Post by jcline on Jul 21, 2006 14:07:34 GMT -4
Analyzing the SHO Data – SEC Fails to Provide Accuracy and Transparency – July 18, 2006
David Patch
In what appears to be an attempt to create success out of failure, the SEC’s Division of Market Regulations most recent analysis of Regulation SHO leaves more open questions than it does answers. Questions about the integrity of how the analysis was conducted and why the SEC would try and misrepresent the pertinent facts required by the public to properly evaluate their proposed rule changes and comment on those changes.
Tucked in the footnotes of the recently released proposal was the “detailed data” the Division of Market Regulation stated they would provide the public as part of the proposed rule change. I started to look at this “data” and compare it to what had been gathered previously under the Freedom of Information Act.
What I found was disturbing.
First the footnotes:
18. " For example, in comparing a period prior to the effectiveness of the current rule (April 1, 2004 to December 31, 2004) to a period following the effective date of the current rule (January 1, 2005 to May 31, 2006) for all stocks with aggregate fails to deliver of 10,000 shares or more as reported by NSCC:
* the average daily aggregate fails to deliver declined by 34.0%;
* the average daily number of securities with aggregate fails for at least 10,000 shares declined by
6.5%;
* the average daily number of fails to deliver positions declined by 15.3%;
* the average age of a fail position declined by 13.4%;
* the average daily number of threshold securities declined by 38.2%; and
* the average daily fails of threshold securities declined by 52.4%.
Fails to deliver in the six securities that persisted on the threshold list from January 10, 2005 through May 31, 2006 declined by 68.6%. "
and….
22. Between the effective date of Regulation SHO and March 31, 2006 99.2% of the fails that existed on Regulation SHO's January 3, 2005 effective date have been closed out. This calculation is based on data, as reported by NSCC, that covers all stocks with aggregate fails to deliver of 10,000 shares or more.
Now to some realities:
In comparing the period of fails between June 2004 (SHO Approved by Commission) and December 2004 the level of fails increased substantially with the average daily level of fails for the NASDAQ/ NYSE in June at a run rate of 155 Million shares while the OTCBB/Pink Sheets/ and AMEX combined for an average daily level of fails in June 2004 running at over 470 Million shares. By December 2004 these numbers had jumped to a run rate of 205 Million shares for the NYSE/NASDAQ (35% Increase) and 576 Million shares for the OTCBB/Pink Sheets and Amex (26% Increase).
Question for the SEC. Was the December 2005 figures inflated by the members to take advantage of the upcoming “grandfather clause”?
The April 2005 month end figures revealed that the average daily level of fails had been reduced to run levels representing 118 Million shares for the NYSE/NASDAQ and 406 Million for the remaining markets. Depending on how these fails become analyzed makes for some interesting discussions.
According to the SEC Analysis, SHO has reduced the average daily aggregate fails to deliver by 34.0% over the course of 16 months but what really happened.
Ø Comparing the December 2004 data to April 2005 the NASDAQ/NYSE market reduced fails by 42% while the OTCBB/Pink Sheets and Amex reduced the fails by 29%. Together the fails were reduced by a total of 33%.
Ø Comparing the June 2004 data to April 2005 the NASDAQ/NYSE markets reduced fails by 35% while the OTCBB/Pink Sheets and Amex reduced the fails by 11%. Together the fails were reduced by only 14%.
Clearly what dates you use for comparison purposes are critical in this analysis and if the December figures were actually over-inflated the data would highlight a less effective SHO program.
My Conclusion: All efforts to reduce fails under Regulation SHO stopped after 4 months of the program and those efforts barely brought the markets to levels seen before SHO was placed into law. Since April 2005 then less than 1% of additional failures have been taken out of the markets and those April levels are barely below the pre-SHO June 2004 levels.
Then there is the issue of grandfathered fails. According to the SEC, grandfathered fails associated with the January 7, 2005 threshold securities have been reduced by 99.2%. But, were they done legally?
Under the guidelines of SHO, all grandfathered fails are exempted from mandatory closeouts but all fails that occur after a company has been listed on Regulation SHO are not. Those most recent fails will require immediate closeout or additional penalties apply.
In May of 2006 the NASD submitted a notice to their members referring to additional guidance identified by the SEC regarding the closure of fails under SHO. This guidance was with regards to how the members were closing out fails and that fact that fails were improperly being closed.
Instead of closing out most recent fails first, members were selecting which fails to close based on “in the money” vs. “out of money” status taking the most financially palatable first. Since many of these issues continued to decline under SHO the most palatable were the oldest fails as they represented the highest levels of profit for the failing firm. Unfortunately this was not the manner in which the Division of Market Regulation provided the data.
This member approach to closing out fails will also skew significantly the average age of a fail if the oldest fails are in fact being closed when the most recent ones were required by law.
This evidence is made much clearer by the additional data presented which includes such details as, 99.2% of the grandfathered fails were reportedly eliminated but of the six issuers who have been on the list since the inception, the level of fails in these securities was reduced by only 68%. How then is the mandatory closeout provision under SHO being enforced when issuers under mandatory closeout guidelines remain on the list with new, non-grandfathered fails?
My Conclusion: The SEC is not actively enforcing the laws of SHO and has allowed the industry additional graces to protect the financial interests of their operations. The ones to pay the price for these shortcoming are the investing public.
When questioned about these concerns and the accuracy of information in the SEC proposal, SEC spokesman John Heine indicated that the comment period was the place to address these concerns. The fact that the comments would be based on the information provided by the SEC, and that information is suspect apparently did not seem to sink in.
For decades now investors have wondered what the motivations behind the SEC are. Here again is yet another example of where the SEC appears to have sugarcoated a story to imply success when failure resulted. The Commission did so to protect their reputations and to protect Wall Street from the repercussions of investor awareness.
While I applaud Chairman Cox for his open and public comments about this serious problem, I believe the Chairman could improve his position and in the process provide the public a valuable service by seeking out those “misinformed” individuals in the Division of Market Regulation who have become accustom to misrepresenting the facts in order to spin the outcome and remove them from their posts. The SEC is the top regulator in charge of insuring that the investing public is provided nothing but the highest quality of information with regards to these capital markets. Allowing such poor quality of information, ultimately slanted information, to be disseminated out of the SEC should never be tolerated.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006
David Patch
In what appears to be an attempt to create success out of failure, the SEC’s Division of Market Regulations most recent analysis of Regulation SHO leaves more open questions than it does answers. Questions about the integrity of how the analysis was conducted and why the SEC would try and misrepresent the pertinent facts required by the public to properly evaluate their proposed rule changes and comment on those changes.
Tucked in the footnotes of the recently released proposal was the “detailed data” the Division of Market Regulation stated they would provide the public as part of the proposed rule change. I started to look at this “data” and compare it to what had been gathered previously under the Freedom of Information Act.
What I found was disturbing.
First the footnotes:
18. " For example, in comparing a period prior to the effectiveness of the current rule (April 1, 2004 to December 31, 2004) to a period following the effective date of the current rule (January 1, 2005 to May 31, 2006) for all stocks with aggregate fails to deliver of 10,000 shares or more as reported by NSCC:
* the average daily aggregate fails to deliver declined by 34.0%;
* the average daily number of securities with aggregate fails for at least 10,000 shares declined by
6.5%;
* the average daily number of fails to deliver positions declined by 15.3%;
* the average age of a fail position declined by 13.4%;
* the average daily number of threshold securities declined by 38.2%; and
* the average daily fails of threshold securities declined by 52.4%.
Fails to deliver in the six securities that persisted on the threshold list from January 10, 2005 through May 31, 2006 declined by 68.6%. "
and….
22. Between the effective date of Regulation SHO and March 31, 2006 99.2% of the fails that existed on Regulation SHO's January 3, 2005 effective date have been closed out. This calculation is based on data, as reported by NSCC, that covers all stocks with aggregate fails to deliver of 10,000 shares or more.
Now to some realities:
In comparing the period of fails between June 2004 (SHO Approved by Commission) and December 2004 the level of fails increased substantially with the average daily level of fails for the NASDAQ/ NYSE in June at a run rate of 155 Million shares while the OTCBB/Pink Sheets/ and AMEX combined for an average daily level of fails in June 2004 running at over 470 Million shares. By December 2004 these numbers had jumped to a run rate of 205 Million shares for the NYSE/NASDAQ (35% Increase) and 576 Million shares for the OTCBB/Pink Sheets and Amex (26% Increase).
Question for the SEC. Was the December 2005 figures inflated by the members to take advantage of the upcoming “grandfather clause”?
The April 2005 month end figures revealed that the average daily level of fails had been reduced to run levels representing 118 Million shares for the NYSE/NASDAQ and 406 Million for the remaining markets. Depending on how these fails become analyzed makes for some interesting discussions.
According to the SEC Analysis, SHO has reduced the average daily aggregate fails to deliver by 34.0% over the course of 16 months but what really happened.
Ø Comparing the December 2004 data to April 2005 the NASDAQ/NYSE market reduced fails by 42% while the OTCBB/Pink Sheets and Amex reduced the fails by 29%. Together the fails were reduced by a total of 33%.
Ø Comparing the June 2004 data to April 2005 the NASDAQ/NYSE markets reduced fails by 35% while the OTCBB/Pink Sheets and Amex reduced the fails by 11%. Together the fails were reduced by only 14%.
Clearly what dates you use for comparison purposes are critical in this analysis and if the December figures were actually over-inflated the data would highlight a less effective SHO program.
My Conclusion: All efforts to reduce fails under Regulation SHO stopped after 4 months of the program and those efforts barely brought the markets to levels seen before SHO was placed into law. Since April 2005 then less than 1% of additional failures have been taken out of the markets and those April levels are barely below the pre-SHO June 2004 levels.
Then there is the issue of grandfathered fails. According to the SEC, grandfathered fails associated with the January 7, 2005 threshold securities have been reduced by 99.2%. But, were they done legally?
Under the guidelines of SHO, all grandfathered fails are exempted from mandatory closeouts but all fails that occur after a company has been listed on Regulation SHO are not. Those most recent fails will require immediate closeout or additional penalties apply.
In May of 2006 the NASD submitted a notice to their members referring to additional guidance identified by the SEC regarding the closure of fails under SHO. This guidance was with regards to how the members were closing out fails and that fact that fails were improperly being closed.
Instead of closing out most recent fails first, members were selecting which fails to close based on “in the money” vs. “out of money” status taking the most financially palatable first. Since many of these issues continued to decline under SHO the most palatable were the oldest fails as they represented the highest levels of profit for the failing firm. Unfortunately this was not the manner in which the Division of Market Regulation provided the data.
This member approach to closing out fails will also skew significantly the average age of a fail if the oldest fails are in fact being closed when the most recent ones were required by law.
This evidence is made much clearer by the additional data presented which includes such details as, 99.2% of the grandfathered fails were reportedly eliminated but of the six issuers who have been on the list since the inception, the level of fails in these securities was reduced by only 68%. How then is the mandatory closeout provision under SHO being enforced when issuers under mandatory closeout guidelines remain on the list with new, non-grandfathered fails?
My Conclusion: The SEC is not actively enforcing the laws of SHO and has allowed the industry additional graces to protect the financial interests of their operations. The ones to pay the price for these shortcoming are the investing public.
When questioned about these concerns and the accuracy of information in the SEC proposal, SEC spokesman John Heine indicated that the comment period was the place to address these concerns. The fact that the comments would be based on the information provided by the SEC, and that information is suspect apparently did not seem to sink in.
For decades now investors have wondered what the motivations behind the SEC are. Here again is yet another example of where the SEC appears to have sugarcoated a story to imply success when failure resulted. The Commission did so to protect their reputations and to protect Wall Street from the repercussions of investor awareness.
While I applaud Chairman Cox for his open and public comments about this serious problem, I believe the Chairman could improve his position and in the process provide the public a valuable service by seeking out those “misinformed” individuals in the Division of Market Regulation who have become accustom to misrepresenting the facts in order to spin the outcome and remove them from their posts. The SEC is the top regulator in charge of insuring that the investing public is provided nothing but the highest quality of information with regards to these capital markets. Allowing such poor quality of information, ultimately slanted information, to be disseminated out of the SEC should never be tolerated.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006