Aug. 18, 2021
Pay for order flow is a novel concept that if done according to the rules in place would be an effective means to get more retail market participants. The issue is that some market makers [appear to] have abused this concept by holding/delaying flow orders from the LIT market which is a violation of the rules and has a potentially huge impact on any stock SP. The real issue is lack of transparency of the trades involved. The honor system inherent to the process cannot be trusted as the numbers do not add up. A shorted stock needs to clear daily at a minimum, for that matter all trades should be in real time in order to present to the trader a true picture of what the market is doing. Holding trades, not covering short trades, offsetting short trades with options is market manipulation pure and simple. To date the penalty for this behavior has been of little consequence. It is a business decision by the market makers that paying a 7 figure fine is just a part of doing business, especially if the associated violations generate 10 figure profits. In my view, lack of transparency is the overriding issue. Requiring real time, documented fulfillment of all trades along with accurate risk liquidity is the answer, which SR-2021-010 does address, but I am not sure if there isn’t wiggle room for the market makers to subvert this proposed rule. 1) Will there be a delay in transferring data if a Member does so on behalf of a Sponsored member? The entire issue of market transparency and in the end solvency to me is driven by the timeliness of the SFT’s and the subsequent reporting. Once in the NSCC hands the issue is moot, but until that data is reported isn’t there possibly a real time delay that could be manipulated? 2) As I read and understand the proposed rule, If a Transferor does not submit a recall notice for Final Settlement obligations yet to be satisfied and does not return the lent securities by the recall date, the Transferor would be eligible to “Buy In” and in essence, per your example, pay a fee of $1.00 for a 100$ SP stock. In your example, if the Transferor fails to recall the lent shares, and does not buy in those shares, NSCC collects a fee and moves the recall date 24 hrs. If the same thing happens on day two, day three and I suppose beyond the recall date is moved again, and the fee is paid to NSCC. How long can this keep getting moved forward? When will the lent shares be returned or covered? I applaud the effort to take control of what I believe to be egregious manipulation of the market, but remain concerned that the market makers who abuse the system will find ways to continue to do so and fell the proposal as stated does not go far enough to make the market fully transparent and truly all investor driven, not just the biggest players. -- Wayne Stoughton