Andrew Robinson Comment On Regulatory Notice 21-19
Andrew Robinson
N/A
It is ludicrous to expect any self-reporting method of counting short positions to be anywhere near reliable. Organisations engaged in industrial scale naked shorting will obviously not tell the truth about their positions, especially when the fines for mis-reporting are a tiny fraction of the profits they can make. The only trustworthy method of counting shorts would be to count the shares in circulation and subtract that from the number of shares that ought to be in circulation. FINRA should therefore require Brokers dealing in US securities to report the aggregate long positions of their clients (and how many FTDs these include) at market close, enabling FINRA to then publish daily reports of total short positions for each security. Doing this on a daily basis would be a massive improvement over any self-reporting system. Introducing this system may be expensive, but it is the only way to circumvent the array of methods currently used to hide synthetic short positions, and doing so is essential if the market is to avoid the potential for the creation of an "infinity pool", which would threaten the integrity of the entire economic system. The danger of an "infinity pool" should not be underestimated. The traditional short squeeze can be defused by covering short positions, because participants with long positions will maximise their profits by competing to sell their holdings before the shorts are completely covered. This may damage or bankrupt the shorts, and may cause a domino effect, but this has historically been a containable event. In situations where over 100% of the float is shorted, the best tactic for participants with long positions stops being 'sell before the shorts cover', instead their best move is to take advantage of the unlimited downside of being short, by only ever selling a small portion of their shares, keeping more than 100% float permanently out of the hands of the shorts, who will have to pay an infinite price for the few shares that are sold. This situation has the potential to bankrupt every entity with any short position, and then as liabilities are transferred domino fashion, the DTCC, the DTCC's insurers, and the entire US economic system. FINRA should consider that such an event is neither impossible nor indeed unlikely without a robust method of ensuring aggregate short positions never exceed 100% of the issued shares.
Andrew Robinson Comment On Regulatory Notice 21-19
It is ludicrous to expect any self-reporting method of counting short positions to be anywhere near reliable. Organisations engaged in industrial scale naked shorting will obviously not tell the truth about their positions, especially when the fines for mis-reporting are a tiny fraction of the profits they can make. The only trustworthy method of counting shorts would be to count the shares in circulation and subtract that from the number of shares that ought to be in circulation. FINRA should therefore require Brokers dealing in US securities to report the aggregate long positions of their clients (and how many FTDs these include) at market close, enabling FINRA to then publish daily reports of total short positions for each security. Doing this on a daily basis would be a massive improvement over any self-reporting system. Introducing this system may be expensive, but it is the only way to circumvent the array of methods currently used to hide synthetic short positions, and doing so is essential if the market is to avoid the potential for the creation of an "infinity pool", which would threaten the integrity of the entire economic system. The danger of an "infinity pool" should not be underestimated. The traditional short squeeze can be defused by covering short positions, because participants with long positions will maximise their profits by competing to sell their holdings before the shorts are completely covered. This may damage or bankrupt the shorts, and may cause a domino effect, but this has historically been a containable event. In situations where over 100% of the float is shorted, the best tactic for participants with long positions stops being 'sell before the shorts cover', instead their best move is to take advantage of the unlimited downside of being short, by only ever selling a small portion of their shares, keeping more than 100% float permanently out of the hands of the shorts, who will have to pay an infinite price for the few shares that are sold. This situation has the potential to bankrupt every entity with any short position, and then as liabilities are transferred domino fashion, the DTCC, the DTCC's insurers, and the entire US economic system. FINRA should consider that such an event is neither impossible nor indeed unlikely without a robust method of ensuring aggregate short positions never exceed 100% of the issued shares.