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To: Pendretti who wrote (966)	4/30/1998 9:15:00 AM
From: John Fairbanks	Read Replies (3) \| Respond to of 4230

FWIW -- I was reading an article a while back that was talking about why BB stocks always tank the last of the month. It basically said that MMs calculate their cash postitions at the end of the month and that often they will short BB stock the last few days of the month to increase their cash position. The extent of their abilities to carry on market activities for the following month is apparently regulated by the SEC or NASD and it is tied to this capital position. Anyway, the article said that to build that capital position MMs will typically short BB stocks at the end of the month and cover those positions once the new month has started. Based on the lack of regulation, this is a legal way for them to have their capital position look better than it actually is. I know it's tacky posting something like this without the article but it's been a long time. It will be interesting to see if it recovers Friday and Monday... of course, if that newsletter recommend does anything they might decide to cover early and short something else today! ;-)

To: Pendretti who wrote (966)	4/30/1998 11:14:00 AM
From: brodway	Respond to of 4230

PenDretti................ You guys are all somewhat right in your analysis of the requirements of carrying a short. First, since the short can only be carried in the margin account, it certainly works similarly to the margin account we are all familiar with. If the short position happens to be a losing proposition, then the clearing house will initiate a margin call for the brokerage house. Remember the brokerage is in fact also just another account, from the perspective of the clearing firm. They trade/short through the "trading or house account" and they certainly get house calls when the requirements of their accounts dont meet requirements. I believe, however, that their borrowing ratio is greater then what is available to us. We are generally bound by Regulation T when maintaining a margin account and get house calls when our equity position falls below that level. This is when a house call is generated. Similarly, brokerage firms get called do deposit more money/stock in the trading/house account when their equity positions fall below house requirement, although they are lower then the ones we have. I believe, and dont quote me on this, their borrowing ratio is something like 10/1. In terms of mm not being able to cover their shorts, that is a much easier question, indeed. The people who allow the brokerage firm to continue their shorting business is of course the clearing house, and therefore they have to be responsible for any losses that the mm cant cover, if his short is called in. Specifically, the clearing firm always stands behind the brokerage house in the event of default of payment, because they are in fact the supervising body; so if they allow the shorting activity to continue, they must also know that there is a downside risk that comes along with it. The problem, of course comes in when the clearing firm cant deliver either, which almost never happens, then the losses get covered by SIPC, or the Securities Insurance Protection Corporation. Basically, we will never get stuck holding the bag, if the stock goes high enough for them not to be able to cover. One thing that you must not forget, however, is that the clearing firm always has set floors on the net capital requirements for the brokerage house/mm. If their shorts are bringing that net capital down as a result of net losses(when tgsk rises), the clearing firm will ask the mm to deposit more cash to continue to hold that short(sort of like we have to with a house/fed call). If they cant come up with more money then the clearing house will ask them to cover the short position, or will do it for them if they fail. This in essence is what mm hate, when they can no longer carry a short because their net capital position is deteriorating. This is what we are hoping will trigger them to start covering in tgsk. When they see that holding that short position is causing them grief, they will bail. The only way for that to happen is for us to keep buying and keep them sweating. Hope you found this somewhat helpful, Sincerely, Brodway.