posted
Excellent Tex Thanks! ohh ... delete this after you read it. LOL
-------------------- All post are my opinion. Do your own DD. Who's clicking your buy/sell button!? Posts: 6648 | From: Virginia | Registered: May 2006
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1. How do I buy or sell stock in a company that is quoted on the OTC Bulletin Board ® (OTCBB)?
The process of buying or selling OTCBB stock is the same as buying or selling any other stock. You must open an account with a broker (a party that executes buy and sell orders). You cannot buy OTCBB stock directly from the OTCBB or the OTCBB.com.
2. Can a security be traded on the OTCBB and NASDAQ ® at the same time?
No. The OTCBB is a quotation service for securities which are not listed or traded on NASDAQ or a national securities exchange.
3. What are some of the differences between companies quoted by an OTC quotation service and companies listed on a stock market?
Stock markets (including NASDAQ and the registered exchanges, such as NYSE or AMEX) have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock market have reporting obligations to the market, and an on-going regulatory relationship exists between the market and its listed companies. OTC quotation services (OTCBB, Pink Sheets) facilitate quotation of unlisted securities. As such, any regulatory relationship between an OTC quotation service and the issuers may be relatively limited or non-existent.
4. What is the difference between OTC, other-OTC and OTC Bulletin Board (OTCBB)? And where do the Pink Sheets fit in?
An over-the-counter (OTC) security is generally considered to be any equity security that is not listed on NASDAQ, NYSE or AMEX. The OTCBB and the Pink Sheets are both quotation services for OTC securities. NASDAQ operates the OTCBB service and permits NASD members to quote any OTC security that is current in certain required regulatory filings (see Listing requirements ). The Pink Sheets is a privately owned company that permits NASD members to quote any OTC security and does not maintain regulatory filing requirements. An OTC security can be dually quoted on both the OTCBB and the Pink Sheets. As well, there are many OTC securities that are not quoted on either the OTCBB or the Pink Sheets; however, they have trading symbols assigned to them so NASD members can comply with trade reporting obligations and report transactions in these securities. These securities are sometimes said to be on the "grey market".
Other-OTC/NBB . Any OTC security that is not quoted on the OTCBB but is eligible for trade reporting on the Automated Confirmation Transaction Service (ACT) is categorized as "other-OTC" or non-Bulletin Board (NBB). You will see both of these terms throughout the OTCBB.com website. This includes, but is not limited to, securities quoted on the Pink Sheets. Because other-OTC securities are not quoted on the OTCBB, you will not be able to access quotes on these stocks through the OTCBB.com website, the NASDAQ Workstation II, or any other NASDAQ product. If they are quoted on the Pink Sheets, you may be able to obtain quotes for other-OTC securities on the Pink Sheets website at www.pinksheets.com.
5. What is the correct way to refer to the OTCBB or securities quoted on the OTCBB?
Correct and accurate terminology when referencing the OTC Bulletin Board are as follows:
OTC Bulletin Board Quoted on the OTC Bulletin Board
Listing and Eligibility Requirements
6. What are the "listing" requirements for the OTCBB?
Because the OTCBB is a quotation service for NASD Market Makers, not an issuer listing service or securities market, there are no listing requirements that must be met by an OTCBB issuer. Accordingly, there are no financial requirements and there is no minimum bid price requirement.
7. Are OTCBB companies considered to be "listed"?
No, the OTCBB is not an issuer listing service, and there is no listing agreement between either the OTCBB or NASDAQ and the issuer. There are, however, certain requirements an issuer must meet in order for its securities to be eligible for a market maker to enter a quotation on the OTCBB.
8. What are the eligibility requirements for the OTCBB?
In order for a security to be eligible for quotation by a market maker on the OTCBB, the security must be registered with the Securities and Exchange Commission (SEC) or other federal regulatory authority that has proper jurisdiction (see below) and the issuer must be current in its required filings with such federal authority.
Domestic issues quoted on the OTCBB are limited to the following securities:
securities of issuers that make current filings pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Act"); securities of depository institutions that are not required to make filings under the Act, but file publicly available reports with their appropriate regulatory authorities; securities of registered closed-end investment companies; and securities of insurance companies that are exempt from registration under Section 12(g)(2)(G) of the Act. Foreign issues and ADRs must be registered with the Securities & Exchange Commission (SEC) pursuant to Section 12 of the Securities Exchange Act of 1934.
9. How many market makers are required for a security to be on the OTCBB?
A minimum of one market maker is needed.
10. What are the listing fees for the OTCBB?
There are no listing fees for the OTCBB. Market makers do pay a fee for participating in the OTCBB of $6 per security per month.
11. Does the OTCBB have shareholder approval rules?
No. The OTCBB does not have shareholder approval rules.
12. Is an OTCBB issuer required to have an audit committee?
OTCBB issuers may choose to have an audit committee, and certain OTCBB issuers may be required to have an audit committee by virtue of an applicable law or rule. However, the OTCBB rules do not separately require OTCBB issuers to establish or maintain an audit committee.
13. How does a company get on the OTCBB?
An issuer may not submit an application directly to be quoted on the OTCBB. A market maker must sponsor the security and demonstrate compliance with SEC Rule 15c211 before it can initiate a quote in a specific security on the OTCBB.
14. How does a security delisted from NASDAQ or an exchange get on the OTCBB?
For a security being delisted from NASDAQ, NYSE, or AMEX, a Market Maker must file a Form 211 and a Form 211 Addendum.
15. Can a company be "delisted" or removed from the OTCBB?
OTCBB issuers that become delinquent in their required regulatory filings will have their securities removed from the OTC Bulletin Board. Further, all OTCBB issues must maintain at least one registered Market Maker to remain on the OTCBB. When the last Market Maker in a security withdraws from the stock, the issue is removed from the OTCBB after 4 days pursuant to Rule 15c2-11. An issuer cannot voluntarily withdraw from the OTCBB; only a market maker can voluntarily withdraw it's quote from the OTCBB. If an OTCBB security becomes listed on NASDAQ or an exchange, it will no longer be eligible and will be removed from the OTCBB.
16. Can a company appeal the removal of its securities?
The issuer of a security quoted on the OTCBB may appeal the removal of its securities to a Hearings Panel that consists of independent persons appointed by the NASD board. The pool of panellists includes accountants, investment bankers, corporate officers and securities lawyers. A request for a hearing will stay the determination to remove the securities pending a determination by the Hearing Panel. Such requests should be faxed to the Hearings Department at 301.978.8080 no later than 4:00 pm , two business days prior to the scheduled removal date. All hearings will be governed by the Rule 9700 Series of the NASD Rules. Hearings are limited to the question of whether the issuer is current in its required filings.
17. May a company appeal the Panel's decision?
Yes. The issuer may appeal the Panel's decision to the NASDAQ Listing and Hearing Review Council ("NLHRC"). The NLHRC may also decide to call the decision for review. The appeal to the NLHRC does not stay the Panel's determination; consequently, a company that has been removed by the Panel will not be reinstated prior to a final determination by the NLHRC. If the NLHRC overturns the Panel, then the company's securities may be reinstated on the OTCBB. After a determination by the NLHRC, the company may appeal to the SEC, and, from there, it may proceed to the Federal court system.
Form 211 (SEC Rule 15c2-11)
18. What is a Form 211?
The Form 211 is the form which must be completed and submitted to NASD OTC Compliance Unit to initiate or resume quotations in the OTCBB, the "Pink Sheets", or any other comparable quotation medium pursuant to SEC Rule 15c2-11
19. After a Form 211 is filed, how long until the security can begin quotation on the OTCBB?
There is no standard time to process a 211 and clear the market maker to begin quoting a security on the OTCBB. The time it takes to review a 211 may vary significantly depending on many factors including whether or not NASD has to request additional information from the market maker that submitted the form and upon how long it takes the market maker to respond to requests for additional information.
20. How do I check the status of a Form 211 filing?
Contact the. NASD OTC Compliance Unit Please note that the Form 211 review process is proprietary and, thus, NASD will only discuss details of the filing or review directly with the firm that submitted the Form 211.
21. Do financials submitted with the Form 211 have to be audited?
Yes, the periodic reporting requirements under NASD Rule 6530 require annual audits of an OTCBB issuer's financial statements. However, current NASD rules do not require the financial statements of Pink Sheet issuers to be audited, but they should be prepared in accordance with GAAP or, for foreign issuers, in accordance with their home country's accounting standards.
22. Do I have to file a Form 211 for a security delisted from NASDAQ?
A delisted Nasdaq Issuer that wishes to be quoted on the OTCBB should contact their market makers to request that they complete a Form 211 for review and processing
23. Do I have to file a Form 211 for a New York Stock Exchange or American Stock Exchange delisted security?
Yes. Prior listing on NYSE or AMEX does not exempt a Market Maker from the Form 211 filing requirement."
U.S. Stocks and Options Easy to borrow TRADING PLATFORM Realtick® InstaQuote The following stocks are listed as 'easy to borrow' for short selling. QuoteTracker This list is updated only once every morning on market days. TradeStream DETAILS Please contact us if you have questions. Email: info*ecnbroker.comm Commissions & rebates "
[gotta see the site, to see the window with latest tickers -- tex]
posted
HAS ANYONE USED INVESTOOLS OR TEACH ME TO TRADE SOFTWARE OR HAVEN ANY EXPERINCE WITH THOSE COMPANYS? THANKS
Posts: 9 | Registered: May 2006
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NASD hosts a number of conferences and events focusing on regulatory securities issues of interest to legal and compliance personnel and others.
2007 Holiday Schedule
NASD will be closed in observance of these holidays:
January 1 New Year's Day (Observed) January 15 Martin Luther King, Jr. Day February 19 Presidents' Day (Observed) April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
NASD and financial markets may close early the day before a holiday.
Holiday Calendar and Events
Events
NASD hosts a number of conferences and events focusing on regulatory securities issues of interest to legal and compliance personnel and others.
2007 Holiday Schedule
NASD will be closed in observance of these holidays:
January 1 New Year's Day (Observed) January 15 Martin Luther King, Jr. Day February 19 Presidents' Day (Observed) April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
NASD and financial markets may close early the day before a holiday.
quote:The 2007 holiday schedule for NASDAQ is as follows:
January 1 New Year's Day January 15 Martin Luther King Jr.'s Birthday (Observed) February 19 Presidents' Day April 6 Good Friday May 28 Memorial Day July 4 Independence Day September 3 Labor Day November 22 Thanksgiving Day December 25 Christmas Day
The NASDAQ Stock Market and the securities exchanges will be closed on Monday, January 1, 2007, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Martin Luther King, Jr., Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, January 15, 2007, in observance of Martin Luther King, Jr., Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Jan. 9 Jan. 12 Jan. 17 10 16 18 11 17 19 12 18 22 15 Markets Closed -- 16 19 23
Presidents' Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, February 19, 2007, in observance of Presidents' Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Feb. 13 Feb. 16 Feb. 21 14 20 22 15 21 23 16 22 26 19 Markets Closed -- 20 23 27
Good Friday 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Good Friday, April 6, 2007. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* April 2 April 5 April 10 3 9 11 4 10 12 5 11 13 6 Markets Closed -- 9 12 16
Memorial Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, May 28, 2007, in observance of Memorial Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* May 22 May 25 May 30 23 29 31 24 30 June 1 25 31 4 28 Markets Closed -- 29 June 1 5
Independence Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Wednesday, July 4, 2007, in observance of Independence Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* June 28 July 3 July 6 29 5 5 July 2 6 10 3 9 11 4 Markets Closed -- 5 10 12
Labor Day 2007 The NASDAQ Stock Market and the securities exchanges will be closed on Monday, September 3, 2007, in observance of Labor Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Trade Date Settlement Date Reg. T Date* Aug. 28 Aug. 31 Sept. 5 29 Sept. 4 6 30 5 7 31 6 10 Sept. 3 Markets Closed -- 5 7 11
Columbus Day 2007 The schedule of trade dates-settlement dates below reflects the observance by the financial community of Columbus Day, Monday, October 8, 2007. On this day, The NASDAQ Stock Market and the securities exchanges will be open for trading. However, it will not be a settlement date because many of the nation's banking institutions will be closed.
Trade Date Settlement Date Reg. T Date* Oct. 2 Oct. 5 Oct. 9 3 9 10 4 9 11 5 10 12 8 11 15 9 12 16
Note: October 8, 2007, is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board. Transactions made on Wednesday, October 3, will be combined with transactions made on Thursday, October 4, for settlement on October 9. Securities will not be quoted ex-dividend, and settlements, marks to the market, reclamations, and buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on October 8.
Thanksgiving Day 2007
The schedule of trade dates-settlement dates below reflects the observance of the financial community of Thanksgiving Day, Thursday, November 22, 2007. All securities markets will be closed on Thursday, November 22, 2007, in observance of Thanksgiving Day.
Trade Date Settlement Date Reg. T Date* Nov. 16 Nov. 21 Nov. 26 19 23 27 20 26 28 21 27 29 22 Markets Closed -- 23 28 30
Christmas Day 2007 and New Year's Day 2008
The NASDAQ Stock Market and the securities exchanges will be closed on Tuesday, December 25, 2007, in observance of Christmas Day and Tuesday, January 1, 2008, in observance of New Year's Day. "Regular way" transactions made on the business days noted below will be subject to the following schedule:
Contact Information Questions regarding the application of those settlement dates to a particular situation may be directed to the Corporate Data Integrity Department at 203.375.9609.
posted
Going long on a pennystock? cuz it's a "real company," right?
quote:Posted by: cws9 In reply to: None Date:9/20/2005 9:46:20 PM Post #of 11736
Copied from another board. I don't have a link but it is interesting anyways.....
BEFORE YOU BUY AN OTC PENNY STOCK
There are several key areas to look at when doing DD on an Over-the-counter pennystock. And it doesn't even include looking at the financial information.. . that is the least important thing to look at.
Share structure and distribution is the FIRST place our eyes should go when looking at an OTC stock. Don't even READ the news until you know whether or not 5 million shares were sold at .005 to a company in the Cayman Islands.
If so, you can rest assured that there will be heavy selling on any run up, as each new buy is met with an insider sell. And the stock will probably then get heavily shorted near the top. . and driven down to nothing. . and I do mean NOTHING.
And if the company does not report their financials to the SEC. . .RUN AWAY. Don't even consider them, because they will surely rip you off any way that they can. And if they SAY that they will soon be reporting their "audited" financials. . .run even faster. . .this means they have NO INTENTION of filing with the SEC. And even if they say "we will be filing with the SEC" or even "we HAVE submitted our financials to the SEC." DON'T BELIEVE THEM.
MDCE put out a half dozen press releases telling shareholders that they filed their financials with the SEC. . .but somehow. . .as if by magic. . .they have never appeared on the Edgars.
This stuff is the BASICS of penny trading.
SECOND, look at the HISTORY of the stock. . .was there a reverse split or reverse merger in its past? If so, there will probably be more problems or more reverse splits in the future. How long has the company been in business? It is one thing for a company to come up with an idea. . .it is CLEARLY another for same company to figure out a way to successfully market that product or service. . . and it is another thing yet, for the company to properly manage their money.
Take down the names of the officers of the companies, the investor relations people or firm and any other important parties. . .and do a "entire website" search at the SEC. This is not an Edgar search. . and can be found on the main page of the SEC, which EVERY penny trader should know very well. If your party comes up in the search, you can know their history. . if not, it does not mean they are "clear". . .they still could be under investigation or have played a smaller role in other scams, etc. . . .or just have never been caught. Be UN-trusting as a defense to loss and you will increase your chance at gains.
The easy way to do searches on SEC is to use "adj" between names like John Smith. . ."john adj smith" . . if it is an odd last name, it should be fine by itself. . "stephanapolous" or "gianapolitana" or "santodominguez" etc. . .otherwise use adj on firm names like "La Jolla adj Capital" or "La adj Jolla adj Capital" . . this will keep the thousands of uses of "capital" or the city "La Jolla" from coming up in the search. It means literally adjacent" words.
THIRD, read the press releases with a cynical eye. . . if they say that the industry is reported to generate 14 billion in revenues each year and we estimate that our revenues in the coming year will be between 40 million and 60 million dollars. . .. RUN away.
If there is no LOGICAL and detailed explanation of HOW the company plans to make ANY money. . .then they don't. . . they just plan to sell shares. . to you? . . hopefully NO. . to the suckers that don't have a clue what they are doing. ANY reports of "projected" revenues should be based on PRIOR performance. . .if not, it is just a pie-in-the-sky arbitrary number picked out to make them look good to prospective penny traders.
If the company headquarters is in Vancouver, Boca Raton, La Jolla, Denver or Las Vegas. . . . RUN AWAY. There is an old saying in the record biz, where thousands of demo tapes are sent every week. . . "if we reject 100 percent of those wanting a record deal, we will be correct in our decision 99 percent of the time. . .and that ain't bad"
By catagorically denying ANY company hailing from these cities, thus rejecting 100 percent of them. . .we will be correct in our decision 99 percent of the time. And that is not bad.
Other suspect cities, which would require EXTENSIVE DD to justify,include New York City, Dallas, Houston, Palm Springs or other cities of the Coachella Valley, Ft. Lauderdale or other cities in South Florida, any city in Nevada, ANY city in Canada where everyone can short-sell penny stocks, any other "resort" city. . .
If Gucci has a store there. . .then chances are your company does not operate a 50,000 square foot building in the same town. . but rather is just one of many operations out of a small office there.
FOURTH. .INVESTIGATE. . . A good way to find out about the company? CALL THEM. NO, I don't mean to call the number they provide you. . .I mean call the local area directory assistance and ask for the company name. . . I have even gone as far as asked for the numbers of each of the officers of suspect companies, only to find that NOBODY had a listed number. . not even the company.
If the company has an unlisted number. . .think about it. . their customers or clients will not be able to find them. . they are absolutely bogus. If the CEO or his wife answers. .or there is a baby crying in the background. . .guess what? The company is being run out of the kitchen table of a house, and they want your money. . .why? There are bills that need paid, that's why.
Another good trick, is to offer to visit the company headquarters on short notice. . .say something like I will be in town first thing in the morning and would like directions to the company headquarters, so you can report back to your thread on Silicon Investor. . .yes they all read our threads.
If they say the company is moving, under construction or give ANY reason whatsoever for not allowing you there. . . you have your answer. . they are bogus. .don't believe them. . .if they offer to meet you elsewhere or to guide you in. . . decline and say, you may be late and insist on getting precise directions to the company headquarters. You will be amazed at the number of companies that will refuse to tell you.
If you are still interested in the company at this point. . .then you must ask yourself how much you are willing to lose. . . if you are "investing" 2,000 or more dollars, then go to Southwest Airlines website on a Tuesday thru Thursday and book a 33 to 99 dollar "internet special" flight there and go and see them for yourself. For just a same day trip. . or overnight if you feel adventurous. . .for just a few hundred bucks. . you can get a first hand account of where your money is going.
If they sell goods. . .you want to see the warehouse, shipping, receiving department. . .it should be impressive. . even if it is tiny. . if they sell services. . you want to see the laborers performing these services. . .if the company is nothing more than a small office with no laborers, because they "farm out" or their workers work "out of their homes" . . .RUN away. That is a lie. . the company is in business just to sell shares. In which case, be sure to note the leather interior of the CEO's car. . because that is what your 2,000 bucks bought.
Note the name or names on the door. Instead of the company name, does it say "capital.. .equity. . .investor. . .relations. . .financial". . etc??? Do you know why? Because they operate NUMEROUS companies from the same office. . . in which case, your presence is not only NOT WANTED. . .it is threatening to their livelyhood.
If that is the case, I would not bother to even enter, as it may be a potentially dangerous or threatening situation. . . I would turn around and never look back.
But here is the part of penny trading that is the most important of all.. .and what I expect from each of us here on the fishing thread. . . when you have information about these companies like that described above. . and someone else is getting suckered into the same company. . . have the decency to tell them.
You don't need to go on the thread and tell eveyone they are invested in a bogus company. . .chances are good that they have already figured that out. . . but in the course of daily discussion, when the name pops up. . and you can shed some light. . do not hold back.
If they were unlisted. . say so. . if they have convertible debentures from an offshore placement. . say so. . .if there was a 1 for 100 reverse split a year ago. . .say so . . etc etc etc.
Not every company on the OTC or the Nasdaq is bogus.. . . but as I said on the Scammy Awards:
Welcome to the Over-The-Counter market of Electronic Bulletin Board and Pink Sheet stocks.
Out of 100,000 issues, 90,000 are scammys 9,000 are clueless 900 are really trying Leaving 100 that are worth buying.
-------------------- All post are my opinion. Do your own DD. Who's clicking your buy/sell button!? Posts: 6648 | From: Virginia | Registered: May 2006
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-------------------- The difference between genius and stupidity is that genius has its limits Posts: 9956 | From: NYC | Registered: Mar 2006
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posted
JUICEY, got that one, but as a youtube link--sure won't hurt to have a coupla different links for that one...
Boo? that's a nice link...
btw, just read the first one on the list, ". . . Stock Operator" the other night; had heard of it of course, but had never read. Fascinating...what struck me was how well it stands it...very modern, in a sense. For example, once he set up an office, he had "wires" installed...lol, early online, he was...
anyway, that link on Bob's list didn't work for me, so here's one to a freebie, .pdf download. Well, can be read online, too, if download not wanted...
posted
"Stock issued as part of a bankruptcy reorganization..."
Posted by: matrix In reply to: 2ligit2quit who wrote msg# 980 Date:4/2/2007 9:43:06 PM Post #of 1002
When a company issues stock, the recipient is restricted from reselling it unless: -- he's held the stock for a certain period of time (normally one year or more); OR -- a registration statement is filed and deemed effective; OR -- the issuance falls under an exemption to registration
Stock issued as part of a bankruptcy reorganization plan happens to fall under category #3. In other words, the stock can be immediately free-trading and sold into the float if they so desire. Since the filings say they want to do a merger, they'll probably retain enough to keep control. It's possible the BK order may restrict how much they can sell prior to the merger occurring.
< ** remember, though: don't get confused when the rules aren't "strictly followed"; i.e., go by the ex-date regardless of record and payable dates. If you're considering a significant chunk of change, always CALL NASD for verification...although rare, dailylist screwups have been known.** -- tex >
Division of Market Regulation: Key Points About Regulation SHO Date: April 11, 2005 I. Short Sales A. What is a short sale? A short sale is generally the sale of a stock you do not own (or that you will borrow for delivery).1 Short sellers believe the price of the stock will fall, or are seeking to hedge against potential price volatility in securities that they own.
If the price of the stock drops, short sellers buy the stock at the lower price and make a profit. If the price of the stock rises, short sellers will incur a loss. Short selling is used for many purposes, including to profit from an expected downward price movement, to provide liquidity in response to unanticipated buyer demand, or to hedge the risk of a long position in the same security or a related security.
B. Example of a short sale. For example, an investor believes that there will be a decline in the stock price of Company A. Company A is trading at $60 a share, so the investor borrows shares of Company A stock at $60 a share and immediately sells them in a short sale. Later, Company A's stock price declines to $40 a share, and the investor buys shares back on the open market to replace the borrowed shares. Since the price is lower, the investor profits on the difference -- in this case $20 a share (minus transaction costs such as commissions and fees). However, if the price goes up from the original price, the investor loses money. Unlike a traditional long position — when risk is limited to the amount invested — shorting a stock leaves an investor open to the possibility of unlimited losses, since a stock can theoretically keep rising indefinitely.
C. How does short selling work? Typically, when you sell short, your brokerage firm loans you the stock. The stock you borrow comes from either the firm's own inventory, the margin account of other brokerage firm clients, or another lender. As with buying stock on margin,2 your brokerage firm will charge you interest on the loan, and you are subject to the margin rules. If the stock you borrow pays a dividend, you must pay the dividend to the person or firm making the loan.
D. Are short sales legal? Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.
II. "Naked" Short Sales In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. 3 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").
Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from naked short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.
III. Regulation SHO Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. Some of the goals of Regulation SHO include:
Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.
Locate Requirement: Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.6 This "locate" must be made and documented prior to effecting the short sale.
"Close-out" Requirement: Regulation SHO imposes additional delivery requirements on broker-dealers for securities in which there are a relatively substantial number of extended delivery failures at a registered clearing agency7 ("threshold securities"). For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency8 to take action to "close-out" failure-to-deliver positions ("open fails") in threshold securities that have persisted for 13 consecutive settlement days.9 Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker)10 may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement).
Temporarily suspending Commission and SRO11 short sale price tests12 in a group of securities to evaluate the overall effectiveness and necessity of such restrictions. The Commis
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