March 23, 2008
Please invesigate the failings within the DTCC.
Fails to deliver amount to about $6 billion daily.
- Depository Trust and Clearing Corporation
A group of unscrupulous traders has found a way to skim billions of dollars from the stock market. This scam goes forward affecting $6 billion in trades every day, and yet there has been virtually no public outry and very few SEC investigations or indictments. The process seems so smooth that no one raises an eyebrow.
But this particular financial manipulation of markets depresses stock prices and drains equity from corporations. It has bankrupted entrepreneurs, cut yields for legitimate investors, and pinched huge amounts of savings from retirees portfolios.
What is going on? And why are these scams which are essentially phantom trading of non-existent stocks -- allowed to continue largely unnoted and unpunished?
Over 1,000 businesses have been destroyed at the hands of phantom traders.
Phantom traders are stock market predators who use back-office tricks to swoop down on targeted stocks and flood the market with sell transactions, which are not based on the actual stock of the companies involved. Many investors, and even some sophisticated businessmen, have no idea this scam is happening because its been successfully hidden amidst the flow of billions of transactions which are processed every market day.
Yet, according to expert estimates, over 1,000 businesses have been destroyed at the hands of phantom traders.
Basic economics dictates that the price of any stock is a function of the supply of that stock and the demand for it in the marketplace. It follows that if the supply of a companys stock increases, then its price will tend to move down. More importantly, if a stock price goes down, investors often assume insiders have realized there is a problem with the company, and they rush to sell their own stock, putting further downward pressure on the stock price.
Phantom traders sell stocks short without owning or borrowing them, flooding the market with sell orders with the intent of driving down the stocks price.
Phantom traders have learned to manipulate this process to their advantage. They initiate a wave of short selling of a stock they target. It is legal to sell a stock short, meaning that you borrow the stock from someone who owns it, sell it, and hope to replace it buy it back at a lower price.
Phantom traders, however, sell stocks short without owning or borrowing them, in effect initiating phantom transactions, which appear to flood the market with sell orders with the intent of driving down the stocks price.
The targeted business may not even know the scam is underway. A young company may have raised capital in the stock market with a successful initial public offering. It takes that new equity and begins to use the money to expand and grow its market share.
But suddenly there is a troubling problem. The companys stock price, which may have shot up after its IPO, begins to drop off. Within days, the stock price begins to plummet.
When the total of these sell orders is calculated, the sum of stocks in play is actually higher than the amount of stock issued by the company.
Investors arent sure what is happening, but they see the downturn and begin to sell. There seems to be a rush to get out of the stock as the market witnesses a growing wave of sell orders. But something is wrong. When the total of these sell orders is calculated, the sum of stocks in play is actually higher than the amount of stock issued by the company.
Whats happening is that phantom traders are selling the stock out of thin air without owning or borrowing it to intentionally increase supply and drive the stock price down. They artificially create a wave of selling so they can profit by a strategy of shorting the stock.
Experts say some $6 billion worth of trades every day are phantoms. Of course hundreds of billions are traded every day in the markets, but phantom trades cause additional legitimate trades as well by manipulating price movements.
How serious is the problem? Many hedge-fund managers and industry insiders call such activity part of the process. "It's a red herring," says one, implying that it goes on all the time, part of the Wall Street dance. But phantom trading is not only illegal, it harms real companies and real investors who arent even aware they are being skimmed.
$6 billion worth of trades every day are phantoms.
Phantom trading is not a small issue. When investigators ran the figures for just one day last March, unsettled trades that are the haven for phantom trading amounted to more than 750 million shares in almost 2,700 stocks, exchange-traded funds and other securities.