Post by fastwalker on Jan 2, 2005 9:40:46 GMT -5
An interesting article on SHO. Read only if you have time and you want to understand..
REGULATION SHO
A prelude to financial chaos
On October 29, 2003, the Securities and Exchange commission issued a proposed rule change effecting short selling in a number of ways. The complete proposal can be found on the SEC website.
We believe their current proposed rule changes are the result, in part at least, of an efficiently executed campaign to eliminate short selling led by some of the most notorious pump and dump specialists around. Attention was further brought to this movement by investrend, a financial website that claims to provide "independent" analysis of companies while executing "shareholder enhancement" programs for their client companies. Investrend launched an aggressive PR campaign utilizing an abusive technique called "ticker spam" adding as many as 119 company symbols in a single press release in order to promote its site while campaigning against naked short selling, the same position being supported by stock promoters, pump and dump artists and toxic funding groups. Since no legitimate PR distribution service allows abusive ticker spamming, investrend uses its own financialwire.net service to effect the campaign. Their efforts have done more to keep this situation in the public's eye than any other single source we are aware of.
There can be no doubt that the types of abuses that infect the markets extend from abusive naked short selling at one extreme to manipulative and fraudulent pump and dump schemes on the other. Unfortunately, in its attempts to deal with abuses within the area of short selling, the SEC has completely ignored the market dynamic and, as a result, has set the stage for an economic catastrophe. They are, in our opinion, attempting to treat a symptom while ignoring the entire patient or considering the cause of the disease in the first place. (It should be noted that while naked short selling is illegal on the retail level within the US, it is not illegal outside the US nor is it illegal within the market maker community. This is contrary to many statements by proponents of Regulation SHO)
Our-Street.com is convinced, based upon years of experience, that the SEC's current proposed ruling will exaggerate the losses experienced by the average investor in micro-cap companies while enriching the worst of the dishonest stock promoters in direct proportion to their unethical or illegal practices.
At first, people may scratch their heads and wonder how that could be possible, but one only has to understand the market dynamic to realize that this, in fact, is the only outcome possible.
We're going to repeat this because we want you to understand that this is not some kind of overstatement or hyperbole on our part. We are totally serious when we say this. We are absolutely convinced that the SEC's Regulation SHO, as proposed, will result in utter financial chaos, increasing investor losses while enriching unethical stock promoters within the bulletin board and pink sheet markets. We further are absolutely convinced, based upon how the rule is currently written, that no other outcome is possible. If you will take the time to read this article, you will come to understand why we can say this with such confidence.
Before you can understand why we can say this with such confidence, you have to understand how the market works. The stock market is a dynamic situation. Within a market there are many factors all working to influence the market and a stock's price, all at the same time. Without going into great detail, on any given day, the geopolitical and economic conditions throughout the world affect the market. The weather and natural catastrophes affect the market. The market itself and its momentum both on an exchange wide basis and within a particular sector or and individual stock will affect a stock's performance. The company's performance and it's press releases also have a direct effect on a stock as does the amount of promotional activity and short selling taking place in the stock. All these things can and do affect a stock's price on any given day.
THE SEC AGREES - SHORT SELLING PROVIDES THE MARKET WITH IMPORTANT BENEFITS
When it comes to short selling in general, the SEC acknowledges that "short selling provides the market with at least two important benefits: market liquidity and pricing efficiency." The SEC explains these benefits further saying that "Market liquidity is generally provided through short selling by market professionals, such as market makers (including specialists) and block positioners, who offset temporary imbalances in the buying and selling interest for securities. Short sales effected in the market add to the selling interest of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of selling interest. Short sellers covering their sales also may add to the buying interest of stock available to sellers."
The SEC goes on to explain pricing efficiencies in this way, "Market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values. Such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. This evaluation is reflected in the resulting market price of the security."
Accordingly, it isn't simply short selling that is the problem, it is the abusive short-selling including abusive naked short selling that the SEC is addressing with this proposed change in the regulations. We share their concern but do not support their proposed solution.
In broad terms, the reason we don't support the SEC proposal is because, like with any dynamic situation having a number of components, when you significantly alter one component, you change the entire dynamic and unless you address the offsetting components. This can create disastrous results if not properly thought through.
THE BULLETIN BOARD - DANGER AHEAD
With that basic truth established, let's focus specifically on naked short selling and exactly where the elimination of it will create economic havoc; that would be on the NASD Bulletin Boards.
So, why is the bulletin board so different than other exchanges that the elimination of naked short selling would cause such a problem? The answer lies in the lack of certain listing requirements which are present on other exchanges. This would allow a company to structure their stock so as to make pumping the stock to unreasonable levels a snap and would virtually eliminate any opportunity for short sellers to find any stock to short to combat this event.
Boxing a Stock
One of the favorite tricks of unethical promoters is to organize or reorganize a stock prior to a heavy promotion so that the number of shares outside of their control is either greatly limited or virtually eliminated. This tactic is commonly called "boxing a stock". This is most usually done through a reverse split and, in the case of a shell company, is followed by a reverse acquisition. In accomplishing such a reorganization, the amount of freely traded shares is often reduced to the level where a legitimate market really can't exist.
The poster child for both the campaign against naked short selling and as fine an example of the effect of aggressive promotion a boxed stock as one is likely to see was Genemax Corp. (OTC BB: GMXX). With over 15 million shares initially outstanding, the company began pumping their stock under the direction of Vancouver promoter Brent Pierce, whose activities in British Columbia were already restricted by a 15-year trading suspension imposed on him by the B.C. Securities Commission in 1993.
According to Grant Atkins, one of Genemax's directors, the number of shares actually available to the public for trading at the time was 250,000, hardly enough to allow for a legitimate market but perfect for those running the promotion to pump the stock to beyond $20 from a pre pump level of $1.05 even in the face of heavy naked short-selling.
more...
REGULATION SHO
A prelude to financial chaos
On October 29, 2003, the Securities and Exchange commission issued a proposed rule change effecting short selling in a number of ways. The complete proposal can be found on the SEC website.
We believe their current proposed rule changes are the result, in part at least, of an efficiently executed campaign to eliminate short selling led by some of the most notorious pump and dump specialists around. Attention was further brought to this movement by investrend, a financial website that claims to provide "independent" analysis of companies while executing "shareholder enhancement" programs for their client companies. Investrend launched an aggressive PR campaign utilizing an abusive technique called "ticker spam" adding as many as 119 company symbols in a single press release in order to promote its site while campaigning against naked short selling, the same position being supported by stock promoters, pump and dump artists and toxic funding groups. Since no legitimate PR distribution service allows abusive ticker spamming, investrend uses its own financialwire.net service to effect the campaign. Their efforts have done more to keep this situation in the public's eye than any other single source we are aware of.
There can be no doubt that the types of abuses that infect the markets extend from abusive naked short selling at one extreme to manipulative and fraudulent pump and dump schemes on the other. Unfortunately, in its attempts to deal with abuses within the area of short selling, the SEC has completely ignored the market dynamic and, as a result, has set the stage for an economic catastrophe. They are, in our opinion, attempting to treat a symptom while ignoring the entire patient or considering the cause of the disease in the first place. (It should be noted that while naked short selling is illegal on the retail level within the US, it is not illegal outside the US nor is it illegal within the market maker community. This is contrary to many statements by proponents of Regulation SHO)
Our-Street.com is convinced, based upon years of experience, that the SEC's current proposed ruling will exaggerate the losses experienced by the average investor in micro-cap companies while enriching the worst of the dishonest stock promoters in direct proportion to their unethical or illegal practices.
At first, people may scratch their heads and wonder how that could be possible, but one only has to understand the market dynamic to realize that this, in fact, is the only outcome possible.
We're going to repeat this because we want you to understand that this is not some kind of overstatement or hyperbole on our part. We are totally serious when we say this. We are absolutely convinced that the SEC's Regulation SHO, as proposed, will result in utter financial chaos, increasing investor losses while enriching unethical stock promoters within the bulletin board and pink sheet markets. We further are absolutely convinced, based upon how the rule is currently written, that no other outcome is possible. If you will take the time to read this article, you will come to understand why we can say this with such confidence.
Before you can understand why we can say this with such confidence, you have to understand how the market works. The stock market is a dynamic situation. Within a market there are many factors all working to influence the market and a stock's price, all at the same time. Without going into great detail, on any given day, the geopolitical and economic conditions throughout the world affect the market. The weather and natural catastrophes affect the market. The market itself and its momentum both on an exchange wide basis and within a particular sector or and individual stock will affect a stock's performance. The company's performance and it's press releases also have a direct effect on a stock as does the amount of promotional activity and short selling taking place in the stock. All these things can and do affect a stock's price on any given day.
THE SEC AGREES - SHORT SELLING PROVIDES THE MARKET WITH IMPORTANT BENEFITS
When it comes to short selling in general, the SEC acknowledges that "short selling provides the market with at least two important benefits: market liquidity and pricing efficiency." The SEC explains these benefits further saying that "Market liquidity is generally provided through short selling by market professionals, such as market makers (including specialists) and block positioners, who offset temporary imbalances in the buying and selling interest for securities. Short sales effected in the market add to the selling interest of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of selling interest. Short sellers covering their sales also may add to the buying interest of stock available to sellers."
The SEC goes on to explain pricing efficiencies in this way, "Market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values. Such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. This evaluation is reflected in the resulting market price of the security."
Accordingly, it isn't simply short selling that is the problem, it is the abusive short-selling including abusive naked short selling that the SEC is addressing with this proposed change in the regulations. We share their concern but do not support their proposed solution.
In broad terms, the reason we don't support the SEC proposal is because, like with any dynamic situation having a number of components, when you significantly alter one component, you change the entire dynamic and unless you address the offsetting components. This can create disastrous results if not properly thought through.
THE BULLETIN BOARD - DANGER AHEAD
With that basic truth established, let's focus specifically on naked short selling and exactly where the elimination of it will create economic havoc; that would be on the NASD Bulletin Boards.
So, why is the bulletin board so different than other exchanges that the elimination of naked short selling would cause such a problem? The answer lies in the lack of certain listing requirements which are present on other exchanges. This would allow a company to structure their stock so as to make pumping the stock to unreasonable levels a snap and would virtually eliminate any opportunity for short sellers to find any stock to short to combat this event.
Boxing a Stock
One of the favorite tricks of unethical promoters is to organize or reorganize a stock prior to a heavy promotion so that the number of shares outside of their control is either greatly limited or virtually eliminated. This tactic is commonly called "boxing a stock". This is most usually done through a reverse split and, in the case of a shell company, is followed by a reverse acquisition. In accomplishing such a reorganization, the amount of freely traded shares is often reduced to the level where a legitimate market really can't exist.
The poster child for both the campaign against naked short selling and as fine an example of the effect of aggressive promotion a boxed stock as one is likely to see was Genemax Corp. (OTC BB: GMXX). With over 15 million shares initially outstanding, the company began pumping their stock under the direction of Vancouver promoter Brent Pierce, whose activities in British Columbia were already restricted by a 15-year trading suspension imposed on him by the B.C. Securities Commission in 1993.
According to Grant Atkins, one of Genemax's directors, the number of shares actually available to the public for trading at the time was 250,000, hardly enough to allow for a legitimate market but perfect for those running the promotion to pump the stock to beyond $20 from a pre pump level of $1.05 even in the face of heavy naked short-selling.
more...
