Subject: File No. 4-639
From: Abel Saez Incertis
Affiliation: Stock Trader

October 28, 2011

The SEC has to put an end to the BS that the DTCC, the NSCC and clearing firms such as Penson Financial Services are doing to the OTCQB/Pink Sheet markets. In matter of a few months those markets have been severely impaired to the point of causing several stocks to become untradeable.

1) There are cases of OTC stocks, both active companies and shells, that have got DTC chilled by no valid reason. Note that under a DTC chill, shares are banned from trading electronically and must settle in certificate form.
If you try to mail the DTCC, they refuse to answer why a stock has been chilled, telling you to ask your brokerage instead. Then, the brokerage (in my case Zecco) replies by telling they don't have access to such information.
Cute little game eh? They just want you to stop asking questions and accept getting ripped off by outrageous certificate processing fees which can get as high as $700 per trade.
In some cases, those charges can exceed the value of the holdings, as in microcap stock trading it is a extremely common practice to purchase small stakes (between $500 and $1000) worth of a penny stock on the hopes of getting a merger or another event that triggers a considerable increase in price.

2) The NSCC illiquid requirement rule states that for sub $1 stocks, any trade exceeding 25% of 20-day Average Daily Volume requires a deposit from the clearing firm at the NSCC until settlement (typically T+3) which can be substantial in the case of sub penny trades.
By doing my due diligence I found out that for stocks selling at $0.01 and below, prices are marked to $0.01 and the deposit requirement at the NSCC till settlement is calculated as (($0.01 x number_of_shares)-trade_value).

3) The clearing firm Penson Financial Services has stated that on any trade exceeding 25% 20-day ADV, if the trade exceeds a NSCC deposit requirement of $50,000, the stock will be bought-in by Penson at T+1 at the current market price, without a notice to the customer.
While I understand that it's very annoying for clearing firms such as Penson to have to deal with oversized deposit requirements by the NSCC, isn't the share buy-back an ILLEGAL practice called UNAUTHORIZED TRADING?

4) Rather than charging a "NSCC illiquid fee" as interest charge caused by the deposit that the clearing firm has to place at the NSCC on trades whose NSCC Illiquid deposit requirement is below $50,000, fee which for sub $0.01 stocks is calculated as ((($0.01 x number_of_shares)-trade_value) x (days_until_settlement/365)x 10%), several Penson based brokers such as Zecco have prohibited placing any online order whose size exceeds 25% of 20-day average daily volume. They only allow placing bigger share order size trades by phone.
One doesn't need to be a math genius to find out that such restriction causes order sizes accepted by the trading platform to become ever-shrinking down to zero it would only take a few days of little or no volume, and the 25% 20-day ADV will trend towards ZERO. The stock becomes impossible to trade...unless everyone feels like trading via phone, which is a extremely clumsy way to trade.

With all that said, how do you want small-caps and micro-caps to get financing and being able grow at all, if everyone is in a witch hunt trying to impair the OTC markets?
Why would anyone invest in a stock that the DTC can render non-DTC eligible just because they feel like doing so? Any stock could be at risk.
We traders already know that penny stocks are extremely volatile and that most of them are hyped up stories with a business that won't go very far.
However, the DTCC should be forbidden to revoke a stock's DTC-eligibility and force trades to be settled on certificates. If a stock is suspicious of fraudulent activity, that's what SEC trading suspensions are for.
Same for NSCC illiquid requirements, they should be eliminated so clearing firms are freed from the need of dumping enormous sums of money at the NSCC till settlement just be be able to clear subpenny stocks.