What would happen if a market maker sells more shares than exist and fails to deliver ?

[engineering]

Your view is contradicted right in the title of the link you provided,

Nope. Try reading what I wrote again. I'm not very interested in who you consider to be a "bona-fide" "market maker". I am interested in who is on the list of organizations that are allowed to use the special market maker rules.

I was very clear about this because I figured someone would try to define the issue out of existence by simply saying "those weren't real market makers!"

The link that I posted is proof positive that:
1) A "market marker" has engaged naked short selling of a significant scale and duration.
2) The "market maker" was flipping the trades between connected entities to reset the clock on delivery.

Predictably, the response is not "Wow I thought a market maker would never do that. Maybe blind faith in hundreds of entities isn't 100% justified."
Instead it's "Well that wasn't a real market maker."

They were on the list, so they were considered a market maker. End of story.
If you're using the fact that they were caught abusing their status to retroactively claim they never had market maker status then you're just being ridiculous.

In the Wolfson case, the market maker was caught abusing their status and eventually (6 years later) forced to pay a fine that was modestly more than the profit that they made in the first place. (fine was less than 50% more than the alleged profit ) No jail time for anyone, and the longest suspension from trading that was handed out was a whopping 12 months.

They counterfeited tens of millions of shares and they didn't even do Martha Stewart level jail time.
The fine worked out to significantly less than $1 per counterfeit share.

I have come across no mention that any of the shareholders who lost money as a result of their actions received any compensation.

I think the SEC documents for the Wolfson case actually do a decent job of answering the question that started this thread. I doubt that Wolfson managed to single-handedly counterfeit more that total number of pre-existing shares in any particular stock, but I would expect the techniques used to try and hide such an activity and the end result would be similar.

The SEC documents are quite detailed regarding the mechanics of the transactions:
In particular:
1) “reverse conversion” or “reversal,”
2) "reset"
3) "assist"
All of the above involve options trading, so perhaps it may be worth considering the available options data. Someone else probably has a much better understanding of what to look for, particularly in a volatile stock.
Perhaps the sale or large amount of deep in the money calls or puts every 12 days would be a red flag. Over a long enough time period, that behaviour might be readily detectable. A more sophisticated scheme might be much harder to detect.

 

[engineering]

What proves this occurs?
Is there a law against it?
What is the enforcement mechanism?

https://ibkr.info/article/2713
"Payment in lieu of a dividend may also be received when shares are owed to the brokerage firm and have not been received by the dividend record date."

Interactive brokers definition of PIL is a bit different than that claimed by the rolling stone article.

I'm not 100% sure that rolling stone knows what they're talking about.

I think it would require more research into how dividend payments are handled. It sounds like the situation with margin accounts can be complicated.

It seems like a PIL in a cash account would suggest something odd going on. If there's a PIL outside the settlement period that would be interesting.

 

[easymon1]

https://ibkr.info/article/2713
"Payment in lieu of a dividend may also be received when shares are owed to the brokerage firm and have not been received by the dividend record date."

Interactive brokers definition of PIL is a bit different than that claimed by the rolling stone article.

I'm not 100% sure that rolling stone knows what they're talking about.

I think it would require more research into how dividend payments are handled. It sounds like the situation with margin accounts can be complicated.

It seems like a PIL in a cash account would suggest something odd going on. If there's a PIL outside the settlement period that would be interesting.

Proof of occurance is difficult?

 

[engineering]

Proof of occurance is difficult?

Proof that PIL is happening because of excess shares in circulation is difficult. rolling stone seemed to claim that just getting PIL instead of the actual dividend was proof, but I'm not convinced that's true with a margin account and I'm not sure that the author would get that.

Given what ibkr says, if you held bogus shares that hadn't really delivered as a result of a scenario like Wolfson, if seems like you would get a PIL, even in a cash account. it seems possible for it to happen, but I'd like a better source.

 

[easymon1]

No proof of crime it would seem.
Plead the Bart.

Mayhaps the Reach of the operators of the activity under discussion extends beyond the Grasp of the Long Arm of the Law.
It therefore behooves those operators to not only continue the practice but to extend the edge as far as possible until it is unprofitable to continue or a barrier is met. Such is the nature of things competitive.

 

[Sig]

Nope. Try reading what I wrote again. I'm not very interested in who you consider to be a "bona-fide" "market maker". I am interested in who is on the list of organizations that are allowed to use the special market maker rules.

I was very clear about this because I figured someone would try to define the issue out of existence by simply saying "those weren't real market makers!"

The link that I posted is proof positive that:
1) A "market marker" has engaged naked short selling of a significant scale and duration.
2) The "market maker" was flipping the trades between connected entities to reset the clock on delivery.

Predictably, the response is not "Wow I thought a market maker would never do that. Maybe blind faith in hundreds of entities isn't 100% justified."
Instead it's "Well that wasn't a real market maker."

They were on the list, so they were considered a market maker. End of story.
If you're using the fact that they were caught abusing their status to retroactively claim they never had market maker status then you're just being ridiculous.

In the Wolfson case, the market maker was caught abusing their status and eventually (6 years later) forced to pay a fine that was modestly more than the profit that they made in the first place. (fine was less than 50% more than the alleged profit ) No jail time for anyone, and the longest suspension from trading that was handed out was a whopping 12 months.

They counterfeited tens of millions of shares and they didn't even do Martha Stewart level jail time.
The fine worked out to significantly less than $1 per counterfeit share.

I have come across no mention that any of the shareholders who lost money as a result of their actions received any compensation.

I think the SEC documents for the Wolfson case actually do a decent job of answering the question that started this thread. I doubt that Wolfson managed to single-handedly counterfeit more that total number of pre-existing shares in any particular stock, but I would expect the techniques used to try and hide such an activity and the end result would be similar.

The SEC documents are quite detailed regarding the mechanics of the transactions:
In particular:
1) “reverse conversion” or “reversal,”
2) "reset"
3) "assist"
All of the above involve options trading, so perhaps it may be worth considering the available options data. Someone else probably has a much better understanding of what to look for, particularly in a volatile stock.
Perhaps the sale or large amount of deep in the money calls or puts every 12 days would be a red flag. Over a long enough time period, that behaviour might be readily detectable. A more sophisticated scheme might be much harder to detect.

You're not actually reading what I wrote. You're a smart guy, I can tell, but you're doing that thing we all do where we read/listen to someone with half an ear while formulating our response and sometimes as a result miss their entire point.

If you're actually interested in the difference between someone using their MM status in a way that's prohibited by law vs someone acting as a bona-fide MM as defined by that law I'm happy to discuss your underlying question at length. But since that's both fundamental to the concept you're talking about and you've said you're "not very interested" in it, then you're not going to get far in furthering your understanding on this.

 

[Tradersword]

I have a question about the market makers. So in this age of computer, how is slippage or no-fills even possible? Are they still doing this by hand?

 

[Sig]

I have a question about the market makers. So in this age of computer, how is slippage or no-fills even possible? Are they still doing this by hand?

Slippage happens because you're still doing this by hand, not them. It just means they changes their quote or their bid/offer was hit in the time it took you to read the screen and enter your order. They're changing their quotes multiple times a second in some cases, so what looks like "slippage" to you and I is just the fact that what we saw on our screen was stale data compared to what they actually had entered at the exchange.

 

[Tradersword]

My entries are limit orders. (Day trading futures.) Okay, Thank you for your reply.