2011
05.08

How’s this for a conspiracy theory:
The trading systems used by Wall Street allows counterfeit stock to appear out of nothing. This fact is exploited by a variety of crooks (many located on Wall Street) to drive down stock prices, destroy companies and rake in obscene amounts of money in the process. Journalists on highly respected publications such as the Wall Street Journal seem to know about this, but are friends of the crooks on Wall Street, and are actively dismissing any such rumours, often hailing aforementioned crooks as innovators. So the general public remains ignorant. The SEC (U.S. Securities and Exchange Commission), which is supposed to regulate Wall Street, has a corrupt management which has repeatedly quashed any thorough investigations into market manipulation through use of the aforementioned creation of counterfeit stock. More than one SEC manager has gone on to get high paying positions at hedge funds run by the crooks. Some politicians may know about the scale of the problem, but refuse to impose regulation that would force, primarily the DTCC (Depository Trust & Clearing Corporation) to fix their systems. It is even claimed by some that any attempt to clean up the existing massive amounts of counterfeit stock would cause a complete financial breakdown. So we had best just ignore it. Yeah…

Wait. Sorry. Did I say conspiracy theory? I meant well researched and excruciatingly detailed investigative journalism: DeepCapture

Highly recommended (and scary) reading, if you have the time. There is quite a lot of it. I have been quietly following it for a few years, and it feels a bit like “eating the red pill”. If you were slightly puzzled by how major U.S. banks could suddenly crash and burn in 2008, the above situation allegedly contributed to significant degree.

I know I know. I’m not an economist, or a trader. I don’t pretend to understand economics. But I understand that the ability to print counterfeit stock or money is bad for any economy. And I also claim to understand technology, which is one part of the story that fascinates me:

One of the root causes of this is apparently the implementation of a stock trading rule stating that if you have (by administrative error, obviously) sold some shares you did not own, you have 3 days to find and buy (or borrow) those shares elsewhere before you have to deliver them. This seems to me to be an old and largely obsolete rule, as with the advent of digital stock trading, keeping precise track of what stock you own and have borrowed should be quite trivial.
But as it is a stock trading rule, it has in fact been implemented in the clearing system (managed by the DTCC), and brokers can invoke this rule by creating an IOU in the system, sending it to the buyer instead of a real share. Oh, and to the buyer, it looks like real stock. So he doesn’t know, and can resell it as if it was real stock.

Loophole, much?

It appears there are ways you can juggle IOUs to reset the 3 day time limit. But apparently, the authorities aren’t going to come and knock down any doors anyway, even if the seller doesn’t deliver when the three days have gone. They just get silently registered in the system as FTDs (Failure To Deliver). Additionally, if you can bankrupt the company by flooding the market with massive amounts of IOUs, and thus get it delisted from the stock exchange before the time limit, no FTDs will even be registered.

I am already a bit queasy about the handling of money and stock in software. There is so much potential for conjuring up money and stock out of nowhere (intentionally or otherwise). Like printing counterfeit money, but far easier. But what on earth kinds of nutcases intentionally designs a trade clearing system with such a feature?

Well… The DTCC, apparently. And, I suppose, the regulators who still to this day retains a rule that should have been obsoleted by technology.

They do seem to have done everything short of yelling “GET RICH FAST! GET YOUR STOCK PRINTING TOOLS HERE!”

Since 2005, the stock exchanges are required to publish a list of stocks that are failing to deliver above a certain threshold. These are called “reg SHO” lists. This, for instance, is the one for NASDAQ:
http://www.nasdaqtrader.com/Trader.aspx?id=RegSHOThreshold

Note the requirements for being on the list. That’s… Quite a lot of administrative errors, isn’t it?

The DTCC and SEC also have access to more precise numbers, which the SEC is required to release every once in a while. To add insult to injury, Judd Bagley showed how he could very precisely predict the amount of failures of a specific stock based on then publicly available information about the stock and a bit of pattern matching with similar events from other stocks:
Prepare to be astounded
Cataloging Sears stock manipulation

Which does more than simply suggest that there is heavy-handed manipulation going on.

It’s all very bizarre, and somehow very few news outlets have caught on to it. I don’t often latch on to Internet memes, but this one is very apt: Massive, massive FAIL!

You don’t have to believe it. Or care for that matter. DeepCapture makes some incredible claims, and I for one am not able to help much in their fight if I wanted. But it interests me somewhat, and I have found that they have a frightening tendency to be able to back up their claims.

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