April 20, 2022
The SFT Clearing Service is a disgusting proposition. Its designed to create an uncapped, potentially infinite amount of liquidity in an already over-diluted market. For whom is this proposed plan designed to benefit? Obviously not investors.
Investors do not need the SFT program. When an investor buys a security, what they need is the assurance that they are buying a share of stock from a A FINITE NUMBER OF ISSUED SHARES. The SFTs defeat price discovery by inventing a pool of loanable synthetic shares that did NOT originally exist and facilitating overnight wash trades.
When an SFT is used to transact a share in an otherwise illiquid stock, what happens to the price of that stock? Nothing. The price stagnates. The SFT is able to create volume outside of the market, without any of the buy pressure. The SFT essentially allows a short seller to buy the illiquid stock by posting 100% of the market price as 'cash collateral.' That's not a loan. That's not a 'financing transaction.' That's a MARKET ORDER by a different name. The SFT essentially creates a 'temporary buy order' of a non-existent share that is fully internalized and does not go to the lit markets.
This is even worse than dark pool internalization, because even the premise of a dark pool is that it's only supposed to function through the use of real, locatable, finite shares that are held within that pool. On the contrary, SFTs are not finite. This utterly kills price discovery.
To add insult to injury, most of the securities that will see the most SFT usage will be the securities that were sold short to begin with. The original short sales create the sell pressure and the SFTs postpone--or even remove--the buy pressure. This mechanism is ripe for abuse.
So why does the NSCC think that we need SR-NSCC-2022-003?
The NSCC is telling us that the market needs SFTs so it can minimize the 'impact' of FTDs and naked short selling. That sets a terrible precedent The NSCC is basically telling us that its more important for them to use their clearing privileges to minimize the impact of an FTD than it is to prevent FTDs And in turn they're giving the FTD abusers an easy way out
The only people who need this service are the short sellers who have been committing regular fraud in broad daylight and causing a massive pile-up of FTDs on a daily basis. The FTDs are piling up because the short sellers gambled on a stock and they did not want to pay up when it was time for them to settle their debt. That is the problem here. There would not be such an overabundance of FTDs if all market participants were actively forced to deliver what they owe, when they owe it.
The SEC and the DTCC should be cracking down on the short selling fraud itself, not looking for ways to conveniently invent new liquidity and dilute the markets further. It's already bad enough that the market makers themselves have been allowed their own loopholes to create a potentially infinite number of shares through aggressive put and call contracts that outnumber the float of a stock. It should not be possible for a stock to have more open call volume or short interest than the float. Why are we allowing financial institutions the ability to post contracts for shares that don't exist? Its overt fraud and corruption in broad daylight. If you guys have a problem with FTDs, start there. Don't create some SFT program just so you can sweep all of this under the rug. You're only giving the bad actors more tools to skirt their obligations and wreck the markets.
Do not pass this rule. Don't even amend it. Throw this one directly in the trash.