School House Rock: The transformation of a trade

This post entitled School House Rock first appeared on Reddit in early October 2021 posted by u/SajiMeister. Apes Army takes no credit whatsoever for this info and it is posted here without editing purely to preserve the information. This is not financial advice. Do your own research.

School House Rock: The Transformation of a trade into an FTD/Synthetic Share ... Part 1

I’ve been slowpoking this DD as I have so much going on but after listening to David Scott speak in the hearing today I decided to get it done. David Scott this is not financial advice in case you are wondering. Just data and theories laid out for the public.

TADR: TADR will be at the top since the other information is dense and was used to draw the conclusions laid out below. I outlined a few ways to hide FTDs/synthetics based on the research I have done. The meat and potatoes is after. It seems drawn out but honestly, I could have made this a book if I wanted to. The info follows the life cycle of a trade through the various DTCC systems. All of this information comes from SEC, NSCC, DTCC and FINRA. I also included my view on DRS after the summary of FTD/synthetic share hiding. As always this is not financial advice and sorry for the cluttering and rushed writing.

Summing Up the Ways to Hide FTDs

1) You just don’t report them. As can be seen in the BTIG case (2016-2017), you just mark them as long or short exempt and then just don’t log them. This should buy you 2 years of time before facing a penalty of the profit you made. No worries you already made money with that profit so no big deal. Citadel would tell them to step their game up doing this the lazy dog way.

2) Use the Obligation Warehouse. It is purposely excluded from SEC Reg SHO jurisdiction which is exclusively for NSCC CNS. And if you still have doubts just take their tutorial screenshot for clarification. The nice, sweet Christmas elevator music in the background lets you know that its allll good. The 30-day wide settlement date spread is celebrated in their system. It is the wild west system of the DTCC which they take no responsibility if you default doing shady shit with your buddies. Also below is a snippet from FAQ of Reg SHO if you need more clarification.

3) Mark your order as seller’s option aka code “6” in Universal Trade Capture to enjoy a nice settlement of up to 180 days. There is some ambiguity here because FINRA’s TRAQS for OTC trades only allows a 60-day window for seller’s option. Both parties would have to accept but this isn’t a big deal for the buyer because you can throw it into CNS at the end of the settlement period and get netted for any losses incurred by the delayed settlement. You can also throw it into OW which would do the same, the choice is yours. I would imagine brokers use this with each other since each side could eventually need a favor or maybe you want to have the benefit the other way around to enjoy increased profit. On the other note is that the seller’s option can be canceled at any time by either party, and it will then go to normal settlement.

4) Internalize orders. If you use are a broker you can internalize orders and use basically a contract for difference style approach but be aware this is illegal so I’m not saying this is happening but is an option.

5) Internalizing by keeping above a 50% ratio of real shares. So basically someone like Robinhood doesn’t report shares available to short but I think they can use another method to make money. Keep real shares around 50% so that the other shares they hold are backed by the margin “real” shares. This way they can shuffle around shares to use volatility to make money.

6) A) If the buyer of the naked shorted non-cleared shares wants to sell then it’s all good because they are covered in Reg SHO deemed to own long clause which gives them a 35-day window before any type of buy in occurs. If they really want to make some cash they can terminate their ex-clearing deal to force buy in on the original seller then sell after the big boost in price. They probably try to avoid this but it’s a last minute loop-hole they can jump through when in a pinch. If you remember, C+35 was more relevant in late 2020 to early 2021. I’m guessing they have used other methods of fuckery to keep the massive, short debt at a peaceful balanced state. Also note that the spill over probably entered into SLD window which triggered buy ins. Read Leenixus DD’s to better understand.

B) If the buyer of the naked shares wants to sell them then it’s all good because they can use any one of 1-3 to rehypothecate the rehypothecated shares. If there were any signs of this then you would see increased external clearing. External clearing is usually an OTC/dark pool deal, you put the pieces together. Also note the drop in dark pool usage since DRS and increase short volume.

7) Use option fuckery when in a pinch to get out of buy in requirements. This is more of a theory based on previous rules. So when things get really heated, let’s say a one of our early year runups, you perform some option voodoo. My guess is it goes like this buy/sell/exercise or however you want to do it to be able to point to the options as deemed to own long shares. This then buys you 35 days or however long you need to perform the rules 1 through 3 shuffle and balance out those trades to be out of SEC Reg SHO jurisdiction.

8) There is also futures/swaps that would be plausible based on rules 1-3. I’m not even almost an expert on these so just research a Criand,Leenixus,etc… post to understand these.

9) ETF fuckery can also be used which I am not well versed in but I’m sure you can find relevant DD’s. TurdFurg23 is knowledgeable on this.

What do I think about DRS knowing the above?

1) At a very high-level point of view, I know that if we register the float then we will head to space. The reason being is that all these FTD’s are created from a real share. Let’s do a thought experiment. For ease of the thought experiment let’s say there are 50 million shares in the float and 10 million are reported as public short interest and 100 million are rehypothecated hidden from public data. Let’s say 110 million of the total 160 million floating around are owned by apes. Well, when 50 million ape shares DRS then that is all the real shares floating around. The remaining are synthetics created from the locked in a box DRS shares. So now even the public short interest are fake shares. The next step is that a million more shares will be requested to direct register. Their broker then requests or cancels the extended settlement agreement from the person that owes them the shares so they can get the shares they need to deliver. This is happening with completely dried liquidity. They can’t give them another fake share to direct register because you can’t register a synthetic share. They have to then start asking DRS shareholders to sell. This will cause gap ups in bids as there is no one out there selling real shares. Paper-hands will leave the transfer community first then it will be exponential growth to target price.

2) That was a high-level overview, but I believe it will start much sooner than all shares being transferred. Institutions will more than likely have a custodian for their shares and will have had those cleared by now. The institutions could also own loaned shares. The synthetics are most likely all owned by retail whose brokers know you don’t know the difference. When retails locks up enough to take out the float minus institutions then the only place for brokers to locate ape shares is from shares that have already transferred or institutions. The price discovery will trickle out institutions while apes continue to diamond hand. The next phase will be retail as the last remaining holders and the real MOASS starts.

That was my summary of the information. The meat and potatoes are below.

The Life of a Trade

It is easy to get bogged down in the life cycle of a trade as each step of the process could warrant a 20-page paper, but I will try my best to quickly go through the life cycle of the trade from purchaser to settled.

Universal Trade Capture

So, after you purchase your GME stock, your broker will more than likely use the UTC system to handle the trade if they are part of the DTCC. A brief overview of UTC is below.

So basically, the UTC creates a standard for trading information. Think of it as though 10 people are in a room trying to solve a problem, but they all speak different languages. They may work out the problem, but it is not efficient. The UTC creates a standardized language across all DTCC members which allows them to communicate trades and use the DTCC systems as efficiently as possible.

CNS

So what the above slide is saying is that the NSCC becomes the buyer and seller for all securities. This makes it easier to settle unbalanced trades at the end of the day. Let’s call broker one Vlahd. Vlahd is having a great day at work, living life to the fullest buying and selling thousands of shares of all kinds of different stocks. After a long hard day of work Vlahd looks into the CNS system and checks his balance of the stocks he traded. Vlahd checks out his GME position because he knows he bought a few GME shares and sold a bunch but is not really sure how much shares he sold short. Vlahd looks at the screen and wow, he bought 2000 GME shares and sold 1 million GME shares. His deficit for the GME shares is 1 million minus 2000 GME shares or 998 thousand GME shares. Ok but Vlahd knows he got some GME shares in the Vault that NSCC will automatically clear some of those short positions. Vlahd checks and sees 5000 GME shares in the vault. Ok so Vlahd does some finger counting and figures out he is still short 993 thousand GME shares. Well that’s ok because maybe some other brokers accidently bought more GME shares then the NSCC will automatically use Vlahd’s money to buy those shares from the other brokerage. And this ladies and gentlemen is why the NSCC requires collateral from members. If Vlahd’s business is the size of a lemonade stand and he went shorting all kinds of shares then the price of the stock he shorted goes up then he no longer has the collateral to cover his positions to the NSCC. What happens if Vlahd is also leveraged and get’s a margin call from a bank wanting their money back for their failing position? This is a simplification but you can let your imagination run wild at how hairy this can get. Cough cough, robinhood 3 billion dollar NSCC margin call.

The below image is a pretty representation from DTCC slide show on CNS. Below is Tom who netted on the buy side that day.

So, the 100 shares Tom is owed will not come from the broker he purchased them from. This will come from the NSCC’s DTC account. So as this implies, the broker that sold them short to them is not on the hook to give them the shares, the NSCC is. Here we go again understanding why the NSCC margin called RobbingHood.

Basically the next slide here is just saying that the shorter is still responsible for the difference in price for the short so if they shorted at 150$ and the price moves to 200$, their balance of owed funds increases. The next slide then explains how Tom doesn’t get screwed over by an increase in price for the securities.

Well that’s my long winded run down of CNS. This is the longest section since it draws a lot of confusion from people. As you can see CNS does a good job at netting trades and recording fail to delivers. It also shows how a broker can get in a pickle when they overshort securities and the price jumps up. Cough cough Robinhood and why they turned off the buy button. This floods the market with sale orders allowing CNS to clear their FTDs. But wait weren’t there a bunch of diamond handed apes in January? Yes and we will get to that. The turning off the buy button for these brokerages was only a small chunk of the equation. Continued....

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