Tuesday, September 06, 2005

An Ugly State Of The Union

I've been thinking about the whole ugly clearing and settlement system and resultant FTD mess, and the DTCC and SEC's culpability in the matter, and Reg SHO, and abusive naked short selling as part of a stock manipulation strategy, and after having been on vacation for a week, I can honestly say that I believe I have some clarity.

First, a recap. The SEC initiated Regulation SHO in January of 2005, requiring that any stock that had more than 0.5% of its outstanding shares AND 10,000 shares Failed To Deliver (FTD) would go on a list - the REG SHO list. Settlement failures have been against the rules (specifically, rule 17(a)) since 1934. As part of Reg SHO, the SEC "grandfathered" all past settlement failures. The DTCC owns the DTC and the NSCC, and is a monopoly assigned with clearing and settling all public equity trades in the U.S. That monopoly is owned by the brokers - the "participants". It is a private corporation organized under NY banking laws, and is a Self Regulatory Organization, meaning that it is supposed to police itself, and uphold all securities laws. One could easily argue that it is an alter-ego for the Wall Street brokerage community, as is the NYSE and the NASDAQ - that is the position I take in my scribblings.

In the interest of capturing my thinking on the nature and scope of the problem for posterity, I thought I would do a September State Of The Union address, and recap my understanding of the current situation. So here it is, in no particular order:

1) Reg SHO is a failure.

It fails to protect investors, and fails to live up to the most basic requirements of a reasonable measure. The reason it is a failure is fundamental to the flaw in the thinking that created it, namely that some settlement failures are acceptable.

If one views the SEC's mandate, it is theoretically to protect investors, thus justifying a restored faith in the system following the Crash of '29 and subsequent financial chaos. One of linchpins of that restored faith was that trades would clear and settle in a timely manner, eliminating the potential for abusive short selling that typified that period. The thinking was that if one established a reasonable period for clearing (the processing of the order and the buy/sell transaction) and settling (the physical delivery of the shares and the funds, e.g. the conclusion thereof) that one could eliminate naked short selling, wherein a stock was sold into the ground with a stream of sells, and delivery was never made, or was delayed beyond a reasonable period. Back with 1934 technology, reasonable was five business days following the transaction day - T + 5, later ammended to T + 3 in the 80's.

That was great, and settlement failures were pretty academic - if there was no delivery of shares, then no payment was made, and the transaction was void - a broken trade. Seems reasonable - if you didn't deliver the goods, you didn't get any money, and no commissions were paid to either broker (buyer or seller). That worked well. Everyone was motivated to make the trades settle.

Because otherwise nobody got paid. And Wall Street loves to get paid.

There were no extended settlement failures - rule 17(a) required timely settlement, and everyone's pay was based on timely conclusion of the trade.

Before we continue, understand that 17(a) still requires timely settlement of trades (the exact wording is "the prompt and accurate clearing and settlement of securities transactions including the transfer of record ownership"), and does not authorize anyone, not the DTCC, nor the SEC, to just waive the requirement that trades settle promptly and reasonably (the part where delivery is achieved and ownership is transferred) - thus, the notion of grandfathering hundreds of millions of past settlement failures (that SHO pronounced with a stroke of the pen) violates one of their primary mandates - prompt settlement of trades. If it ever faces a legal challenge, I believe it would be struck down as unlawful. I know it, the SEC knows it, and the participants know it. The only reason nobody has sued is because there's no money in it. But make no mistake, it is unlawful.

Now, the SEC will likely argue that the NSCC has Carte Blanche via the NSCC's Addendum C (which was passed by the NSCC to enable the now infamous Stock Borrow Program) and its allowance of "reasonable" settlement in light of "legitimate" failures to deliver, but I would simply direct everyone to consider the idea of "reasonable" settlement.

Reasonable.

In 2005.

In a Six Sigma world of nanosecond technology.

Professor Boni's research paper concluded that the average age of a fail was 56 days. Does anyone think that 56 days would survive the reasonableness test in 2005? It would have failed 71 years ago, and it would fail today - hence Reg SHO is a farce and a failure, and I believe illegal in its grandfathering provision. Now the DTCC will fall back on the NSCC's self-penned Addendum C, which allows for settlement failures for "Legitimate" reasons - but does anyone believe that hundreds of millions of FTDs aged for months are "Legitimate", much less reasonable? The bond market clears and settles in T + 15 seconds - what would a legitimate failure look like in equities? A couple of hours? Maybe a day or two? Definitely not 56 days. Thus, the Addendum C argument is a ruse, and fails any reasonable interpretation. The system is being gamed. And the DTCC and SEC are facilitating it, and using a flawed argument to justify it.

2) Fast forward to the modern era, specifically to the 90's, when Congress agreed that it was a good idea to dematerialize paper stock certificates, and to let the DTC act as a bank, where the certificates would be kept, and one electronic book entry (tick) would be created for each legitimate share. Great in theory. No more paper running around the Street, and increased efficiency. The problem is that the DTCC, the parent of the NSCC and the DTC, decided that it was going to separate out clearing and settling, and no longer require that trades settle in order for everyone to get paid.

You read that right. On Wall Street, signing a contract to attempt to deliver stock at some point in the future now gets everyone paid. Imagine if selling a house worked like that - your real estate broker would get paid and your account debited at the point that he agreed to try to get you a house matching certain specifications. Or imagine a car salesman getting paid the second you signed the agreement, and you got an IOU instead of a car - he'll try to find you one just as soon as he can, or whenever he gets a chance - maybe his acquisition cost will go down if he waits long enough...

Does anyone else see how badly broken this is?

By breaking out clearing and settling as two separate items, the DTCC and the participants that own it have engaged in a nice little rhetorical fraud. They can "clear" the trade the same day it is entered, and the DTCC, the brokers, even the SEC all get paid, and the settlement portion is left as an afterthought that is not really a requisite for anything.

That creates institutionalized fraud, wherein your money is taken, you receive a brokerage statement indicating that you received "shares", but in many cases what you got was an IOU, which has no voting rights, and no ETA as to when it will be converted into real shares - IF EVER!!!

One of the neat tricks the system set up was where the NSCC became the contra party in both sides of the trade, meaning that if the Stock Borrow Program was used in a settlement failure situation, there was no direct connection between the buyer and the seller. By intermediating the exchange, the NSCC now could create plausible deniability if shares didn't show up - it could "borrow" shares held in an anonymous pool, which would be credited to the buyer's broker's account, which would then go right back into the anonymous pool the next day - creating a virtually unlimited stock creation scheme, unlicensed and unauthorized by anyone (again, the DTCC will argue that addendum C gave them that right, to which I would direct them to the reasonable terminology, and the open-ended failures that are the reality - certainly more than 1934's standards, thus unreasonable given current technology).

So we have a de facto stock manufacturing scheme, wherein the number of electronic book entries has nothing to do with the actual number of shares in the DTC vaults (that's how it was originally intended; 1 electronic share for 1 paper share) due to the Borrow Program's abuse by its participant owners - a function of the DTCC becoming a monopoly, with nobody to ensure that anything about the scheme was rational or reasonable - certainly not its participant owners, who now get paid without delivering anything, and for which failure there is no apparent deterrent or penalty. And it is all presided over by the SEC, who relies on the conceit that the brokers and the DTCC will act in good faith, in the shareholders' best interests, on the honor system.

Institutionalized fraud.

Simple.

Absolute power corrupts. As always. And yet the SEC and the DTCC act as though this time in history is different than all other similar times in history. Why would any reasonable person believe that?

3) The worst is yet to come, though. If I am correct, the ex-clearing problem that was created when the DTCC decoupled clearing from settling is now wildly out of control, and is likely at least 5 times as great, if not 10 times or more as great, as the REG SHO Fails.

Here's how the ex-clearing shell game works: The DTCC has a system wherein they will clear the exchange of money for the two parties, but then let the two parties arrange for settlement off-line, between the two of them. You read that right. Again, everyone gets paid, but now the DTCC is out of the loop, as it is just between the two brokers as to when the actual goods will be delivered - if ever.

Now, does everyone get this? The brokers that own the DTCC get to decide when and if the shares get delivered, and they tell nobody at the DTCC - it isn't the DTCC's business what two companies do, after all - that's their business, and presumably they are obeying the rules and delivering promptly.

Am I the only one that understands that this creates a system where the brokers can literally create money at will, and as long as nobody breaks ranks, nobody ever has to deliver anything, ever? Does anyone see any difference between this and just printing as many shares of stock as a broker feels like? No cost of goods sold, and no real barriers as to how many shares can be sold into the market, as long as the den of thieves keeps its second set of books away from the prying eyes of the DTCC - who being owned by them, isn't particularly interested in upsetting the apple cart anyway.

This whole out-of-control scheme has now gotten to the point where I believe that the entire market system is dangerously jeopardized, and is in fact now constructed to ensure that companies which have been abusively shorted using Stock Borrow and ex-clearing FTDs stay depressed in price, or better yet, go out of business. Besides eliminating any effective requirement for delivery, one of the other nice things the DTCC came up with was to allow the sellers who sold the FTDs to have access to the cash they generated due to the FTD sale, over and above whatever the current mark to market price is today.

What that means is that if Short Seller A sold a million shares of NFI naked and FTD'd them at $60 or so, and today's price is $35, Short Seller A gets to use and in fact keep the delta between $35 and $60 (with some remaining above the $35 for collateralization requirements). Call it a cool $20 million assuming that $5 was kept as a collateralization premium. Now, in what other world does the seller get the proceeds from a sale that he never delivered the product on, and which he likely never will?

But it gets better. If Short Seller A gets into bad trouble, and has 20 companies he's done this to, and if he goes belly up, guess what? The DTCC has the financial obligation to make good on buying and delivering the shares, along with the brokers that sold the FTDs, and which are also owners of the DTCC. Does everyone see how it is in the best interests of everyone in the system EXCEPT the company and the shareholders to ensure that once a company is under an attack that results in FTDs significant enough for the company to show up on the SHO list, that it stay chronically depressed, for the duration? How can one achieve that? Why, keep selling more FTD's, and take them ex-clearing!

Folks, I believe that this is a centi-billion dollar problem now. The math bears that out. The DTCC says that the Stock Borrow Program satisfies 18% of the daily FTDs. If 82% of the daily FTDs are not handled by the Borrow Program, then the obvious answer to the question of where they all go is simple - they go ex-clearing. The end result is that now the brokers have significant skin in the game to ensure that the companies' share prices stay low in perpetuity.

That is where I believe that the fraud is the worst. The brokers no longer have to deliver squat, thanks to rules that their SRO, the DTCC, passed, so their interests are no longer as the custodians of the shareholders' interests. Their interests are in fact the diametric opposite. They are alligned with their biggest customers - the short selling hedge funds. How convenient.

So that is where I have arrived, after working this issue for 6 months or so (NCANS was created in February) - we have the SEC knowingly violating its mandate to protect investors and ensure that trades are settled in a timely and reasonable manner, we have the DTCC and the participants removing the delivery obstacle to separating investors from their money, and we have a system that is now organized to perpetuate a systemic fraud that is large enough to where it likely exceeds the DTCC and the participants' NAV and ability to buy all the shares it has created - leaving it with the only alternative it can use - destroy most if not all of the companies that have been the most brutalized. Either that, or face financial Armageddon.

You can't be forced to buy millions of shares if the company is out of business, or is de-listed.

Does everyone completely understand just how far this has gone?

Feel free to send this to your elected representatives, and your state securities representatives. Forget about the SEC - they are clearly part of the problem, IMO.

18 Comments:

Blogger smokyjoe said...

Thanks, I needed that!

9:48 PM  
Blogger smokyjoe said...

Alan Greenscam's greed & jealousy set up the economy like a bowling pin for Bin Laden to crush . In order to protect his bond portfolio gains and to stop Techies from attaining too much wealth/power. Now he is doing it again to stop the homebuilders. How dare such non cerebral working classs people amass the wealth of eastern blue blood financial educated folks. TREASON & involuntary manslaughter. Our troops are dying due to his setting the table for an economy wrecking party.IMHO. HIstorians will get it right in time.

10:08 PM  
Blogger rvac106 said...

d, credit me for a fool, but, I think you're going to have to ratchet it down one more notch. That is to say, take one more step towards explaining this like it was to KOKO. Not necessarily all the way back to apples, but, a mid ground explanation. Then, we can all send it to our Reps, Senators, and the other msg boards.

Pretend you were 'splaining it to Herb.

11:23 PM  
Blogger Tommy said...

I appreciate all the energy on these issues, as I've put in a lot into it myself. But I must correct what I think are mistakes in the model as described by Bobo :

1. The Stock borrow program does not produce any additional shares and does not even facilitate FTDs either. It just locates shares to borrow for brokers to go short from brokers who have shares to lend anyway. It is wildly misunderstood, in my opinion.
2. The DTCC has said that the stock borrow program can settle 82% of FTDs not 18%. So there is still the question of the missing 18% of trades that actually do go FTR status (failure to receive).

IMHO, a security is in real trouble, once the Stock borrow program can no longer handle the short selling anymore, FTRs begin to get issued and the ex-clearing accounting is used to sweep it all under the rug and hide the magnitude and brokers FTDing - and despite all this, the security gets on the REG SHO list anyway. Now that's bad news.

Certainly in smaller companies, a coordinated attack and using the ex-clearing right from the start can just perplex and blindside trading for years and the security may never even show up on REG SHO at all, as it's hidden ex-clearing.

With larger companies, it is harder to pre-plan and coordinate this type attack along with heavier trading volume. So some signs of abuse are visible, the least if which is the company winding up on the REG REG SHO list.

With these larger companies, the smarter crooks will use ex-clearing to try and hide their individual activities, not necessarily to keep the security off the REG SHO list, as they can't anyway. THey just want to cover their tracks.

Bottom line is that all broker/dealers should be required to exactly match the numbers of shares posted into customer accounts with the number of shares held in broker DTC accounts. It's simple really. Very simple.

Any other belief and I'm afraid the Wall Streeters are still successfully confusing the issue. It's very very simple.

No ex-clearing system, FTD, FTR, or whatever else could negatively influence the price of any security if the two accounts match, Simple.

1:37 AM  
Blogger Tommy said...

The problem is enforcement. How can it be enforced what brokers post into their customer accounts? It's very difficult on a continuous basis for sure. But it is important to combat the ex-clearing abuses in this way.

Even if FTD/FTRs are cleaned up, the problem would just shift to ex-clearing entirely.

Though difficult to enforce DTC/customer matching, brokers should not deliberately be able to post more shares into client accounts than they have at the DTC. IOUs from other brokers are not real shares.

If abusive ex-clearing practices are noticed, an investigation would reveal if the brokers are posting excessive shares and hiding it from the DTCC.

Applying the rule that DTC/Customers accounts must always match would kill of most ex-clearing abuses.

Perhaps not all, as foreign brokers would be out of reach. But I hazard to guess that most foreign customers trade in well known large cap stocks anyway. And perhaps foreign brokers are regulated as well, perhaps better than US brokers.

In order for naked shorting to work, there needs to be initial real buyers of the fake shares who pay real money to the sellers. This would put a major stop to that.

At least the problem would be substantially smaller.

1:56 AM  
Blogger bob obrien said...

Tommy, all due respect, if you are going to correct someone on their own blog, check your facts first.

On your item 2, per the DTCC, in @DTCC at:
http://www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html -

"The Stock Borrow program is able to resolve about $1.1 billion of the “fails to receive,” or about 20% of the total fail obligation."

It is actually about 18%. So I am correct, the Borrow Program does not handle over 80% of the fails.

On your point #1, I would ask you to consider the following. The DTCC places all Cede & Co. shares into a big anonymous pool, from which it borrows shares for the Borrow Program. Theoretically all shares are backed by a paper share in the DTC vaults. In practice, the ultimate lender (shareholder), because he is anonymous in the pool, is not advised that the rights associated with that paper share have been lent out to a participant in the borrow program, who then delievers that package of rights to new buyer A, whose broker, being a good participant, deposits those back with the DTCC - and right back into the lendable pool.

So Lender A's shares have been lent, although still are "credited" as being long on the books for Lender A (but no longer borrowable from LENDER A), but are now owned by Buyer A, who has redeposited them into the borrow program. The next day, Buyer B can get those same shares, when they are again borrowed from the anonymous pool (but today from Buyer B), and now Lernder A and Buyer A both have long "credits" but no actual shares, as represented by voting rights - and this is key - the ultimate shareholders are never informed that they no longer own shares, but rather IOUs from the NSCC.

That is how it works, and it DOES effectively create a new series of "shares". or rather book entries that are free to trade alongside real shares, and are treated by the system the same way, as far as the end user is concerned.

As to the FTR, that is for the 82% that the borrow program does NOT deliver real shares to. In that case, there is effective collusion between the buyer's broker and the seller's broker, as the buyer is never told that nothing was delivered - it is all handled ex-clearing, and the buyer is conned - told he got his shares - so everyone gets paid.

Additionally, because of the netting of all trades by a large broker, if Bear (as a hypothetical example) sells 50K NFI naked, but two other Bear clients buy 35K NFI that day, the two are netted against each other so that the apparent shortfall is only 15K - making the problem seem much smaller.

So again, you have the numbers reversed, and the Borrow does in fact create shares out of thin air, albeit by leaving a trail of IOUs in its wake, and always delivering a real share to today's borrower.

7:29 AM  
Blogger Tommy said...

Sorry Bob, I don't mean to be disrespectful, but your blog is just plain wrong. FTDs and FTRs are two different things, not the same.

The good professor made the same mistake in his long paper when he talks about the DTC and NSCC interchangeably - when they're two separate things. Anyway....

On the one hand, you post in your blog that the stock borrow program can not handle 82% of FTDs and now you say it can not handle 82% of FTRs. It can not be both. What I said is correct and what you said in your blog in not. Your new post is now correct but says something else from what you originally posted.

1. In your blog your basis is FTDs
2. In your new post your basis is FTRs
3. Both FTDs and FTRs are not the same.

Look, maybe I'm full of it and got it all wrong, but my model can explain every circumstance applied to it so far, as far as I can personally tell.

I can't even follow or understand your example with buyers A, borrower B etc... so maybe I'm stupid and taking up electronic space, but I'm stating things how I see it.

- Counterfeit shares are created when brokers post more shares into client accounts than they have at the DTC. It's that simple.

After all the explanations, terms, acronyms, pretzel terms, bunny paths, etc...if all we ask is, "do broker DTC accounts match broker client accounts?", or not - that's the only question that matters. It will bring the discussion to where in needs to focus.

1. The DTC, NSCC, Stock Borrow Program do not create these fake shares. The Brokers do, by claiming they have more than they do and FTDing when called on it.

Again, maybe I'm full of it, but that's how I see it.

12:42 PM  
Blogger Tommy said...

Bob,
think of it this way, if every time an IOU is issued when a shares is lent out, the lending broker has one less share at the DTC, since it's now sold to someone else.

So that share should be removed from lending broker client accounts as well, until it is returned, since the broker has one less shares at the DTC.

Problem is, brokers don't do this, they keep the number of shares unchanged in their client accounts, even though their DTC account is now smaller because of the lending.

Repeat this enough times and there's your excess fake shares - just by this process, among many others. Made by your friendly broker with their clients trading on it.

Should this get out of hand, the broker will be forced to FTD if his clients sell enough and the broker then hopes the Stock Borrow Program has enough to cover for him. 18% of the time it doesn't and some buying broker also gets an FTR as well.

I guess it's like a car rental agency. If the car rental agency rents out a car, it is driven off the lot and removed from inventory. When you ask the for availability they'll tell you they only have x number of cars available, instead of saying they're always at 100% availability.

And it's just that simple.

Broker lie and say they're always at 100% availability when they're not. They DON'T have all the shares at the DTC (car lot) that they tell customers.

1:03 PM  
Blogger bob obrien said...

Tommy, here´s the full text of what Thompson said - I think you are ignoring that for every fail to receive, there is a fail to deliver. They are two aspects of the same failed trade - I am completely correct in saying that 18% of the fail to delivers/fail to receives are dealt with via the stock borrow program, leaving 82% that isn´t dealt with via the stock borrow program - the distinction that Thompson makes between failures to deliver and failures to receive is meaningless for the purposes of discussing naked short selling, IMO - we are talking about failed deliveries of shares/failed receipt of shares. I find it akin to discussing whether a car is going 60 MPH or coming at 60 MPH - the point is that the car is moving at 60 MPH:

¨Thompson: Currently, fails to deliver are running about 24,000 transactions daily, and that includes both new and aged fails, out of an average of 23 million new transactions processed daily by NSCC, or about one-tenth of one percent. In dollar terms, fails to deliver and receive amount to about $6 billion daily, again including both new fails and aged fails, out of just under $400 billion in trades processed daily by NSCC, or about 1.5% of the dollar volume. The Stock Borrow program is able to resolve about $1.1 billion of the “fails to receive,” or about 20% of the total fail obligation.

The Stock Borrow program was created in 1981 with the approval of the SEC to help reduce potential problems caused by fails, by enabling NSCC to make deliveries of shares to brokers who bought them when there is a “fail to deliver” by the delivering broker. However, it doesn’t in any way relieve the broker who fails to deliver from that obligation. Even if a “fail to receive” is handled by Stock Borrow, the “fail to deliver” continues to exist, and is counted as part of the total “fails to deliver.” If the total fails to deliver for that issue exceeds 10,000 shares, it gets reported to the markets and the SEC.¨

So 80% or so of the fails, be they deliver or receive, are not handled by the stock borrow program.

Clear? That leaves 80% that presumably are being handled ex-clearing, as they aren´t resulting in cancelled trades.

As to your next point, I think you are missing mine. Each time the anonymous pool at the DTC lends out shares via the NSCC, an IOU is left in the lending participants account, but treated in the NSCC sub-accounts as a long position. That IOU isn´t lendable again. But if you follow the share to its new home with the new buyer´s broker, who deposits it with the DTC again - the same share is again now available to loan.

Maybe a better way of saying it is that one share can create a large number of transactions as it is kited around the system.

As to the solution, I think it is pretty simple: Nobody gets paid until the trade settles. Period.

Not hard at all.

Settle the trades. No other heavy lifting is necessary.

1:59 PM  
Blogger Tommy said...

I stand corrected on the 18%/82% issue and FTD/FTR issue, as defined by the DTCC. Your are quite right, I was wrong.

1. The stock borrow program only handles 18% of FTD/FTRs, as defined by the DTCC. The other 82% of obligations (FTD/FTR) overwhelm even the stock borrow program.

That's being more honest than I gave the General Counsel of the DTCC credit for. It's actually clear that there are more FTDs issued than FTRs, because of the stock borrow program. But they're all obligations and lumped into the pot - fair enough, actually an attempt to be clear.

However,.......
2. "...an IOU is left in the lending participants account (at the DTC-Tom), but treated in the NSCC sub-accounts as a long position."
How do you know this? If true, then you may have a point. IF not, you'd be wrong.

But it makes little sense to me in any case. The reason is because only the DTC accounts matter. Not the NSCC accounts. If a share is to be sold or lent, it has to be in the DTC account, not in some NSCC account. The NSCC net settles trades and reports them all to the DTC at the end of the day. If it's not in the DTC accounts, then that's it. Whatever the DTC number is rules. Just like your checking account.

Again, the DTC and broker client accounts must match, if they don't, we have a problem. Everything else is just fun and games, NSCC sub accounts and all.

Unless,...
The NSCC is stashing away shares in other places besides the DTC - not net settling them, and accounting for them in other ways and separate from the DTC, then we surely have a wild systemic problem. Is that what you're saying?

2:34 PM  
Blogger Tommy said...

Bobo,
If the NSCC is trading out of some SUB account apart from the DTC, my model and solution still hold true. Namely, that the broker DTC accounts don't match broker client accounts.

DTC and Customer accounts must always match, otherwise there is a problem somewhere. Simple.

2:44 PM  
Blogger bob obrien said...

They may well net settle them at the end of the day. That's fine.

And there are always the same number of shares at the DTC.

The ownership changes, and an IOU is left with the lender's account in the sub-account at the NSCC, and the proud new owner's name is book entried at the DTC, and voila, everything nets out perfectly - only one more transaction has been achieved using the same share.

6:57 PM  
Blogger Tommy said...

So what's the problem with the DTCC?

1. The ownership changes (at the DTC-Tom)
2. An IOU is left with the lender's account at the NSCC (to keep track).
3. Voila, everything nets out perfectly.

OK, that's the way it is supposed to be and does not produce an extra share, no matter how many times it's repeated with the same share. It can be done a million times over and not 1 single new share will be produced that way. so long as the brokers also correctly post how many shares they have at the DTC - in this case, 1 less share.

Repeat this process 100 times and you'll have 99 IOUs and 1 share trade able with the last buyer. This is not the problem.

It seems that the fault lies not with the DTCC at all, like I've been stating now for months.

Rather, it is because the brokers pretend as if their IOUs at the NSCC are real shares, fail to remove IOUed shares from circulation when they lend them - mainly in client accounts - to honestly represent to clients, how many shares they really have in their name at the DTC.

Other things brokers treat non shares as shares :

1. FTR notices
2. Ex clearing promises from other brokers to deliver (fancy IOU, non NSCC)
3. FTD and FTR to themselves by just printing shares into customers accounts without buying them through the NSCC or anywhere else.

And there are probably several others. In every single case, the broker does not match his DTC shares with customer shares. It all comes down to that.

7:36 PM  
Blogger bob obrien said...

Tommy, we don´t disagree on the effect of 99 IOU´s being issued - or more appropriately 99 sales transactions taking place, and thus depressing the price with an artificial supply, regardless of how they net it at the end of the day.

I do believe that the FTD situation will appear to be a minor note once the size of the ex-clearing fails becomes known.

Judging by the NASD´s actions of today, we may yet find out.

10:42 AM  
Blogger Jer. 9:24 said...

This comment has been removed by a blog administrator.

11:23 AM  
Blogger Jer. 9:24 said...

Bob,

What NASD actions? I haven't seen any new news on anything they've done today. Are you referring to the subpoenas sent to some of the brokerage firms' stock loan departments? Isn't the NASD a preferred stock holder of DTCC? I wonder if the NASD will follow the trail where it ultimately leads.

The great news, from the Ant & Son blog, is that a number of the state securities regulators have decided to get to the bottom of this scandal. That of course has little to do with the NASD other than its potential to shame them. And it has been clear for at least a year now that the SEC, as little more than a tool of Wall Street and the securities industry, does not have the will to do anything.

Mr. Lambiase on the other hand seems to understand this scam and its implications, at least based on his prior letters to the SEC, and God willing his group has the guts to force it to stop.

As you have said, no need to waste any more time on the SEC, now it's the states' turn. The SEC will surely tag along once they know it can't be hidden any longer.

Anyway, what is the news from NASD?

11:28 AM  
Blogger bob obrien said...

From today's NY Post:

"NASD IS PROBING NAKED SHORT SALES
By RODDY BOYD

September 8, 2005 -- If the National Association of Securities Dealers has its way, the naked shorts will be forced to cover up.

The NASD has requested data from the stock-lending operations of Wall Street giants in a bid to get to the bottom of what one regulator has called an epidemic of so-called naked shorting.

The requests went out to dealers large and small, from Morgan Stanley to Janney Montgomery Scott. "

3:22 PM  
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8:14 AM  

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