Date:    12/26/1999  11:44 AM


Subject: S7-24-99
"One day we'll look back at the use of naked shorts as just so much ancient 
history!"
     
Sometimes systems are set up out of necessity that are neither good nor bad 
by their own definition. When the OTC:BB market was created as an electronic 
alternative to the existing "pink sheet" market, an immediate dilemma 
presented itself. On the listed exchanges Specialists are able to short the 
issues "to maintain fair and orderly markets". They must, however, borrow 
the shares to effect the short position. This ensures that very thin, hard 
to borrow, shares would be somewhat immune to manipulation by the short 
sellers. It also guarantees that stock, borrowed, would be available for 
delivery to the purchaser on settlement day. These shares that are lendable 
are called "marginable" by the industry. Not only can the Specialists borrow 
this stock, individuals can purchase it "on credit" via the use of "margin 
accounts". By putting up 50% of the price for initial purchases, we can buy 
these less risky, better capitalized companies "on margin". Enter the 
OTC:BB:
     
BB shares are treated very differently from their larger corporate cousins! 
These higher risk shares are classified as "non-marginable" securities and 
can only be purchased with cash! No margin accounts. It's against the law to 
borrow "cash account" stock.(S.E.C. Rule 15c-3-3) So what was a poor MM to 
do? When the OTC:BB market was created in the early 1990's, the only choice 
available was to allow the MM's to "naked short" the issues! No one 
envisioned the abuses that were to transpire subsequently! The MM's couldn't 
borrow any stock, against the law, and everyone felt the "fair and orderly 
market" arguement had as much validity in BB's as in exchanges. So a monster 
was born! "Absolute power corrupts absolutely"! The ability to operate a 
stock printing press has compromised the integrity of the system and the 
responsibility that the Market Makers accepted when the BB market was 
initiated. An adjunct to the "naked short" is the "perpetual fail to 
deliver". The MM's don't really have a time limit on when they have to cover 
these shorts. They sometimes don't deliver shares they have shorted for 
several weeks after the designated settlement day. This allows them the time 
to flood the market with stock, get anyone long who ever thought of buying 
the issue, then viciously walk the market down to cover at their leisure! 
Hardly a fair and orderly way to operate a multi-billion dollar market! The 
S.E.C is currently finishing up a "comment period" on this issue and very 
likely change is in the air!
     
Jim Tait
1838 Cour De Bourbon
Germantown,  Tn.  38138