I have suspected this for years. FINRA reports on about only half of NASDAQ's total trading activity which occurs on any given trading day (lot's of trading not reported by FINRA). Further, it is mostly those large brokers and hedge funds who DO NOT report through FINRA, making them more likely to be short sellers. There's a lot of secrecy involved.
But it's grammar-school easy to imagine a scheme where two market makers collude to evade the 13-day FTD reporting requirements:
- Broker 'A' sells naked shorts on Day 1
- by Day 12, Broker 'A' has still not located shares
- instead of covering, Broker 'A' buys more shorts from Broker 'B'
- after a while Brokers 'A' and 'B' are routinely swapping naked shorts
- the 13 day reporting clock is reset indefinitely, thus the rule is nullified
After a legimate short sale, the share count is supposed to be preserved and trackable. But MMs violate this requirement via their short sellers exemption to do their own proprietary (for profit) trading. Let's use an example to see how this problematic short selling can be broken up:
- before a short sale, let's say there was exactly 1 share total available to borrow
- in a legimate short sale, the share count is supposed to be preserved and trackable
- after such a short sale, there are 2 legitimate share owners and a 1 debtor:
- the original owner (the lender), and
- the purchaser of the borrowed share (although this fact is hidden from the new owner), and
- 1 borrower (the short seller) who has a contractual arrangement to purchase a share to replace the one they borrowed through their broker
- they have a margin arrangement or capital reserve requirement with their Broker to enforce this commitment
- Share accounting: 2 shares - 1 promise = 1 share
- thus the share count before and after a legitimate short sale is 1
- MMs can use their privileges to do problematic naked short selling: (the case not just when a broker fails to locate a share to borrow, but when they personally engage in propriety trading by conducting short selling on their own behalf):
- there is no borrower, no 3rd party with a separate capital reserve
- share count is violated, since the Broker never attempts to locate a share
- the role of the law of Supply and Demand is circumvented in setting the share price by skewing the Order Book always to the down side
- Brokers can create infinite synthetic shares over the short term, but always a long enough term to break up a rally (say a few hours or days)
- all of this is done in secrecy, away from the view of the SEC or reporting requirements
So, how does a 'Stock Dividend' break up such a scam? Although any MM who has a large, unreported backlog of synthetic shares created to support their own proprietary trading (with the express goal of depressing the SP), they CAN NOT use their market maker's exemption to create new shares (they only have the right to borrow shares 'in the blind' with the understanding that they will eventually locate them).
This will not be the case after a 5:1 split. With 12 million shares sold short (as of July 31st), after the split their will be a need to identify 48 million new shares to attach to the existing shorts. This is an accounting problem of enormous magnitude for Broker's that have outstanding FTDs on their books.
It will be like a game of 'hot potato', where other MMs will suddenly be unwilling to swap naked short shares as they scramble to locate shares for their own accounts.
Again, this will not be a problem for any MM that has been conducting their business of short selling properly. It will however be a huge problem for any TSLA market maker who has been engaging in proprietary short selling using their 'Madoff exemption', and without a 3rd party to cover those shorts. It will be their own capital reserves that will determine if they can survive the stock dividend, and the relative size of their short position at risk.
I expect some of the 28-odd market makers in TSLA will not survive this. It's notable that Deutsche Bank has recently announced that they are abandoning their role as MM for TSLA, since they were one of Tesla's most vocal critics and had some of the lowest price targets on the street.
TL;dr no MMs will be harmed by the TSLA stock dividend unless they have been acting improperly. We are about to get a glimpse behind the curtain of secrecy on Wall St.
Cheers!
@avoigt @SpaceCash @Hock1 @Boomer19 @Fact Checking
