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Microcap & Penny Stocks : DCI Telecommunications - DCTC Today -- Ignore unavailable to you. Want to Upgrade?

To: Ed Pettee who wrote (4894)	4/15/1998 11:53:00 AM
From: Bob Smith	Read Replies (1) \| Respond to of 19331

Nasdaq would be nice, right now. Excerpts from an article by Gretchen Morgenson: Nasdaq is especially dangerous for short-sellers. Talk to people in stock loan departments on Wall Street, the back-office folks who must locate shares to cover short positions. If they are frank, they will tell tales of tricks used by professional investors, marketmakers and even company managements to juice a stock and massacre short-sellers. When an investor shorts a stock, he must borrow the shares from his broker. In large, widely traded stocks, this is usually a cinch. But in stocks with relatively thin floats, it can be a problem. Why? Because according to stock loan sources, mutual funds-with their massive stockholdings-are not big lenders of equities today. Bank trust departments lend securities, mutual funds generally do not. There could be several reasons for this. One, it's just not that lucrative. A fund might earn 12.5 basis points--$1.25 million on a billion-dollar stock position-lending AT&T stock to a U.S. borrower. Hardly worth the trouble. Then, too, short-selling is considered un-American in some circles. But there's a more devious explanation for this reluctance to lend stock for long periods to short-sellers: rich pickings to be made by squeezing shorts. Call in their borrowed stock, and you force them to go into the open market to cover-at whatever price the market demands. A lender of a stock holds all the cards. At any time after he has lent the stock, he can call it back in; the borrower has three days to return it. Marketmakers who carry positions overnight in the stocks they "make" have been known to pull back their stock and force buy-ins. The occasional mutual fund that lends shares temporarily does this as well. The short-seller isn't the only victim here. Squeezing the short drives up prices, creating volume and upward action that can attract momentum players. But once the squeeze is over, there's nothing to hold up the price. Moreover, eliminating short-sellers makes it easier to drive up the price of an already overvalued stock. Corporate executives of heavily shorted stocks also play this game. First they put their considerable insider holdings into their margin accounts, making them available for lending by the firm's stock loan department. Shortly after these executives make their stock available for lending, it often happens that they remove their holdings from the brokerage firm. Or they move the position into the cash account. Both actions force buy-ins. Result: more volatility, volatility that has absolutely nothing to do with fundamentals. Although no one maintains records of how many buy-ins take place on a given day, traders say they are happening much more frequently today, especially in the past year or so. One professional who has been buying and shorting stocks for 25 years had experienced one buy-in during the previous 24 years of doing business. In the past year, he's been on the receiving end of three. A small army of "freelance" stock promoters ...promise to produce a big increase in volume ... by getting some friends to post bullish "information" about the stock on the Internet. From where they sit, marketmakers can often see where a buy-in is taking place and rush in buy orders ahead of the squeezed short, further squeezing him. Shooting fish in a barrel... ...And it is no surprise that short-sellers have largely walked away from Nasdaq stocks. Which means, among other things, that when the market finally lets go on the down side they won't be there covering their positions and giving the market some support. Neither will many of the marketmakers, who have a habit of not answering their telephones when the market is dropping hard. After all, these dealers can abandon their marketmaking activities in a stock at any time; the only penalty is that they cannot return to that stock for 20 business days. Who, then, will be there to buy? Just ordinary investors. For they are the folks who are most active in over-the-counter stocks. Nonblock trades-orders for fewer than 10,000 shares-accounted for 64.5% of all trading in Nasdaq National Market Stocks last year, and 63.4% of trading in Nasdaq's top 100 issues. As a comparison, nonblock trades on the NYSE were 43%... Issue Date July 29, 1996 \| Copyright Forbes Inc. 1996 c