Investing 101 - Jan 11, 2005 - Printable Version
- Regulation SHO’s Threshold Lists Leave More Questions than Answers
by Dave Patch The much anticipated publication of ‘threshold securities” in compliance to SEC Regulation SHO has come upon us. Over this past weekend, each of the primary market centers submitted something that appeared to be a list of overly exposed issuers to settlement failure abuses. The question now is, what is the accuracy of the lists presented?
The “threshold security” is based on a compilation of market fails recorded at the NSCC within their Continuous Net Settlement System (CNS). These fails are then calculated against the outstanding shares issued by the company and when the percentage of fails exceeds .5% of the outstanding shares, for five consecutive trading days, the issuer is to have made the list.
That is the way it is supposed to work anyway.
On December 13, 2004 Bear Stearns held a conference call to address the newly created Regulation SHO. At the time of this call, Bear Stearns was stating to member participants and clients that the list of “would-be threshold securities”, as provided by regulators, exceeded 1000 issuers. The demographics of the threshold list consisted of 50 – 60 NYSE, 100 AMEX, 100 NASDAQ, and 800+ OTCBB and Pink Sheet Securities.
The list of 1000 in December of 2004 has suddenly shrunk by nearly 500 firms now that the list is made public. Remarkably, the 500 firms that have suddenly disappeared are all securities listed in the “highly illiquid” OTCBB and Pink Sheets trading centers. The NYSE names listed on December 13, 2004 are the very same we see on the list today. The names presented on the NASDAQ traded securities for December 13, 2004 are also the same as what we see recorded today. However, the names on the OTCBB listed securities have all been changed. They have all disappeared. Many being those listed securities fighting the naked shorting wars in Federal and State courts.
How did the OTCBB suddenly become the most efficient trading platform on Wall Street? That is a question everybody is now asking.
With the NASDAQ list now out, only 28 of the near 3200 OTCBB eligible securities made the list. That represents less than 1% of the OTCBB securities. Compare that performance to the Pink Sheets, and the confusion is mind-boggling.
According to article recently published by Carol Remond of the Dow Newswire, a NASDAQ representative claimed that there were only 235 SHO eligible Pink Sheet securities of the approximate 1100 listed. This small number being eligible is due to a lack of up to date filings from the companies defining their number of shares outstanding. The NASDAQ threshold list however has 254 Pink Sheet securities listed. That would represent 100% or more of the Pink Sheet securities that were eligible having settlement issues. That’s right, 100% according to Ms. Remond and her NASDAQ source.
For the NASDAQ NMS and Small-Cap companies, the list contains approx 100 securities. Ironically, Bear Stearns on December 13, 2004 also identified that there would be 100 NASDAQ firms on the list. This implies that, aside for some minor shuffling, Wall Street could not correct the settlement failures on these more liquid securities and the list Bear Stearns was provided was an accurate list.
With the NASDAQ list being nearly 4X in quantity that of the OTCBB, and the fact that the NASDAQ does not have 4X the issuers as the OTCBB, the settlement abuses on the NASDAQ appear far worse than on the OTCBB trading platform. But how is that?
To understand more about this anomaly, consider this. The SEC has on their web site an entire guide to the trading of micro-cap securities. The guide is a precautionary note addressing the pitfalls of trading these securities due to the risky nature of the issuers and the loose regulations of the quoting service. If you were ever to talk to a SEC Lawyer they will tell you, off the record of course, that every micro-cap company is a scam and you deserve to lose your money for investing in them. The guide also highlights the volatility in these securities due to the lack of liquidity in most companies.
So, if the micro-caps are the scam companies. They are the highest risk investments. And they have low liquidity in the markets. How is it the OTCBB securities have the best overall settlement percentage in all the US Trading Markets? The sister Pink Sheet quoting service has a 100% settlement problem on their securities and the OTCBB is near perfect? It appears we do not need Market Making liquidity exemptions in these securities as those efforts would be better served cleaning up the 100 NASDAQ NMS and Small-Cap settlement related issues.
But this is all based on the facts presented in the recently published “threshold security” lists. Unfortunately that list is created by the Market Centers themselves and is calculated based on a Market Owned Operation – the NSCC.
The NSCC, a division of the DTCC, is under attack by issuers on the OTCBB for the alleged illegal settlement of trades. Apparently many believe that the DTCC and NSCC have been hiding fails by creating counterfeit shares for loan to settle the trades and move the fail off the books. Efforts that are best suited for the OTCBB and Pink Sheet trading platforms where there is no real liquidity and thus few shares available to borrow to settle short sales.
Evidence of liquidity related issues to the micro-caps, tremendous buying pressures on these stocks yield little by way of upward price movements but relative miniscule sell pressure will drop a security 10, 15, 20% in a heartbeat. The market makers have been notorious for holding a stock back from being overvalued using their naked short selling, bona-fide market making exemption while allowing stocks to plummet on real sellers. Now, all these traded shares that held back the buying of real investors have all settled? Hard to believe!
To expose this concern of possible games being played, a report out of a visiting scholar to the SEC provides evidence of the disparity in settlements executed on Wall Street. The report, titled “Strategic Delivery Failures in the US Equity Markets” by Professor Leslie Boni provides data that shows that of 3000 OTCBB/Pink Sheet Traded Securities an average across those companies resulted in .91% of their shares outstanding represented in a failed settlement status. This compared to NYSE and NASDAQ having an average of only .15% in a failed status. This is also nearly 2X the limit necessary to fall on to the threshold list and this was the average fail percentage of 3000+ issuers. Worse was the disparity in settlement times between the two as the NYSE/NASDAQ had a mean time of fail of 10.5 days while the OTCBB/pink Sheets was listed as 33 days. http://www.unm.edu/~boni/Fails_paper_Nov2004.doc
So now, we are led to believe that Wall Street suddenly found integrity, and liquidity in these illiquid securities, and found a way to address nearly 2/3 of the issuer problems in a Holiday shortened 3 weeks. Integrity they have been lacking for nearly 2-decades regarding the micro-cap listed securities.
More than likely, under such limited time, Wall Street simply found a way to manipulate the data to further abuse those who have already suffered. Unless the data provided to Professor Boni was inaccurate from the NSCC, past history does not match present day status. Wall Street did not; on their own, decide to clean up one trading sector while completely leaving the other to stand unchanged. It doesn’t happen. Continuous scandals on Wall Street prove the message is not sinking in.
Wall Street has always shown to be an Industry that only changes when forced to change. Wall Street historically never does anything on their own that would impact personal profits. The greed that comes with power and money dictates such behavior. The fact that Wall street regulators spent years telling firms like Bear Stearns that they were not following established laws, yet nothing appeared to change, again confirms to some degree that point. They saw the light in the last 3 weeks prior to SHO and as a global community decided unilaterally, across the board, to clean up the problem. No way!! Doesn’t happen!
For now we are left with two possible scenarios. We can believe the lists presented and begin funneling our investments into the most efficient trading center in the US Securities Markets, the OTCBB or, we can seek answers on how nearly 500 OTCBB securities suddenly disappeared overnight from their settlement problems. Who is responsible, and why was the fail data fudged?
(Editor's note: This article is reprinted by permission from "Stockgate Today", which is hosted by http://www.investigatethesec.com/ . If you haven't already signed the petition there, do it today.)
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