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Coach

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Coach

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Tuesday, 09/26/2000 1:39:46 PM

Tuesday, September 26, 2000 1:39:46 PM

Post# of 82
Why we have MMM and What You can do to Stop it.

We used to have a free flow of investor comment on this page – much of it about Market Maker Manipulation. In the beginning the idea that there even was market maker manipulation was shocking. If anything, it could have only occurred in an isolated incident or two. Right? Wrong.

As more and more investors added their experiences to the growing mass of information being sent into OTCNN, we all learned that gross manipulation of OTCBB stocks is a widespread and prevalent disease infecting much of the OTCBB. We also learned that insiders regard it as nothing more than “business as usual.”

We learned much about how the MMs did it, how they sold stock that they didn’t own, and used unreported MM-to-MM trades back and forth, to manipulate stock prices. What we also found out was that the more we learned from our reader-investors about the mechanics of MMM, the less comfortable the MMs were in practicing it.

Now the cat is out of the bag, and nobody’s going to stuff it back it. MMM is still practiced, because there’s no intolerable penalty for it, but even MMs must know, the days of free wheeling stock manipulation are numbered.

Unfortunately, what used to be a constant flow of enlightening investor information and opinion has all but stopped. Since OTC News Network initiated a more stringent policy regarding anonymous letters – for legal and other reasons – fewer people are willing to speak out.

Many times an investor will say, “Please don’t use my name,” and we won’t. But, if we can’t verify the opinion came from you, we can’t publish the message, no matter how informative it is. This is the same reasoning behind the advice we give over and over again on this site – everything you read that directly affects you should be independently verified! And, one of the best ways to get true information is to know the source.

I, unlike many of OTCNN’s readers, am not anonymous, so I qualify to express my knowledge and opinion – not necessarily the opinion of OTCNN News Network, only my own. So if this column seems familiar to you, you’ll know that I still read your letters and try to investigate your claims.

An insight into the mechanics of MMM can be gained by using a made-up example to explain how a typical short begins, why it generally escalates, and why calling your securities doesn't always work. But here’s the good part, how a company can get even.

Say, for example, Burney Corp. reverse-merges into an OTCBB shell, and those in the know start buying the stock in the open market. This causes a chain reaction in a number of ways. First, usually you will see the stock begin to rise, simply because of the laws of supply and demand.

Next, you will see the Market Makers begin to jockey around for "Order Flow," the lifeblood of a Market Maker. Whether it is buy side or sell side, he doesn't care, just try to work out a small spread and he's done his job. This is where OTCBB stocks can start to have a problem.

If an MM starts to receive order flow, and it is coming from a major, such as Merrill, Schwab, or Ameritrade, he will risk filling the order, even if he doesn’t have the stock, and trying to back bid it, rather than just filling a partial order or passing. Order flow is everything, and if he can fill this order, chances are when that firm gets another order, he will too.

So now lets say the MM is “negative” 5,000 shares of Burney Corp. All the MM was doing was trying to honor a buy order, not necessarily hurt the stock. Now, more orders are coming in. Some he sees, some he doesn't, but at the end of the day, he’s now short 30,000 shares. And the stock that started at $1.00 per share, is now at $2.00.

Dilemma! The market maker is now down 30,000 shares, and nobody is selling him any stock. Day two comes and the same thing happens, only this time the stock closes at $3.00, now he is negative 60,000 shares. Now he is really in a jam. What does he do? He's down 2 points on 60,000 shares and still nobody is selling.

Does he (a) try and cover by buying into the open market and take his hit, (b) continue to fill orders with stock he doesn't own, averaging his short price up, or (c) start short selling the stock, knocking the price down and praying he shakes some sellers out? Those are his 3 choices.

Understand, the Market Maker didn't necessarily mean to get in this jam. It just happened as a function of him trying to create a good "First Call" with the street in a security where the shares are very tightly held. Now his back is against the wall, and he has to try and trade his way out.

Unfortunately, if he chooses to try and short the stock down, he may create an even bigger mess. A good offense is usually the first line of defense. The problem with this scenario is that as he pushes the stock down he (a) is now short even more shares, and (b) because the stock is now lower, he may encounter additional buying that he will also have to short to keep pressure on the stock. Now, he is short 120,000 shares, though he has managed to close the stock down to $2.00, but he still hasn't covered. Now, what does he do?

He can continue along his merry way and try to cover this himself, or he can call upon a few other MM friends to lend a hand and have them all short some stock too. Eventually the end is that they either succeed in driving the stock into the ground and people sell their shares back, or the buyers cause the shorts to lose so much money that they give up and go and play elsewhere. The problem is, how do the buyers make this happen?

Many will say to "register and ship" your shares to take them out of the system. Unfortunately, as good as this sounds, it may not work and the reason is one of the biggest kept secrets on Wall Street. Its called Stock Lending, and it is one of the biggest revenue generators firms have. Some make more money in this department than they do from normal trading commissions.

Say you are firm "A" and the original "Shell" shareholders have their shares of Burney Corp. deposited with you. Every single Market Maker that is short these shares can come to you and pay a daily fee, usually about 5% of the market value, and borrow stock from you.

Now lets say that a bunch of buyers of Burney Corp. request for their shares to be registered and shipped. Either they never get them, or they raise a sufficient fuss and they get them eventually. Why is it so difficult? Because both sides have an incentive to slow the process down.

The firm that is long on the stock doesn't want to deliver them because they are making money loaning them to the shorts. And the shorts don't want them delivered because it dries up their supply from which to borrow. The other thing is that firms all tend to stick together and help each other out, because you never know when you may need a favor of your own. So the question remains: How do you break them?

I’ll have the answer tomorrow in Part 2 of “Manipulating the Manipulators.”


Yesterday we imagined a situation in which some MMs were in a long position and some held extreme short positions in the stock of fictitious Burney Corp. We observed that these firms all tend to stick together and help each other out, because they never know when they may need a favor of their own.

And we asked the question: How do you break them?

The answer is, you can’t, at least not under present regulations. You can, however, cause them to just leave, which in reality is all you really want them to do.

How? It's not easy, but I’ll try to explain.

Because firms tend to watch out for one another, it is very difficult to force a "Buy In". It can be done in Canada however, and here are the steps to do it.

1. Open up an account in Canada. This is difficult because most firms there will not open accounts for U.S. residents. You may get lucky enough to find a firm that will open one for you, but you may have to settle for an offshore account instead. For the sake of the discussion, let’s assume you open a Canadian account.

2. Transfer your shares into your newly opened Canadian account.

3. Request that those shares to be registered and shipped. Now odds are the shares won't be delivered and after 5 business days a fail notice will appear. This is where you need someone who knows what they are doing.

4. After the fail notice, your broker gives his Clearing Firm a “'48 Hour” Buy-In Notice. This notice is then electronically disseminated among all of the other Clearing Firms, who then pass it along to the firms they clear for, meaning the market makers.

This notice basically tells the market makers that they have 48 hours to deliver good, fully paid for shares, or they run the risk of being bought in. They do NOT like this! It is at this point that the market makers will try to buy some stock in the open market, to try and fulfill the request, however, if it is for a lot of stock, them may not be able to find it.

When that happens and the 48 hours has passed, then your broker goes to work for you again. This time he is armed with a blank check. For the sake of example, lets say that a group has DTC'ed 400,000 shares into a Canadian account, and they received only 50,000 before the 48 hours was up.

The broker now goes into the market place and tries to buy 350,000 shares "Guaranteed Delivery." This is very important because otherwise the market makers will just short the shares to you, but they can't be delivered, so when the broker is out there buying in, he must request against guaranteed delivery shares.

In this example, the shares started at $2/share. Now, let’s say that the broker is able to find up to 350,000 shares guaranteed delivery, but pays an average price of $6/share. Who gets the bill for $2.1 million and how do they get it?

The bill is sent to the Clearing Firm that the Canadian broker used, which then sends it out to all the other Clearing Firms. Every market maker will receive their portion of the bill, however much they were short, and now bought in, and will have to pay these monies to their clearing firm within 24 hours.

This is where you hurt them most, in the pocket book. Hopefully you can make it meaningful, and it becomes too expensive for them, and they decide to play elsewhere.

Remember that the market makers have two advantages over the public. They are exempt from being short a non-marginable security, and they generally have tens or hundreds of millions of dollars behind them to wait it out.

The one thing they do not have is the stock to deliver, and you just need to know how to force a buy-in.

(Please address your comments, with name, address and phone, to jburney@otcnn.com , or you can send them anonymously, but don’t expect them to be published.)

Disclaimer:
This content is for informational use only and is not a recommendation to open an account in Canada. OTCNN shall not be liable for any errors in the content herein.

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