Facinating article on "Cellar Boxing" (I)# Stock
l*m
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There’s a form of the securities fraud known as naked short selling that is
becoming very popular and lucrative to the Market Makers that practice it.
It is known as “Cellar boxing” and it has to do with the fact that the
NASD and the SEC had to arbitrarily set a minimum level at which a stock can
trade. This level was set at $.0001 or one-one hundredth of a penny. This
level is appropriately referred to as “the cellar”. This $.0001 level can
be used as a "backstop" for all kinds of market maker and naked short
selling manipulations.
“Cellar boxing” has been one of the security frauds du jour since 1999
when the market went to a “decimalization” basis. In the pre-
decimalization days the minimum market spread for most stocks was set at 1/
8th of a dollar and the market makers were guaranteed a healthy “spread”.
Since decimalization came into effect, those one-eighth of a dollar spreads
now are often only a penny as you can see in Microsoft’s quote throughout
the day. Where did the unscrupulous MMs go to make up for all of this lost
income? They headed "south" to the OTCBB and Pink Sheets where the
protective effects from naked short selling like Rule 10-a, and NASD Rules
3350, 3360, and 3370 are nonexistent.
The unique aspect of needing an arbitrary “cellar” level is that the
lowest possible incremental gain above this cellar level represents a 100%
spread available to MMs making a market in these securities. When compared
to the typical spread in Microsoft of perhaps four-tenths of 1%, this is
pretty tempting territory. In fact, when the market is no bid to $.0001
offer there is theoretically an infinite spread.
In order to participate in “cellar boxing”, the MMs first need to pummel
the price per share down to these levels. The lower they can force the share
price, the larger are the percentage spreads to feed off of. This is easily
done via garden variety naked short selling. In fact if the MM is large
enough and has enough visibility of buy and sell orders as well as order
flow, he can simultaneously be acting as the conduit for the sale of
nonexistent shares through Canadian co-conspiring broker/dealers and their
associates with his right hand at the same time that his left hand is naked
short selling into every buy order that appears through its own proprietary
accounts. The key here is to be a dominant enough of a MM to have visibility
of these buy orders. This is referred to as "broker/dealer internalization"
or naked short selling via "desking" which refers to the market makers
trading desk. While the right hand is busy flooding the victim company's
market with "counterfeit" shares that can be sold at any instant in time the
left hand is nullifying any upward pressure in share price by neutralizing
the demand for the securities. The net effect becomes no demonstrable demand
for shares and a huge oversupply of shares which induces a downward spiral
in share price.
In fact, until the "beefed up" version of Rule 3370 (Affirmative
determination in writing of "borrowability" by settlement date) becomes
effective, U.S. MMs have been "legally" processing naked short sale orders
out of Canada and other offshore locations even though they and the clearing
firms involved knew by history that these shares were in no way going to be
delivered. The question that then begs to be asked is how "the system" can
allow these obviously bogus sell orders to clear and settle. To find the
answer to this one need look no further than to Addendum "C" to the Rules
and Regulations of the NSCC subdivision of the DTCC. This gaping loophole
allows the DTCC, which is basically the 11,000 b/ds and banks that we refer
to as "Wall Street”, to borrow shares from those investors naive enough to
hold these shares in "street name" at their brokerage firm. This amounts to
about 95% of us. Theoretically, this “borrow” was designed to allow trades
to clear and settle that involved LEGITIMATE 1 OR 2 DAY delays in delivery.
This "borrow" is done unbeknownst to the investor that purchased the shares
in question and amounts to probably the largest "conflict of interest"
known to mankind. The question becomes would these investors knowingly loan,
without compensation, their shares to those whose intent is to bankrupt
their investment if they knew that the loan process was the key mechanism
needed for the naked short sellers to effect their goal? Another question
that arises is should the investor's b/d who just earned a commission and
therefore owes its client a fiduciary duty of care, be acting as the
intermediary in this loan process keeping in mind that this b/d is being
paid the cash value of the shares being loaned as a means of collateralizing
the loan, all unbeknownst to his client the purchaser.
becoming very popular and lucrative to the Market Makers that practice it.
It is known as “Cellar boxing” and it has to do with the fact that the
NASD and the SEC had to arbitrarily set a minimum level at which a stock can
trade. This level was set at $.0001 or one-one hundredth of a penny. This
level is appropriately referred to as “the cellar”. This $.0001 level can
be used as a "backstop" for all kinds of market maker and naked short
selling manipulations.
“Cellar boxing” has been one of the security frauds du jour since 1999
when the market went to a “decimalization” basis. In the pre-
decimalization days the minimum market spread for most stocks was set at 1/
8th of a dollar and the market makers were guaranteed a healthy “spread”.
Since decimalization came into effect, those one-eighth of a dollar spreads
now are often only a penny as you can see in Microsoft’s quote throughout
the day. Where did the unscrupulous MMs go to make up for all of this lost
income? They headed "south" to the OTCBB and Pink Sheets where the
protective effects from naked short selling like Rule 10-a, and NASD Rules
3350, 3360, and 3370 are nonexistent.
The unique aspect of needing an arbitrary “cellar” level is that the
lowest possible incremental gain above this cellar level represents a 100%
spread available to MMs making a market in these securities. When compared
to the typical spread in Microsoft of perhaps four-tenths of 1%, this is
pretty tempting territory. In fact, when the market is no bid to $.0001
offer there is theoretically an infinite spread.
In order to participate in “cellar boxing”, the MMs first need to pummel
the price per share down to these levels. The lower they can force the share
price, the larger are the percentage spreads to feed off of. This is easily
done via garden variety naked short selling. In fact if the MM is large
enough and has enough visibility of buy and sell orders as well as order
flow, he can simultaneously be acting as the conduit for the sale of
nonexistent shares through Canadian co-conspiring broker/dealers and their
associates with his right hand at the same time that his left hand is naked
short selling into every buy order that appears through its own proprietary
accounts. The key here is to be a dominant enough of a MM to have visibility
of these buy orders. This is referred to as "broker/dealer internalization"
or naked short selling via "desking" which refers to the market makers
trading desk. While the right hand is busy flooding the victim company's
market with "counterfeit" shares that can be sold at any instant in time the
left hand is nullifying any upward pressure in share price by neutralizing
the demand for the securities. The net effect becomes no demonstrable demand
for shares and a huge oversupply of shares which induces a downward spiral
in share price.
In fact, until the "beefed up" version of Rule 3370 (Affirmative
determination in writing of "borrowability" by settlement date) becomes
effective, U.S. MMs have been "legally" processing naked short sale orders
out of Canada and other offshore locations even though they and the clearing
firms involved knew by history that these shares were in no way going to be
delivered. The question that then begs to be asked is how "the system" can
allow these obviously bogus sell orders to clear and settle. To find the
answer to this one need look no further than to Addendum "C" to the Rules
and Regulations of the NSCC subdivision of the DTCC. This gaping loophole
allows the DTCC, which is basically the 11,000 b/ds and banks that we refer
to as "Wall Street”, to borrow shares from those investors naive enough to
hold these shares in "street name" at their brokerage firm. This amounts to
about 95% of us. Theoretically, this “borrow” was designed to allow trades
to clear and settle that involved LEGITIMATE 1 OR 2 DAY delays in delivery.
This "borrow" is done unbeknownst to the investor that purchased the shares
in question and amounts to probably the largest "conflict of interest"
known to mankind. The question becomes would these investors knowingly loan,
without compensation, their shares to those whose intent is to bankrupt
their investment if they knew that the loan process was the key mechanism
needed for the naked short sellers to effect their goal? Another question
that arises is should the investor's b/d who just earned a commission and
therefore owes its client a fiduciary duty of care, be acting as the
intermediary in this loan process keeping in mind that this b/d is being
paid the cash value of the shares being loaned as a means of collateralizing
the loan, all unbeknownst to his client the purchaser.
