Post by jcline on Jan 8, 2007 19:06:37 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
For Sale, Market Making Exemptions – January 8, 2007
David Patch
"Our concern is that people are registering as market makers just to get the [short sale] exemption," said Tom Gira at the Security Traders Association's annual conference. "But the exemption is limited to bona fide market making."
While short selling reforms and short selling practices are becoming ever growing concerns of investors and issuers alike, regulators continue to maintain loosely controlled market exemptions to market makers who are setting up shop to simply gain leverage over the remainder of the investing public. Leverage the SEC has recently identifies as having the potentials to manipulate the price of securities.
While Gira may not represent the securities regulators by his comments, two separate NASD alerts to members would indicate that his concerns are not necessarily unfounded. The NASD submitting a September 2006 and December 2006 warning to market makers that there are limits to what exemptions can be taken relative to market making operations vs. proprietary trading activities.
In the August notice to members the NASD clarified that "the SEC stated that bona fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker's exception for the purpose of avoiding compliance with the locate requirement by the other broker-dealer or customer." But market making, which has been around for a considerable amount of time, has never been allowed such usage so why are regulators only now finding that they must send seasoned members notices like this?
By making such a bold statement, we can rest assure that audits of the bona fide market making exemption has revealed such illegal tactics have taken place in the past and most likely continue to take place today. Partially because of the heavy reliance on the honor system of self regulation..
"It's very easy to hang on the box and never really provide liquidity, yet benefit by being an exempt market maker," Gira said. A true market maker is not "somebody who goes in the box and all they do is sell."
But sell they do sit in the box and only sell and such selling, utilizing the market making exemption in the process, is what generates fails in the settlement system and provides the necessary sell side leverage to drive down stock values. Bear Raids – sanctioned by your local federal regulator.
How integrated is this strategy in market making operations?
"This is going to have a serious impact on our ability to make markets," Mark Madoff, co-director of trading at Bernard L. Madoff Investment Securities, said of the SEC's plan to eliminate the grandfather clause of Regulation SHO. Effectively, Madoff contends that the elimination of the grandfather clause would eliminate the indefinite amount of time a market maker will have to settle a trade executed under the bona-fide market making exemption and cut into their profits.
Oh to have to play these markets like the rest of the investing public.
Putting Madoff and Gira's comments into common context, it would appear that investors with a sell side [short] trading strategy are setting up shop as market makers to sell short what they would otherwise not be able to short if they acted as an individual investor. In using the market making exemption, the operation will not only be able to sell short without the expense of a stock borrow but can also control the markets as a market maker in the stock selling by more and more shares into any upside volume controlling the price and any short position liabilities.
When this market making exemption was originally created, the emphasis was on creating "temporary" liquidity where there was a significant delta between the buy side and the sell side of a market. The laws intended that in solving some of these temporary liquidity issues, stock volatility would be minimized and natural liquidity would evolve into the markets.
But "temporary" in market making has evolved over time and now market makers are taking this to mean "indefinite". Market makers are now selling short, using the exemption from the stock-borrowing requirement, and are failing to flatten out and close these positions within reasonable standards of time. Instead, they are making this a sell only trading strategy with the exemption providing the leverage necessary for themselves and clients to protect profits.
Market making for sale, Cheap prices exceptional profits!
In 2003 the SEC recognized the risks settlement failures were creating in the market and passed a reform in June 2004 to tighten down the duration of time a failed trade can linger in the markets. The SEC conveniently added a clause to this law however to protect the massive level of pre-existing fails that existed previously. The clause, referred to as the grandfather clause, allowed for all pre-existing fails to be exempt from any mandatory closeout and future shorting restrictions.
Now that the SEC provided the industry over 2 years to clean up these "grandfathered fails" they are looking to rescind such a clause identifying it as an unnecessary loophole. And for that the industry threatens their ability to sufficiently regulate market volatility.
All I want to know is this; if market makers can't make a market without massive and indefinite naked short selling, and market makers are setting up shop to specifically circumvent the shorting requirements as an investor, who funded the market makers to execute this type of trading strategy?
Could these market making operations be the brainchild of short interest investors who finance these operations in exchange for the trade exemption? In the case of Scott Ryan and his market making firm Ryan and Co. that is partially what the NASD has implied.
In 2005 the NASD barred Ryan for executing short sales on behalf of three hedge funds using the exemption now being referenced as the means to short securities that otherwise could not be shorted by the funds. Tom Gira, by his comments, appears to think of this as a more prevalent practice than what the public is led to believe exists and what the regulators have done by way of enforcement activities.
Now of course this is only speculation on my part about the degree to which a market maker is setting up shop and selling their exemptions but, over recent years the SEC and NASD have proven beyond a shadow of doubt that illegal short selling has been a prevalent yet un-enforced factor in our securities markets.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006
An online newspaper reporting the issues of Securities Fraud
For Sale, Market Making Exemptions – January 8, 2007
David Patch
"Our concern is that people are registering as market makers just to get the [short sale] exemption," said Tom Gira at the Security Traders Association's annual conference. "But the exemption is limited to bona fide market making."
While short selling reforms and short selling practices are becoming ever growing concerns of investors and issuers alike, regulators continue to maintain loosely controlled market exemptions to market makers who are setting up shop to simply gain leverage over the remainder of the investing public. Leverage the SEC has recently identifies as having the potentials to manipulate the price of securities.
While Gira may not represent the securities regulators by his comments, two separate NASD alerts to members would indicate that his concerns are not necessarily unfounded. The NASD submitting a September 2006 and December 2006 warning to market makers that there are limits to what exemptions can be taken relative to market making operations vs. proprietary trading activities.
In the August notice to members the NASD clarified that "the SEC stated that bona fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker's exception for the purpose of avoiding compliance with the locate requirement by the other broker-dealer or customer." But market making, which has been around for a considerable amount of time, has never been allowed such usage so why are regulators only now finding that they must send seasoned members notices like this?
By making such a bold statement, we can rest assure that audits of the bona fide market making exemption has revealed such illegal tactics have taken place in the past and most likely continue to take place today. Partially because of the heavy reliance on the honor system of self regulation..
"It's very easy to hang on the box and never really provide liquidity, yet benefit by being an exempt market maker," Gira said. A true market maker is not "somebody who goes in the box and all they do is sell."
But sell they do sit in the box and only sell and such selling, utilizing the market making exemption in the process, is what generates fails in the settlement system and provides the necessary sell side leverage to drive down stock values. Bear Raids – sanctioned by your local federal regulator.
How integrated is this strategy in market making operations?
"This is going to have a serious impact on our ability to make markets," Mark Madoff, co-director of trading at Bernard L. Madoff Investment Securities, said of the SEC's plan to eliminate the grandfather clause of Regulation SHO. Effectively, Madoff contends that the elimination of the grandfather clause would eliminate the indefinite amount of time a market maker will have to settle a trade executed under the bona-fide market making exemption and cut into their profits.
Oh to have to play these markets like the rest of the investing public.
Putting Madoff and Gira's comments into common context, it would appear that investors with a sell side [short] trading strategy are setting up shop as market makers to sell short what they would otherwise not be able to short if they acted as an individual investor. In using the market making exemption, the operation will not only be able to sell short without the expense of a stock borrow but can also control the markets as a market maker in the stock selling by more and more shares into any upside volume controlling the price and any short position liabilities.
When this market making exemption was originally created, the emphasis was on creating "temporary" liquidity where there was a significant delta between the buy side and the sell side of a market. The laws intended that in solving some of these temporary liquidity issues, stock volatility would be minimized and natural liquidity would evolve into the markets.
But "temporary" in market making has evolved over time and now market makers are taking this to mean "indefinite". Market makers are now selling short, using the exemption from the stock-borrowing requirement, and are failing to flatten out and close these positions within reasonable standards of time. Instead, they are making this a sell only trading strategy with the exemption providing the leverage necessary for themselves and clients to protect profits.
Market making for sale, Cheap prices exceptional profits!
In 2003 the SEC recognized the risks settlement failures were creating in the market and passed a reform in June 2004 to tighten down the duration of time a failed trade can linger in the markets. The SEC conveniently added a clause to this law however to protect the massive level of pre-existing fails that existed previously. The clause, referred to as the grandfather clause, allowed for all pre-existing fails to be exempt from any mandatory closeout and future shorting restrictions.
Now that the SEC provided the industry over 2 years to clean up these "grandfathered fails" they are looking to rescind such a clause identifying it as an unnecessary loophole. And for that the industry threatens their ability to sufficiently regulate market volatility.
All I want to know is this; if market makers can't make a market without massive and indefinite naked short selling, and market makers are setting up shop to specifically circumvent the shorting requirements as an investor, who funded the market makers to execute this type of trading strategy?
Could these market making operations be the brainchild of short interest investors who finance these operations in exchange for the trade exemption? In the case of Scott Ryan and his market making firm Ryan and Co. that is partially what the NASD has implied.
In 2005 the NASD barred Ryan for executing short sales on behalf of three hedge funds using the exemption now being referenced as the means to short securities that otherwise could not be shorted by the funds. Tom Gira, by his comments, appears to think of this as a more prevalent practice than what the public is led to believe exists and what the regulators have done by way of enforcement activities.
Now of course this is only speculation on my part about the degree to which a market maker is setting up shop and selling their exemptions but, over recent years the SEC and NASD have proven beyond a shadow of doubt that illegal short selling has been a prevalent yet un-enforced factor in our securities markets.
For more on this issue please visit the Host site at www.investigatethesec.com .
Copyright 2006