The OTC, minimizing your risk by using other peoples money and the only thing that matters is VOLUME!
There is no “real” money involved in the OTC exception of course being those aforementioned top tier actual successful business that have operated for years, the less than 1% crowd. Everyone else however is dependant on a financial model that is based solely on the “shareholder” and their money. The quantity is not based on Price Per Share it is however based on the much more valuable amount of volume one can pull into the model to make it work.
So we start with the ISSUER, that is the company that is issuing the stock. They are not risking their money, in fact most buy a shell with a convertible clause in it for a payment at a later date, typically a year. Why risk your own money when you can just hand over a huge convertible note for payment. Now they have no business plan or financier lined up here because they do not even have an interest in running a legit public business. They want to abuse the SEC rule for exemptions and just issue shares for capital growth. So they attract the second person in the chain some form of Loan Shark that has no problem handing over money for shares and specific terms.
This Loan Shark wants even value for his money and hedges his success by charging additional percentages for costs involved. He knows that it will cost him 20% up front to deposit these new certs in an account to bring them to the market, so lets use an example. He “loans” them $50,000 for 500,000,000 at Par value of .0001, he also tags on the cost of doing business which is the 20% it will cost him to bring shares to the market so another 100,000,000 gets thrown on. He also charges an “interest” rate typically 20-30% on a good stock and 40-50% on a horrible stock, risk assessment is where it at.
So he rolls into the market with his 700,000,000 shares and needs to unload them, he hires a promoter who may have a crew of pumpers and touts. The promoter gets handed some share for promotion and either shares, cash or just plain old information is used to pay the pumpers and touts. But at no point is anyone “risking” their own money unless they choose to do so, it is all on the shareholders dime so far. Which now takes us to the next portion of the issue, drumming up the volume and selling.
Yesterday we talked about how no MM is making a market in the sense of buying, selling or banking shares inthe OTC, being that it is too cost prohibitive and financially it is suicide for business here in the OTC, the Illiquid Marketplace. But the MMs do in fact make a market with “short volume”, before the NSS patrol gets all up in a cackle on this, it is legal market making principles as defined by SEC Rule 200, 201 and 203. Now here is this huge deposit of 700,000,000 shares that needs to be sold and the MMs did not have to pay a deposit fee to have access to it, it is on the shareholders dime.
So the MMs have no risk exposure since they are not holding the shares, they are not eating the costs of a haircut to have shares on deposit or losing interest on their cash and better yet they can make money by match trading and market making without none of the risks. The best part is everything they draw from this huge block of shares on deposit is by playing it safe by marking these all “SHORT” to cover their ass if trades get rejected. It could be the dimwit that brought the block to sell did not have restricted legend removed and it causes a rejection for example. Nobody wants to pay rejection fees and MMs certainly do not want their cash to be debited for 130% of the trade value for T+3 days, so everything is being marked as “SHORT” even though there is positive ownership of the certs being sold.
Here is the SEC take on this process:
Quote:
Pursuant to the suggestions of other commenters, we are including an additional exception from the uniform locate requirement of Rule 203(b)(1) for situations where a broker-dealer effects a sale on behalf of a customer that is deemed to own the security pursuant to Rule 200, although, through no fault of the customer or the broker-dealer, it is not reasonably expected that the security will be in the physical possession or control of the broker-dealer by settlement date, and is thus a "short" sale under the marking requirements of Rule 200(g) as adopted.70 Such circumstances could include the situation where a convertible security, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by settlement date. 71 Rule 203(b)(2)(ii) as adopted provides that in all situations, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event no later than 35 days after trade date, at which time the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity.
It is risk management at it’s best, nobody is investing anything of their own and are riding on the shareholders dime for it all. The pumpers have a great time posting the Daily Reg SHO shouting that it’s the shorts that are eating this alive when in reality they are just “long” position trades being marked as short to error on the side of safety in the financial sense. Why risk a rejection? A fee for the rejection and your capital being tied up for T+3 for 130% of the value of the trade is just not worth the risk and it is easier just to mark it SHORT. Sorry to burst the bubbles of those believing in the evil MMs and the Shorts on the Daily Reg SHO, there are no such monsters here in the OTC.
Volume is where it is at folks, the PPS is nothing to everyone involved except the shareholder. The person paying for it all is the only one that is concerned with PPS, everyone else, the Issuer, the Loan Shark, the MMs, pumpers and touts are only concerned with volume. The OTC is strictly driven by volume and nothing else, EXCEPTION the top tier less than 1% crowd I spoke about earlier. The PR campaigns are negotiated with the shares for cash trades, the Loan Shark may request 3 to 5 PRs during a specific period with even specified content. But it is all strictly driven to target bringing in volume to dump the tremendous amount of shares.
Remember, they have to get 600,000,000 for the loan shark to break even, anything after that is purely profit. He has to clear his $50,000 and then the Illiquid equity position fee to the DTCC of $10,000 for this example. The remaining 100,000,000 shares is all about selling before the volume dries up, they have to get rid of them. That is why you often see posts from people exclaiming “Who is selling down here”, “Where are these shares coming from”.. Well someone that is not going to eat a loss for selling at any PPS as long as they get buyers.
So as you can see the OTC is strictly dependant on the shareholder to provide the money and the buying of shares. Nobody else wants the shares, nobody else risks their own money on these, just shareholders. Unlike an exchange where people actually loan money and hold shares in that business because they believe they will get a return, or MMs buying and selling and banking shares because there is liquidity to do so.
This is why the DTCC "Chill" and "Global Lock" are effective tools in the OTC, restrict the volume and well the "Share Printing Machine" dies with the lack of volume.
(posted by Bigbake1)
