Let's just keep OSTK in mind rather than stay away from it. Bryne has a grudge and maybe or not it is deserved.
In the issue that the FTD would in effect "counterfeit" shares (i.e. a share sold with out a borrow) would mean there has to be in the hands of stockholders an amount of stock more that what the company has issued. That would cause quite a problem at proxy time. I don't understand this. Yet it must happen. Thompson of dtcc admits that the Stock Borrowing system only fixes 20% of the FTD. So how are these "extra" proxies resolved? I don't have an answer as how this works.
Does Charles Schwab email a customer and say, "You know those 1000 sh of OSTK you bought for 3.25 four days ago that are now selling for 3.80?... Well, the seller didn't deliver the shares.... Sorry." Has that ever happend to any of you? Me neither.
Maybe it is not a big problem. But we know FTDs are real, so there must be a mechanism.
Likewise, I'm having a big problem figuring out under what circumstances a MM needs to sell naked shorts in big blocks. If the orders are limit orders (and what big trade isn't limit?) then if the highest bid is < lowest ask, there is no trade. That's the way it is supposed to work isn't it? It would be fair for the MM to reach into his own portfolio and sell stock at the bid (lower than the lowest ask on the book), just as it would be fair to buy the ask for the MM's own account. It might be fair, but more unethical, for an MM to step in and take the bid with a short (legitimatly borrowed). If there is an ask on the book, I don't think it would be proper. But how could it ever be proper to naked sell?
Maybe there is a buy on the books and none on the ask? No sellers so the MM has to step in... If there are only buyers, shouldn't the stock be going up? A short seller thinks it ought to go down. If there are only buyers at a low price, and no sellers on the ask... Why should there be a trade at all?
What if there is an "At Market" Buy order. Firstly, I'm sure a 10,000 sh At Market buy order is *real common*. Secondly, the At market should go against the book. The MM could sell his own shares into the price rise, sell short borrowed shares. But if the MM can't borrow shares, where does the MM get the right to sell naked at a price lower than legitimate share holders are willing to sell?
MM stands for "Market Maker". Not "Market Manipulator". At least in theory.
-Magrathea |
