In an effort to spread the real truth about the technicalities of the market mechanics and to arm investors with real knowledge and not some
twisted fuzzy logic based on the agenda of crony bashers, the details can be cleared up by understanding these concepts.
Every transaction in the marketplace is a "trade".
There are no "buys" or "sells", there are only "trades".
Some like to characterize a trade executing at the bid as a "sell" and a trade executing at the ask as a "buy" but this is unnecessarily overcomplicating market dynamics which may or may not mean anything to the dynamics of the market in that stock at that time.
There are only trades and all trades are more generally called, "transactions".
There are several different types of transactions based upon the nature of the position that the market participant takes in the security.
The participant can execute a purchase of the security; thereby going "long" and holding shares marked as "long".
The participant can execute a sale of the security; thereby selling shares and so has the obligation to deliver shares in exchange for cash.
The participant can execute a sale of the security with borrowed stock; thereby selling shares the participant does not actually have on hand but instead has borrowed to sell to buyers.
These shares are marked as "short".
The participant can execute a buy-in of the security otherwise known as a "cover"; wherein the "short" sales are "closed" based upon the act of the owner
of the shorts covering by way of buying back shares in the market in order to turn around and deliver those shares to the original owner whose shares were
initially borrowed for the short sale transaction.
There are many other types of transactions in equities but the rest involve options contracts and other assorted transactions which have nothing to do with the pink sheets (cross trades and so on).
It is important to mention that there are bonafide market making activities which are seen as "special" for the SEC/FINRA.
MMs can "provide liquidity" and "make a market" by executing all of these transaction types in a security, at will and simultaneously.
One extremely important point for investors to realize though is that NONE of the back office ("legged-trades") market making activities ("transactions")
are included into the "consolidated tape" . The consolidated tape is called "consolidated" for a reason. What FINRA "consolidates" are the aggregate
transactions among all the exchanges which are real and unique among actual market participants, wherein market making activities including back office work-arounds to get a hold of hard to borrow shares or added liquidity are excluded.
The consolidated tape can be understood as all of the executed trading activity from all exchanges for a particular ticker. Bid/Ask quotes and trades
typically come from many different exchanges so the Consolidated Tape Association brings all the actual real trades together and the final report of all trades is called the consolidated tape.
Another important point is that this does not mean that the consolidated tape does not include the "trades" exclusively by or between market makers. It
also does not exclude trades wherein they have taken on the transaction as the counter-party (the MM is on the other side of a trade from a retail
participant, otherwise known as "providing liquidity" when demand is high and supply of shares is scarce, they can short a retail order to go long in order
to execute the retail purchase of shares and so they go short the same number of shares at the same price to allow the "trade" to occur but really the
retail buyer does not have any real shares in their account yet but real shares must eventually be delivered to the buyer within the T+3 or T+4 settlement
window, otherwise the "transaction" "fails" and a "failure to deliver" occurs). Typically though MM's keep their own inventory of shares for the stock in which they are acting as liquidity provider, so in actuality the need to short most or all of the retail orders to purchase the stock is rather rare; primarily only amidst a sudden and HUGE influx of buyer demand and interest in the stock. The notion that every single trade on any regular quiet day on Wall St must be first shorted by an MM in order to fulfill execution of the transaction is FAULTY. It can happen and does happen but typically transactions are handled directly by liquidity providers and there is no need to fulfill the order via a legged trade; shares can simply be bought and sold between counter-parties (whether the agent and/or counter-party is the broker-dealer or other retail investor/trader).
Now, these trades by MM's or between MM's included in the consolidated tape would be trades executed to finalize an originating order (for a client account). For instance, if client X puts in an order to purchase 10 shares and MM only has 5 shares on hand and needs to either short 5 shares and sell 5 shares or short all 10
shares or go and buy 5 shares from another MM or go buy 10 shares from another MM to sell to the client, none of those extra market making transactions
would be included in the report. The trade would eventually go through after the MM (by whatever means) got a hold of the 10 shares and executed the order
for the client, thereafter the consolidated tape would show that 10 shares were traded at the price the client purchased the shares . The consolidated tape
would NOT include any "legged" trades with other MM's in order for the MM to obtain real or borrowed shares in order to fulfill the order; this is the case
for positions marked as "long" AND for positions marked as "short". Therefore, the "short sales" in the FINRA Reg SHO (ORF) daily report simply show the
number of positions marked as "short" for that day.
For short sales made in the normal execution of bonafide market making activities, ("legged trades"), such activity is also reported by MM's to regulators
but via a different reporting mechanism, called OATS, which handles the reporting of all the back-office market making activity between firms and only if a
security is "OATS reportable". It's a kind of audit trail for FINRA to keep track of MM activity (for compliance).
The shares involved in such market making activities are exempt from the short sale reporting requirements (Rule 5100) and
so the MM can mark those shares as "short exempt" and t hey do NOT appear in the Reg SHO short sale report and the back office activity of those shares do
not cumulatively effect the total daily volume figure; only the final 10 shares purchased from the client would be added to the total volume from the
previous example.
It appears some have misconstrued the technicalities of the short-INTEREST reporting requirements with the daily Reg SHO figures.
Rule 4560
"Each member shall maintain a record of total "short" positions in all customer and proprietary firm accounts in all equity securities...
and shall regularly report such information to FINRA...Reports shall be received by FINRA no later than the second business day after the reporting
settlement date designated by FINRA...
Members shall record and report all gross short positions EXISTING in each individual firm or customer account, including the account of a broker-dealer, that resulted from (1) a "short sale,"...
Members shall report only those short positions resulting from short sales that have settled or reached settlement date by the close of the reporting settlement date designated by FINRA."
"The recording and reporting requirements of this Rule shall not apply to:
(1) any sale by any person, for an account in which he has an interest, if such person owns the security sold and intends to deliver such security as soon
as is possible without undue inconvenience or expense;"
"(2) any sale by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an
over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of securities through rights or a standby underwriting commitment."
These are the short INTEREST reporting requirements for SETTLED and EXISTING short sales!
These are NOT the total DAILY short sale metrics!
As for the daily Reg SHO short sale transaction figures. They stem from Rule 6624.
Rule 6624
"Pursuant to applicable trade reporting rules, members must indicate on trade reports submitted to FINRA whether a transaction is a short sale transaction
("short sale reporting requirements"). The short sale reporting requirements apply to transactions in all OTC Equity Securities, as defined in Rule 6420.
Thus, all short sale transactions in these securities reported to FINRA must carry a "short sale" indicator. "
So the daily Reg SHO short sale numbers can wind up becoming SETTLED transactions OR they can become failure to delivers.
The short transactions aggregated in the bi-weekly short INTEREST figures are SETTLED transactions AND are "short" positions which
remain OPEN. The short sale position can remain open for any duration of time for which the shorter desires, similar to how a long can
hold on to his/her "long" shares for as long as they wish before selling. At some point the shorter COVERS the OPEN short position and
by covering the short position is CLOSED.
Therefore we have learned that OPEN and CLOSED short positions have NOTHING to do with transactions which have been SETTLED or
turned into failed trades (failures to deliver or "FTD"s).
The daily Reg SHO short sales are simply an accounting of any and ALL positions marked as "short sale" during the regular course of intra-day trading.
They have nothing to do with T+3 or T+4 settlement window of time or if those short transactions will eventually be settled or failed.
Any claims that the bi-weekly short INTEREST is the "real" number for investors to monitor and the daily short sale figures are just MM activities because
of some notion about whether or not certain short transactions are settled or failed within T+3 is entirely FALSE and NONSENSE .
In an OTC stock whereby there are short sale transactions being executed daily and short sales are being covered daily, the short INTEREST can remain very
low or non existent because participants shorting and covering are not holding OPEN (and necessarily settled) short positions for longer than T+3, or long
enough for those shorts to be included in a bi-weekly report. Therefore there can exist a scenario wherein there is zero short INTEREST (because bi-weekly
reports show zero open short positions) but there is still over half of the total daily volume (day in day out) consisting of short sale transactions.
Feel free to read Rule 6622 which outlines exactly when and what OTC Reporting Facility Participants are required to report.
Rule 6622
" Transactions not reported within 10 seconds after execution shall be designated as late. "
"A pattern or practice of late reporting without reasonable justification or exceptional circumstances may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of trade in violation of Rule 2010."
Furthermore, I would invite any and all market participants ( especially market makers invovled with RFMK ) to re-read the updates in the FINRA ruleset
with regard to short sales executed pertaining to Rule IM-5100.
07-31 Rule Changes
"Similarly, bona fide market making would exclude activity that is related to speculative selling strategies of the member or investment decisions of the
firm and is disproportionate to the usual market making patterns or practices of the member in that security. The Association does not anticipate that a
firm could properly take advantage of its market maker exemption to effectuate such speculative or investment short selling decisions. Disproportionate
short selling in a market making account to effectuate such strategies will be viewed by the Association as inappropriate activity that does not represent
bona fide market making and would therefore be in violation of Rule 5100."
" Rule 5100 prohibits a member from effecting a short sale for the account of a customer or for its own account directly or through the offices of a third
party for the purpose of avoiding the application of the Short Sale Rule . Further, the Rule prohibits a member from knowingly, or with reason to know,
effecting sales for the account of a customer or for its own account for the purpose of avoiding the Rule. With this interpretation, the Association wishes
to clarify some of the circumstances under which a member would be deemed to be in violation of Rule 5100."
"For example, in instances where the current best bid is below the preceding best bid, if a market maker alone at the inside best bid were to lower its bid
and then raise it to create an "up bid" for the purpose of facilitating a short sale, NASD would consider such activity to be a manipulative act and a
violation of NASD's Short Sale Rule . NASD also would consider it a manipulative act and a violation of the Rule if a market maker with a long stock
position were to raise its bid above the inside bid and then lower it to create a "down bid" for the purpose of precluding market participants from selling
short. In addition, if a market maker agrees to an arrangement proposed by a member or a customer whereby the market maker raises its bid in order to
effect a short sale for the other party and is protected against any loss on the trade or on any other executions effected at its new bid price, the market
maker would be deemed to be in violation of Rule 5100. Similarly, a market maker would be deemed in violation of the Rule if it entered into an arrangement
with a member or a customer whereby it used its exemption from the rule to sell short at the bid at successively lower prices, accumulating a short
position, and subsequently offsetting those sales through a transaction at a prearranged price, for the purpose of avoiding compliance with the Rule, and
with the understanding that the market maker would be guaranteed by the member or customer against losses on the trades."
When you look at the dark side, careful you must be, for the dark side looks back.
$RFMK
twisted fuzzy logic based on the agenda of crony bashers, the details can be cleared up by understanding these concepts.
Every transaction in the marketplace is a "trade".
There are no "buys" or "sells", there are only "trades".
Some like to characterize a trade executing at the bid as a "sell" and a trade executing at the ask as a "buy" but this is unnecessarily overcomplicating market dynamics which may or may not mean anything to the dynamics of the market in that stock at that time.
There are only trades and all trades are more generally called, "transactions".
There are several different types of transactions based upon the nature of the position that the market participant takes in the security.
The participant can execute a purchase of the security; thereby going "long" and holding shares marked as "long".
The participant can execute a sale of the security; thereby selling shares and so has the obligation to deliver shares in exchange for cash.
The participant can execute a sale of the security with borrowed stock; thereby selling shares the participant does not actually have on hand but instead has borrowed to sell to buyers.
These shares are marked as "short".
The participant can execute a buy-in of the security otherwise known as a "cover"; wherein the "short" sales are "closed" based upon the act of the owner
of the shorts covering by way of buying back shares in the market in order to turn around and deliver those shares to the original owner whose shares were
initially borrowed for the short sale transaction.
There are many other types of transactions in equities but the rest involve options contracts and other assorted transactions which have nothing to do with the pink sheets (cross trades and so on).
It is important to mention that there are bonafide market making activities which are seen as "special" for the SEC/FINRA.
MMs can "provide liquidity" and "make a market" by executing all of these transaction types in a security, at will and simultaneously.
One extremely important point for investors to realize though is that NONE of the back office ("legged-trades") market making activities ("transactions")
are included into the "consolidated tape" . The consolidated tape is called "consolidated" for a reason. What FINRA "consolidates" are the aggregate
transactions among all the exchanges which are real and unique among actual market participants, wherein market making activities including back office work-arounds to get a hold of hard to borrow shares or added liquidity are excluded.
The consolidated tape can be understood as all of the executed trading activity from all exchanges for a particular ticker. Bid/Ask quotes and trades
typically come from many different exchanges so the Consolidated Tape Association brings all the actual real trades together and the final report of all trades is called the consolidated tape.
Another important point is that this does not mean that the consolidated tape does not include the "trades" exclusively by or between market makers. It
also does not exclude trades wherein they have taken on the transaction as the counter-party (the MM is on the other side of a trade from a retail
participant, otherwise known as "providing liquidity" when demand is high and supply of shares is scarce, they can short a retail order to go long in order
to execute the retail purchase of shares and so they go short the same number of shares at the same price to allow the "trade" to occur but really the
retail buyer does not have any real shares in their account yet but real shares must eventually be delivered to the buyer within the T+3 or T+4 settlement
window, otherwise the "transaction" "fails" and a "failure to deliver" occurs). Typically though MM's keep their own inventory of shares for the stock in which they are acting as liquidity provider, so in actuality the need to short most or all of the retail orders to purchase the stock is rather rare; primarily only amidst a sudden and HUGE influx of buyer demand and interest in the stock. The notion that every single trade on any regular quiet day on Wall St must be first shorted by an MM in order to fulfill execution of the transaction is FAULTY. It can happen and does happen but typically transactions are handled directly by liquidity providers and there is no need to fulfill the order via a legged trade; shares can simply be bought and sold between counter-parties (whether the agent and/or counter-party is the broker-dealer or other retail investor/trader).
Now, these trades by MM's or between MM's included in the consolidated tape would be trades executed to finalize an originating order (for a client account). For instance, if client X puts in an order to purchase 10 shares and MM only has 5 shares on hand and needs to either short 5 shares and sell 5 shares or short all 10
shares or go and buy 5 shares from another MM or go buy 10 shares from another MM to sell to the client, none of those extra market making transactions
would be included in the report. The trade would eventually go through after the MM (by whatever means) got a hold of the 10 shares and executed the order
for the client, thereafter the consolidated tape would show that 10 shares were traded at the price the client purchased the shares . The consolidated tape
would NOT include any "legged" trades with other MM's in order for the MM to obtain real or borrowed shares in order to fulfill the order; this is the case
for positions marked as "long" AND for positions marked as "short". Therefore, the "short sales" in the FINRA Reg SHO (ORF) daily report simply show the
number of positions marked as "short" for that day.
For short sales made in the normal execution of bonafide market making activities, ("legged trades"), such activity is also reported by MM's to regulators
but via a different reporting mechanism, called OATS, which handles the reporting of all the back-office market making activity between firms and only if a
security is "OATS reportable". It's a kind of audit trail for FINRA to keep track of MM activity (for compliance).
The shares involved in such market making activities are exempt from the short sale reporting requirements (Rule 5100) and
so the MM can mark those shares as "short exempt" and t hey do NOT appear in the Reg SHO short sale report and the back office activity of those shares do
not cumulatively effect the total daily volume figure; only the final 10 shares purchased from the client would be added to the total volume from the
previous example.
It appears some have misconstrued the technicalities of the short-INTEREST reporting requirements with the daily Reg SHO figures.
Rule 4560
"Each member shall maintain a record of total "short" positions in all customer and proprietary firm accounts in all equity securities...
and shall regularly report such information to FINRA...Reports shall be received by FINRA no later than the second business day after the reporting
settlement date designated by FINRA...
Members shall record and report all gross short positions EXISTING in each individual firm or customer account, including the account of a broker-dealer, that resulted from (1) a "short sale,"...
Members shall report only those short positions resulting from short sales that have settled or reached settlement date by the close of the reporting settlement date designated by FINRA."
"The recording and reporting requirements of this Rule shall not apply to:
(1) any sale by any person, for an account in which he has an interest, if such person owns the security sold and intends to deliver such security as soon
as is possible without undue inconvenience or expense;"
"(2) any sale by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an
over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of securities through rights or a standby underwriting commitment."
These are the short INTEREST reporting requirements for SETTLED and EXISTING short sales!
These are NOT the total DAILY short sale metrics!
As for the daily Reg SHO short sale transaction figures. They stem from Rule 6624.
Rule 6624
"Pursuant to applicable trade reporting rules, members must indicate on trade reports submitted to FINRA whether a transaction is a short sale transaction
("short sale reporting requirements"). The short sale reporting requirements apply to transactions in all OTC Equity Securities, as defined in Rule 6420.
Thus, all short sale transactions in these securities reported to FINRA must carry a "short sale" indicator. "
So the daily Reg SHO short sale numbers can wind up becoming SETTLED transactions OR they can become failure to delivers.
The short transactions aggregated in the bi-weekly short INTEREST figures are SETTLED transactions AND are "short" positions which
remain OPEN. The short sale position can remain open for any duration of time for which the shorter desires, similar to how a long can
hold on to his/her "long" shares for as long as they wish before selling. At some point the shorter COVERS the OPEN short position and
by covering the short position is CLOSED.
Therefore we have learned that OPEN and CLOSED short positions have NOTHING to do with transactions which have been SETTLED or
turned into failed trades (failures to deliver or "FTD"s).
The daily Reg SHO short sales are simply an accounting of any and ALL positions marked as "short sale" during the regular course of intra-day trading.
They have nothing to do with T+3 or T+4 settlement window of time or if those short transactions will eventually be settled or failed.
Any claims that the bi-weekly short INTEREST is the "real" number for investors to monitor and the daily short sale figures are just MM activities because
of some notion about whether or not certain short transactions are settled or failed within T+3 is entirely FALSE and NONSENSE .
In an OTC stock whereby there are short sale transactions being executed daily and short sales are being covered daily, the short INTEREST can remain very
low or non existent because participants shorting and covering are not holding OPEN (and necessarily settled) short positions for longer than T+3, or long
enough for those shorts to be included in a bi-weekly report. Therefore there can exist a scenario wherein there is zero short INTEREST (because bi-weekly
reports show zero open short positions) but there is still over half of the total daily volume (day in day out) consisting of short sale transactions.
Feel free to read Rule 6622 which outlines exactly when and what OTC Reporting Facility Participants are required to report.
Rule 6622
" Transactions not reported within 10 seconds after execution shall be designated as late. "
"A pattern or practice of late reporting without reasonable justification or exceptional circumstances may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of trade in violation of Rule 2010."
Furthermore, I would invite any and all market participants ( especially market makers invovled with RFMK ) to re-read the updates in the FINRA ruleset
with regard to short sales executed pertaining to Rule IM-5100.
07-31 Rule Changes
"Similarly, bona fide market making would exclude activity that is related to speculative selling strategies of the member or investment decisions of the
firm and is disproportionate to the usual market making patterns or practices of the member in that security. The Association does not anticipate that a
firm could properly take advantage of its market maker exemption to effectuate such speculative or investment short selling decisions. Disproportionate
short selling in a market making account to effectuate such strategies will be viewed by the Association as inappropriate activity that does not represent
bona fide market making and would therefore be in violation of Rule 5100."
" Rule 5100 prohibits a member from effecting a short sale for the account of a customer or for its own account directly or through the offices of a third
party for the purpose of avoiding the application of the Short Sale Rule . Further, the Rule prohibits a member from knowingly, or with reason to know,
effecting sales for the account of a customer or for its own account for the purpose of avoiding the Rule. With this interpretation, the Association wishes
to clarify some of the circumstances under which a member would be deemed to be in violation of Rule 5100."
"For example, in instances where the current best bid is below the preceding best bid, if a market maker alone at the inside best bid were to lower its bid
and then raise it to create an "up bid" for the purpose of facilitating a short sale, NASD would consider such activity to be a manipulative act and a
violation of NASD's Short Sale Rule . NASD also would consider it a manipulative act and a violation of the Rule if a market maker with a long stock
position were to raise its bid above the inside bid and then lower it to create a "down bid" for the purpose of precluding market participants from selling
short. In addition, if a market maker agrees to an arrangement proposed by a member or a customer whereby the market maker raises its bid in order to
effect a short sale for the other party and is protected against any loss on the trade or on any other executions effected at its new bid price, the market
maker would be deemed to be in violation of Rule 5100. Similarly, a market maker would be deemed in violation of the Rule if it entered into an arrangement
with a member or a customer whereby it used its exemption from the rule to sell short at the bid at successively lower prices, accumulating a short
position, and subsequently offsetting those sales through a transaction at a prearranged price, for the purpose of avoiding compliance with the Rule, and
with the understanding that the market maker would be guaranteed by the member or customer against losses on the trades."
When you look at the dark side, careful you must be, for the dark side looks back.
$RFMK
