cdu shorting activity, page-437

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    Hi hottuna,

    I am not in a position to get evidence. However, I can give you a possible scenario.

    Assume Institution "A" lends shares to Institution "B" for short selling purposes but Institution "A" also buys the shares sold short by "B", (or for that matter "A" could be buying the shares being short sold by other Institutions also involved in borrowing/lending). That particular scenario would explain why Institution A's holding doesn't change significantly after settlements are effected. i.e. The shares borrowed from "A" would flow out of their account but other shares purchased (e.g. the short shares by "B") would also flow back into their account.

    The process would result in Institution "B" holding cash for the sale but still owing shares back to "A" which would need to be addressed at a later date. A's portfolio would show marginal on the register.

    The observed spikes and troughs in open short positions could then result from "A" dealing to "B" off-market and vice versa (or for that matter other Institutions), although it is not clear what such short term transfers would be trying to achieve. It is also possible that such transfers avoid the register with some other sort of legal agreement in place to make the transactions secure for those involved.

    Finally, B's loan account could subsequently be reversed by "A" selling shares to "B"off-market at a price to suit in return for B's cash, and then B transferring the shares back to "A" off-market to extinguish the loan. Either that or the borrowed shares could be converted to a sale arrangement with A receiving cash from B.

    Although convoluted and dubious in concept, the situation does explain observed trends in the absence of other plausible explanations. There is also the possibility that Institutions could be buying back the shares lent out by other Institutions not necessarily their own in a group approach to the short selling taking place.

    It also means that there is most likely next to no chance of appropriate price discovery taking place when the borrower(s) need to extinguish their obligations to the lender(s). Instead, convenient off-market adjustments between "friendly" Institutions would be expected to resolve any outstanding obligations.

    However, such a situation would be farcical in terms of market integrity and would debunk the efficient price discovery theory used to justify shorting. It would also be manipulative in the extreme. It would allow prices to be kept under pressure at virtually no cost to those involved for as long as required.

    The explanation certainly goes a long way to explaining the escalation in darki pool trades, the escalation in open short positions, the lack of response on the register despite large increases to open short positions and it would also go a long way to explaining a poorly performing share price which CDU experiences.

    Alternative explanations are of course possible as the situation is extremely murky and raises acute concerns for the integrity of the market and the fairness of trading.

    Let us all hope the High Court ruling brings fairness and integrity to the market by proper Regulation or as a last resort Civil Action.


    cheers,

    Max
 
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