Tag Archive | "SHLD"

Anarcho-Regulation

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Anarcho-Regulation


Short-side stock manipulators are slippery and, by definition, dishonest. These people thrive on the internet, where they can anonymously spread misinformation and then away, with little fear of being held accountable. Still, on a few occasions, I’ve observed anonymous defenders of illegal naked short selling attempt to mount a philosophical defense of their actions. When they do, the best case they can make sounds like this:

“America’s capital markets are too large and complex for our regulators to handle. As a result, overvalued, scamming companies run rampant, defrauding investors. We, the naked short sellers, are doing the rest of you a favor by taking the law into our own hands in an effort to short these companies out of existence, or at the very least depress their share prices such that when they finally do fail, the rest of you will not lose as much as you would have. So you’re welcome.”

This silly idea is taken directly from anarcho-capitalism: an economic and political philosophy describing how market participants themselves, operating in the absence of government regulation, might find a profit motive in the maintenance of order.

To be fair, these “principled” naked short sellers and I do in fact agree on one matter: the fact that our markets are operating without an effective regulator. And I’ll also concede that there was a time when the rest of this anarcho-capitalist manifesto might have applied; specifically, many years ago, when manipulative short sellers limited their activities to micro-cap companies that were expert at selling: not goods or services, but stock. And because the world of penny stocks is recognized by all as a financial Wild West to begin with, this form of frontier justice – though distasteful – was allowed to fill a niche in the great financial ecosystem…akin to the fleas biting the rats feeding on the scraps fallen from the table of American capitalism. Then, for reasons too complicated to fully explain here, following the market crash of 1987, predatory short selling began to move from the shadowy back alleys and onto Wall Street, where, within less than two decades, these parasites had moved far up the food chain, never quite able to satisfy their blood-lust, while regulators continued looking the other way.

I offer all this information as background, in order to help you more fully appreciate what follows.

Last month, the Deep Capture team began to spot patterns in the equities and options trading of companies whose stock experienced unusually high levels of sustained delivery failures: a sure sign of manipulative naked short selling. We determined that certain pairs of transactions (what we’ve come to call “matched blocks”) faithfully predicted the numbers of shares that would go on to be reported as undelivered by the seller two trading days later. Because delivery is only considered “failed” after three trading days (T+3), and these transactions were taking place on T+1, we realized that they must be happening in response to the naked shorts generated on T+0; specifically, that these trades are likely intended to give the appearance that the SEC’s mandatory close-out requirement has been met, thus “resetting” the three-day clock ticking down until delivery is forced.

This sort of thing is not supposed to be happening, by the way. It’s illegal, and, under significant political pressure, last year the SEC lightly reproached three other firms for engaging in identical activity.

Whatever the case, these matched blocks, which we can observe in near-real time, proved uncanny predictors of failed trades reported by the SEC in much-less-than-real-time (usually delayed by two to three weeks). We took advantage of this reporting time lag to publicly predict – based on the matched blocks – delivery failures in shares of Sears Holdings (NASDAQ:SHLD) several days before those figures were released.  When they finally were, our predictions proved accurate to within 2.5% — including faithfully anticipating a near 50% drop from one day to the next.

After publishing these predictions for Sears, I posted messages alerting readers of stock message boards dedicated to discussing Amedysis (NASDAQ:AMED) and Mannkind Corp. (NASDAQ:MNKD): two other companies whose trading data demonstrated links between matched blocks and delivery failures nearly identical to that of Sears, and where many posters were attempting to understand – though with only fragmentary information – what was going on.

All along, it was my intention, upon finishing my analysis of apparent manipulation in Sears, to raise awareness of the same sort of activity in Amedysis and Mannkind; however I never really had the chance, because it appears the would-be manipulator got spooked by the attention and decided to move on, covering at what was almost certainly a hefty loss.

In fact, the similarities observed in the trading of these three stocks from unrelated sectors (a brick-and-mortar retailer, a biotech firm and a provider of home health care), is somewhere between striking and spooky. In each case, the volume of the matched blocks reached their peaks on February 17 (the date of publication of my Sears prediction), and then abruptly tapered off. By March 2, Mannkind was off the Threshold list. By March 3, Sears Holdings was off the Threshold list. By March 22, Amedysis was also off the list.

It’s impossible to be certain whether the attention brought by Deep Capture had anything to do with the sudden abandonment of what had been a concerted effort at downward manipulation of the stock prices of three decidedly non-scam companies; yet the coincidences are too many to be ignored (there are others, by the way).

The idea that we might have had something to do with helping to restore fairness to the markets for these stocks, combined with my remembrances of the so-called anarcho-capitalist ideal described above, got me thinking about a new way of approaching this blog:

Because our financial markets are so large and complex, and our financial markets regulator so captured and inept, stock manipulating hedge funds have been running rampant, damaging companies and defrauding investors.  We, the investigative bloggers, are stepping in to do the job the SEC either cannot or will not do, by shining a bright light on acts of  manipulation when we see them, and publicly identifying the perpetrators (yes, we’ve figured out ways to potentially accomplish this, as well) when able. And we’ll continue doing it, until either America’s stock settlement system is repaired, or the SEC returns from its several decades-long coffee break.

That’s right. The naked short sellers offer anarcho-capitalism, and DeepCapture.com responds by giving them a dose of anarcho-regulation.

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I’ve astounded even myself!

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I’ve astounded even myself!


Last week I dared to predict the number of then unreleased delivery failures in shares of Sears Holdings (NASDAQ:SHLD). The figures I ultimately settled upon (after two minor tweaks in the days to follow) were:

1/29/2010 879,444
1/28/2010 873,222
1/27/2010 870,570
1/26/2010 851,904
1/25/2010 848,742
1/22/2010 865,266
1/21/2010 857,106
1/20/2010 1,535,508
1/19/2010 1,540,914

This morning, the SEC having yet to release the numbers, I explained the basis for my prediction, which is in simple terms, based on a pattern of apparently manipulative naked short “reset” transactions the Deep Capture team has observed in SHLD, and how those trades consistently predict how many shares of SHLD will fail to deliver after two days.

Well, literally moments after I published my explanation, the SEC released the numbers.

I asserted that my prediction would be accurate to within +/-2.5%. I’m embarrassed to reveal that in the end, my predictions were on average accurate to within 2.55%.

Sorry. I’ll try harder next time ;).

For the record, here’s a table comparing my predictions and the actual numbers.

date
predicted
actual
difference
percent
1/19/2010
1,540,914
1,566,164
25,250
1.61%
1/20/2010
1,535,508
1,498,938
36,570
2.44%
1/21/2010
857,106
910,786
53,680
5.89%
1/22/2010
865,266
914,056
48,790
5.34%
1/25/2010
848,742
854,491
5,749
0.67%
1/26/2010
851,904
846,268
5,636
0.67%
1/27/2010
870,570
851,094
19,476
2.29%
1/28/2010
873,222
851,705
21,517
2.53%
1/29/2010
879,444
866,606
12,838
1.48%
Average:
2.55%

At this point, the most relevant question is: will the SEC do anything about this obvious violation of the law?

Sadly, I predict that no, the SEC will not.

The next most relevant question is: will the manipulator continue manipulating, knowing he or she has been spotted?

Because I suspect the manipulator is operating without much concern over being held accountable, I must also predict that no, this pattern is unlikely to change.

However I can confidently predict that Deep Capture will continue identifying and reporting on these sorts of abuses, in the trading of SHLD and several other companies, in the very near future.

Mostly inconsequential postscript: Deep Capture team member Patrick Byrne points out to me that instead of average error, I should have used weighted error, in which case my prediction was off by just 2.51%.

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Cataloging Sears stock manipulation

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Cataloging Sears stock manipulation


Most of the examinations of stock manipulation published here on deepcapture.com take place after the fact, the damage being done. However, we’ve become aware of instances of apparently illegal, manipulative trading in several companies’ stocks, happening right now, which we have the ability to monitor and report on in nearly real time.

I’ll start with Sears Holdings Corporation (NASDAQ:SHLD).

A few months ago, an unusual trading pattern in shares of Sears emerged, in which large blocks of shares change hands within minutes of deep in-the-money call options equivalent to precisely the same numbers of shares in these blocks. This behavior is consistent with the illegal “reset” transaction described in the enforcement case brought by the SEC against naked short seller Steven M. Hazan:

“…a market participant who has a “fail-to-deliver” position in a threshold security buys shares of that security while simultaneously selling short-term, deep in-the-money call options to – or buying short-term, deep in-the-money put options from – the counterparty to the share purchase. The purchase of shares creates the illusion that the market participant has satisfied the close out obligation of Reg SHO. However, the shares that are apparently purchased in the reset transactions are never actually delivered to the purchaser because on the day after executing the reset, the option is either exercised (if a call) or assigned (if a put), transferring the shares back to the party that apparently sold them the previous day. This paired transaction allows the market participant with the fail-to-deliver position to effectively borrow the stock for a day, in order to appear to have satisfied the close out requirement of Rule 203(b)(3).”

If you want to see each of these reset transactions in detail, you can do so here. But if you’re content with the bottom lines, take a look at the following table, keeping in mind each call option contract gives the buyer the right to purchase 100 shares of the underlying stock (meaning, these trades were undeniably “matched” to one another).

Date Call option contracts Equities block size Date Call option contracts Equities block size
12/3/09 6,166 616,600 1/4/10 10,374 1,037,400
12/4/09 6,194 619,400 1/5/10 10,368 1,036,800
12/7/09 6,369 636,900 1/6/10 10,610 1,061,000
12/8/09 6,668 666,800 1/7/10 10,972 1,097,200
12/9/09 7,287 728,700 1/8/10 16,032 1,603,200
12/10/09 7,749 774,900 1/11/10 15,106 1,510,600
12/11/09 7,958 795,800 1/12/10 15,050 1,505,000
12/14/09 8,376 837,600 1/13/10 15,107 1,510,700
12/15/09 8,387 838,700 1/14/10 15,054 1,505,400
12/16/09 8,876 887,600 1/19/10 8,403 840,300
12/17/09 8,654 865,400 1/20/10 8,483 848,300
12/18/09 4,767 476,700 1/21/10 8,321 832,100
12/21/09 6,598 659,800 1/22/10 8,352 835,200
12/22/09 6,918 691,800 1/25/10 8,535 853,500
12/23/09 7,433 743,300 1/26/10 8,561 856,100
12/24/09 8,444 884,400 1/27/10 8,622 862,200
12/28/09 8,773 877,300 1/28/10 8,490 849,000
12/29/09 9,087 908,700 1/29/10 8,326 832,600
12/30/09 9,459 945,900
12/31/09 9,830 938,000

Take a look at how these blocks trades appear when charted.

SHLD matched block trades: click to enlarge

Looking at the relationship between these matched blocks and the delivery failure data currently available suggests the blocks are a pretty reliable predictor of delivery failures reported two days later.

SHLD matched block trades and delivery failures: click to enlarge

Moving fails back two trading days we see just how reliable a predictor these matched block trades really are.

SHLD matched blocks and failed trades, offest -2 days: click to enlarge.

On average, SHLD fails are roughly 102% of these matched blocks. Given that relationship, I feel quite confident predicting how the as-yet-unreleased SHLD delivery failures will appear (note the dashed line).

SHLD matched block trades and offset delivery failures with prediction: click to enlarge

Now for the good and bad news inherent to this situation.

The good news is: this unusual market activity is fairly easy to spot.

The bad news is: despite being easy to spot, in recent months multiple companies have come under identical attack, suggesting whoever is responsible is not too concerned about the consequences of overtly violating the securities laws…a familiar situation for anybody who’s followed deepcapture.com for any length of time.

I’ll have more on this subject as soon as the SEC fails data are released, so stay tuned.

Posted in Featured Stories, The Crime: "Naked Shorts" & Other Insincere IOUs, The Deep Capture CampaignComments (16)

Prepare to be astounded

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Prepare to be astounded


I’ve got everything ready to go for my next post, save one thing: the most current stock delivery failures data, corresponding to the second half of January, which the SEC was supposed to have made available yesterday.

I’m particularly eager to get that batch, because it has the capacity to confirm or rule-out my ability to predict the future.

See, I believe I know, to within a few percentage points, how some of that delivery failures data — up to this point supposedly known only to the DTCC and SEC — will read.

But instead of going mad waiting for it to be posted, I’m going to very publicly make my prediction here and now, and then follow up with the actual numbers once published. I shall then take my clairvoyant victory lap around the tiny office where I sit.

Therefore, I do predict the following:

With a margin of error of +/-2.5%, Shares of Sears Holdings Corporation (NASDAQ:SHLD) will be shown to have experienced CNS delivery failures of the following magnitudes on the indicated dates:

1/29/2010 879,444
1/28/2010 873,222
1/27/2010 870,570
1/26/2010 851,904
1/25/2010 848,742
1/22/2010 865,266
1/21/2010 857,106
1/20/2010 1,535,508
1/19/2010 1,540,914

Please check back often between today and tomorrow (or whenever the SEC gets around to posting the final numbers) to learn how accurate my predictions turned out to be, how I arrived at them, and why this is very bad news for our capital markets.

(note: on 2/22 at 8:27am MST I adjusted my prediction)

Posted in Featured Stories, The Crime: "Naked Shorts" & Other Insincere IOUs, The Deep Capture CampaignComments (62)

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