8/06 - [NCANS] Massive Naked Short Theory Finally becoming Unravelled
Background:
On 2/4/06, "Bob O'Brien" created a blog entry entitled: "A FOIA Request 'Day In The Life Of OSTK' From The SEC" It began with: "Alan Newman of Crosscurrents fame finally got some aged data from the SEC - data which gives one a little hint as to the scope of the problem, and is mind boggling in its implications... According to the latest FOIA request, 550K shares of OSTK were FTD as of August 1, 2005."
Given that this figure would mean 90% of the trading volume for OSTK on that day was from naked shorting, it was put forth as a smoking gun that OSTK was being manipulated by the evil naked shorts. But, wait, if that's true wouldn't one expect the stock to have been hammered that day? It actually went up! Of course Bobo had an explanation for why it wouldn't... don't be stupid!
But, wait, isn't what is shown on a given day the result of trades from four days ago given the T+3 clearing rule? Eh, doesn't matter, whether we are talking 70%, 80%, 90% of the volume, as long as we can always blame things on the evil naked shorts. But, wait, isn't the volume fiven on the FOI document not just one trading day, but cumulative over time? Not to worry, because FTDs = naked shorting and that's fraud no matter what the number of trades, which, anyhow, we just *know* is a really really big number.
But wait, then we come to find out that 97% of the FTD trades on 8/1 were actually marked as "long" and not "short"! End of story? End of movement? Hah! Bobo then goes on to say: "Today, on the OSTK CC, Dr. Byrne revealed that out of 150 trades he executed in August for his purchases of the 50K that went undelivered for months, 144 turned out to be incorrectly marked long, subsequently failing. That's around 97% incorrectly coded as long. But still, FTD." Aha! some sinister underling at the DTC switched the tags when no one was looking! Makes perfect sense. Not.
But wait, forget all the above. We just *know* FTDs=naked shorting and yada yada. Why? Oh come on now, if you don't understand this by now you're just an idiot! Uh, sure.
But wait, a funny thing happened. Someone who appeared to know what they were talking about rained on the parade.
Re: More Information and Intrigue on FOIA Data
By AWS on 2/8/2006 10:15 AM
///AWS- My point in case you missed it was that almost all of Dr. Byrne's purchases were filled from sellers who were shorting stock illegally.///
You don't know this. Unfortunately, you think you do. You have no real knowledge of how trades can fail otherwise, so you've jumped prematurely to believing that all of them were illegal shorts (when shorted.)
I'll be repetitive again, so bear with me. Let me construct a model:
1- 10mm share company goes public at $10 a share. All get sold, and no shares remain short at the underwriter...or in the system. $100,000,000 dollars of equity, 10mm shares, no shorts...a perfect world.
2- time passes...company looks dodgy. Shorts enter the game. Now 15,000,000 long positions out there, 5,000,000 shorts (all borrowed legally) ...all trades clear jsut fine...Bobo & Patrick not alarmed.
3- time passes. Something sparks share lenders not to lend (a la Byrne). Fresh buyers want 1,000,000 physical certificates. These get pulled from the lending pool. No legal shorts cover. Finding shares becomes more difficult. The 10,000 shares borrowed from Morgan Stanley are requested back, prompting a search elsewhere. Musical Chairs. Borrowing desks arrange for several blocks of 1000 shares to replace the 10,000. That is done, all deliveries made, no fails, but the borrow is getting tight.
4- More non-lending buyers purchase shares. Some lending owners panic and sell out - leading to their back offices requesting their lent shares returned. The borrow pool is squeezed to the point that small deliveries are failed upon - not borrowed in time. The blocks that are borrowable become smaller and smaller (more likely to fail) and FTDs pile up. Bobo and Patrick alarmed.
5- More pressure on the system. More non-lending buyers purchasing from lending owners. More fails, more screams from the new buyers for delivery. Bobo very alarmed, Patrick has a slide entitled "Jihad" at CC.
Now you can overlay a scheme of NSS over this one if you want (and BOY, do you want) but, NSS does not explain all the fails. And claiming illegal activity by the guy you happened to buy from, ain't the answer. In my model there is no illegal NSS, but a lot of screaming guys asking "Where are my shares!!!???"
I'll try to answer more questions for Bobo or Patchie or others to the extent I can [repeat: not an equity settlements expert] but someone needs to get the troops up to speed with the legal limits of trading shares where legal shorts exist. Legal shorts can become naked ones, and they can scramble for shares to borrow after the fact. Dealers could have a bed & breakfast scheme on the side to avoid reporting long-standing fails. I get that. Wall Street is full of slime - I agree. I saw slimy stuff going on around me, but t was more of the internal backstabbing variety rather than the illegal kind. I didn't work at Solly during the 2yr auction debacle. I didn't buy securities from one friend, sell them to another, kiting the difference with the dealer book eating the difference. Most Wall Street types are honest. Some let ambition cloud their jusgement and deserve to be lynched. I'm all for that.
AWS
Bobo- If you think I'm coopting too much space, being repetitive and generally too much of a PITA, let me know. I'll slink away. This is your batchelor pad not mine.
thesanitycheck.com
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To be continued... |
