Just some info on short selling and MMs that I posted on the "Fun" thread.
These guys are going to have to cover one of these days. They must be really in the hole.
Here is an article I found about undeclared shorts. I know this is the fun thread, so I will post it on the info thread as well.
Forgive me commander for this serious post...
#1 Undeclared Short Selling
Introduction
Many dynamic growth companies have been damaged by undeclared short
selling. This practice consists of creating stock that doesn't exist or
borrowed (as is the legal requirement) and subsequently sold in large
amounts in the open market creating panic selling and decimating share
prices, where they hope to buy the position back at lower levels (creating
a profit for the short seller).
Declared Short Sellers
Declared (legal) short sellers are institutional money managers and fringe
group market professionals, not small capital public investors. Their
positions are reported publicly on a regular basis, and these individuals
must borrow the shares before taking on a short position. They must also
typically deposit 50% of the value of the short as a margin deposit. From
whom do they borrow? Read the fine print on your margin account agreements
and you will see it is YOU! This is a perfectly acceptable, legal and
ethical investment strategy - just like in commodities you have some folks
betting on higher prices, others betting on lower prices in a controlled,
disclosed, and regulated environment.
Undeclared Short Sellers
Undeclared short sellers don't borrow the stock they are selling. They (in
most cases) don't even have to pay the margin requirements for their
position. They are betting on (and trying to create) total failure of the
public company. The odds of failure in small business are better than 98 to 2.
There are many ways a public company can confirm an undeclared short
position in their stock. One way is to use the response to the company's
annual general meeting. The company can add the issued stock (IS) and the
short interest (SI). The sum is the stock available in the company's
market. Now add the known shareholder positions (KS) and the street stock
proxies (SP) If the (KS+SP) sum is greater than the (IS+SI) sum, you have
an undeclared position in your stock. Most street stock owners (held in
street name at a brokerage firm) don't even submit proxies. You can
estimate the size of the undeclared short position by multiplying the stock
proxies by 1000. This assumes 10% of the street owners submitted proxies
(an estimate, by the way, which is unusually high). When public companies
do this comparison they often learn they have 3-7 million shares short and
undeclared.
The limiting of access to undeclared short selling was supposed to be the
Equity Reform Movement but it hasn't limited the practice. It excludes most
retail brokers, newsletter editors, money managers and anyone on the
fringes of the internal working of the market. Undeclared short selling
networks include a few powerful market insiders, a couple of politicians,
and a few financial powerhouses. Their motto: "You can never sell too much
stock." It is estimated these individuals gross over a billion dollars
annually, making it a very big business.
How Can Undeclared Short Sellers Create Nonexistent Shares?
The trading system is responsible for some of it but most nonexistent stock
comes from offshore tax havens. It is impossible to trace the beneficial
owner. The nonexistent stock trades several times and comes to rest within
the control of the undeclared short selling group. Undeclared short sellers
have enough power to force the company to issue more stock, if necessary.
It works because the trading system lacks closure. The monthly brokerage
house account statements aren't tied to specific shares issued by the
public company. The client account statement is a "claim" of sorts on
shares. It does not represent actual ownership of share certificates. You
end up with an open-ended option on the stock you buy - and no actual
ownership. Nine times out of ten your brokerage firm loans your shares to
the shorts (short sellers) on settlement day!!
So, What Do I Do Now?? (Complaints to regulatory agencies)
Though it sounds good in theory, complaints to the so called "experts" who
regulate our financial markets have proven to be completely useless. The
problem is simple: Lack of knowledge on the part of the regulator. You
would be hard pressed to find anyone versed on undeclared shorting with the
SEC itself let alone the NASD (who oversees NASDAQ and the Bulletin board)
who are "association police" with no real legal power and virtually no
transactional knowledge. A complaint to the NASD would probably result in
them attacking the public company and the legitimate brokers who bought the
shares for their client -- they would attack the victim rather than the
culprit.
A Short Trap
The term "short trap" refers to backing the shorts into a position whereby
they must cover (buy back the short position in the open market). The only
effective way is to demand delivery of all of the shares currently held in
street name. This must be done by the shareholder. The problem is that most
brokers are brainwashed to believe that if the shares are not on account at
their brokerage firm they are gone forever and the commissions generated
selling the shares will go to somebody else. One possible solution is a
large buyer (sometimes as much as 10% of the float) who will demand
delivery of his shares.
The Good News (Is there any?)
The good news is that is the trap is effectively enacted the short will
HAVE to cover the position. This can, in some cases, take a $.50 stock to
$15 or $20 a share - creating huge liquidity for the company and make the
shareholders rich. (20-1 returns are not uncommon) Some of the most
successful stocks on Wall Street are a result of an effect short trap.
Example: Presstek (PRST) -- this was a $20 stock that made shareholders a
five banger when a major promoter brought in some large players to bust the
short.
The Only Real Protection
The only real protection: education of investors! Demand delivery of all
shares you buy!!!!
#2 The Famous "Month End Maneuver"
We receive dozens of emails from our readers asking the question: "Why do
my OTC stocks all seem to get killed at the end of each month, and quite
often rally the first couple of weeks of the following month?" Rather than
individually responding to them, and to help better educate the public we
want to explain what typically goes on at brokerage firms at the end of
each month, and why.
First of all definitions: MONTH END. Typically the day (either settlement
day or trading day depending on their system of accounting) that a BD
(Broker Dealer - registered as such with the NASD) calculates their paper
gains and losses for the purpose of calculating that firms NET CAPITAL
(disclosed financial position) for FOCUS REPORTS (financial reports filed
with the SEC). For example:
ABC is short 100,000 shares of XYZ corp - a small, OTC stock trading at
$1.875 bid, $2.125 offer. Their month end is "settlement day" - meaning
trade day plus three (like when you or I have to pay for the stock we buy)
and the date is June 24, 1997 - (making settlement the last day of the
month). In order to enhance their balance sheets (which allows them to sell
or buy more stock against their net capital) they decide to start hitting
(selling) the stock. Here's the way it looks:
They enter an order to sell 10,000 shares at the market. The bid was only
good for 2000 shares (not surprising since size buying or selling always
shrinks the offer or bid size) so the current market then becomes:
$1.75 - $2.125 ... until they offer stock at $1.875 - making it $1.75 -
$1.875... but not for long..
They enter an order to sell 8000 shares at $1.75 - which was good for 5000
shares this time. Now the market is:
$1.625 - $1.875 .. until they offer down to $1.6875.. and it continues:
They see on level two (a trading system that shows the depth of an OTC
market) that there is two bids at $1.625, but the next level is $1.3125. Ah
ha! A good target price.
They sell another 5000 shares at $1.625 - each market maker buys 2500
shares and bid down - making the current price $1.3125 - $1.6875... but low
and behold:
They offer stock at $1.375 - making the price $1.3125 - $1.375..
The company is now short a total of 112,000 shares.. and in one day shows a
paper profit of $84,000 - which applies to their month end balance sheets!
Do this on a couple of stocks each month and a small BD can end up with
several hundred thousand dollars in additional buying power. The only
problem is that it is that you and I are the ones who get creamed. I know
of one savvy investor who buys the hell out of his small stocks at the end
of each month - and is usually able to sell them at a profit the first few
days of the month when the same market maker stops LEANING ON (doing the
above outlined shenanigans) the stock.
So at the end of each trading month, don't panic and assume something is
wrong with your small stocks! You are probably witnessing the "MONTH END
MANEUVER" !! |
