That is some great research Creede. It pretty much confirms what you have posted elsewhere and discussions that have been had on many boards.
I recently noticed a poster who commented to you that MM's strictly take no position, try to clear their books at the end of the day and really do not care about the stock per se.
Clearly, this is a theoretical ideal and not grounded in reality as you have often posted.
MM games, are often the subject of posting lore, often denied by their apparent "defenders," or rather those who only see "scam" on one side of the market and never when it involves hedge funds, MM's or negative disinformation agents.
Here we see the argument used by the MM, which argument was apparently rejected,
Respondent 1 argued that such fees were paid for "due diligence" reviews and were perfectly permissible.
This language is particularly instructive IMO:
On May 11, 1993, the SEC issued its decision in General Bond upholding the findings of violation. See In re General Bond & Share Co., 51 S.E.C. 411 (1993). The SEC noted that market makers are normally compensated by trading for their own accounts. Id. at 413. When listing stock in
the "Pink Sheets," market makers are typically concerned with the security's liquidity and intrinsic value. Id.
The SEC found that these were not the motives of General Bond. Instead, General Bond was motivated by the receipt of fees from the issuers. Id. at 413-14. General Bond had argued that NTM 75-16 established a new rule which had to be submitted to the SEC and approved prior to its
implementation. Id. at 414. The SEC rejected this argument. First, the SEC noted that Conduct Rule
2110 "sets forth an elastic standard intended to encompass a wide variety of conduct that may operate
as an injustice to investors or other participants in the marketplace." Id.
The SEC then referred to NTM 75-16 as a warning to members and further referenced a No-Action letter that the SEC had
issued to a broker/dealer in 1973 containing similar language. Id. at 415 (citing Monroe Securities Inc.,
SEC No-Action Letter (Pub. Avail. June 4, 1973)).
Page 6 of the decision contains a pretty good summary, and correctly indicates the inherent conflict of interest and potential manipulatory environment when a MM requires a fee to make a market:
Staff claims that member firms were first warned about the "pay to list" prohibition in NTM 75-
16. In NTM 75-16, the NASD cautioned members that the practice of accepting payment to make a
market in an issuer's securities "may be prohibited under existing laws." The NASD further indicated in
NTM 75-16 that payments by an issuer to a market maker would probably be viewed as a conflict of
interest for a member making a market in that issuer's securities. Finally, the NASD warned members
that "any arrangement whereby a member charges an issuer a fee for making a market or accepts an
unsolicited payment from an issuer whose securities the member makes a market in raises serious
questions under the anti-fraud provisions of the federal securities laws." NTM 75-16. Staff also cites
to NTM 92-50, published in October 1992, which is a comprehensive guide regarding procedures for
compliance with SEC Rule 15c2-11 and Schedule H, Section 4 to the NASD By-Laws (now known
as Marketplace Rule 6740).5 NTM 92-50 states, "A market maker cannot accept any form of
compensation, including cash [or] securities . . . for the purposes of making a market, to cover out-of pocket expenses for making a market, or for submitting an application to make a market in an issuer's securities." (emphasis added). |
