What every investor should knowVP is a great stock, however in saying that at this particular moment in time I see the SP is being manipulated.
Without Level II you are unable to see exactly how many bids and sell orders are available for a stock at any given time – especially for an exchange that has minimal liquidity like Vodis and therefore is much easier to manipulate. The depth of the market can be seen using a paid service called Level II that gives you access to the order book in real time. I have always said that anyone who trades should pay for such a service.
However, even with this service, you’re far from being protected.
- Multiple Trading Platforms Many retail investors have no clue that there are multiple parallel trading platforms for the stocks they buy in Canada. There are many alternative market centers that process trades for stocks listed on the TSX and TSX Venture. Some of these include Alpha Trading Systems, Chi-X Canada, Pure Trading, Omega ATS, and dark pool Match Now.
Alternative trading systems in Canada handled 33 per cent of trading volume
- Short Selling Short selling is believed (or so “they” say) to be a necessary part of the market, providing balance and efficiency.
While this may be true in some instances, especially with the advent of high frequency trading and ETF’s, the basic idea of short selling is completely absurd. Short selling is simply selling stock you don’t have.
You borrow stock from someone (who likely doesn’t know you’re borrowing it), sell it, and hope that the stock goes down so you can buy it back at a cheaper price.”
It’s no secret that short selling can and often does hurt companies. While short selling can provide efficiencies in the market and create more liquidity, Canada’s market doesn’t stand a chance.
This is because of yet another Canadian regulatory hurdle.
This regulatory hurdle has caused short selling in Canada to run rampant – especially on Canada’s small cap exchange, the TSX Venture.
- Discontinuing Price Restrictions of Short Sell Orders (Tick Test)
Historically, you could only sell a stock short if the price is higher than the last different price; simply put, you can only short a stock as it was moving up. (This was know as the Uptick Rule.)
However, this rule only works when there is a strict sequence of orders in the order execution book; when bid/ask orders are placed in line on a first-come, first-served basis. But with parallel trading systems, a definitive sequence of different prices can’t be established at any exact given point in time because one order book might show a downtick, while the other an uptick. As a result, it would be extremely difficult to enforce the uptick rule.
By allowing competing trading platforms and encouraging HFT (which was believed to create more liquidity), regulators had no choice but to remove the tick test rule. This means we can now short a stock anytime we want. That’s great news for short sellers, but for companies trying to raise money at higher prices to hire more staff or move their projects forward, this rule change can cripple them – especially under the liquidity constraints of the Canadian market.
It doesn’t take a lot of money to control a stock via short selling on the TSX Venture. As a matter of fact, institutions often hammer stocks via short selling and back up their shorts with warrants they obtained in a previous financing. They often force the price of a stock down to finance the same companies they’re shorting to get a better financing price, or to force a company into a financing arrangement.”
The removal of the uptick rule has created a breeding ground for short funds to make a lot of money betting against companies – especially companies that trade on the TSX Venture.
When you consider that companies that trade on the TSX Venture are likely companies that are speculative and often negative cash-flow businesses, short selling can immediately hurt a company’s ability to finance.
Furthermore, short funds can use computer trading to add additional pressure on stocks to the downside by making it look like there is a lot of stock for sale. In other words, stock manipulation.
And yes, stock manipulation is illegal.
So how do they do this?
- How to Manipulate Stock Through Short Selling
When the removal of the uptick rule was implemented on October 4, 2012, a short marking exempt designation (SME) was also introduced.
Via IIROC:
“The “short-marking exempt” designation is required to be applied to orders for qualifying accounts of arbitrageurs, market makers and “high-frequency traders” that typically generate a high volume and speed of orders on a fully automated basis, may have orders on both sides of the market on various marketplaces at the same time, and that adopt a “directionally neutral” strategy such that generally, the position in each security in the account is flat at the end of the trading day.”
In other words, as long as a firm adopts a “directionally neutral” strategy, such that generally, the position in each security in the account is flat at the end of the trading day, it doesn’t have to declare the short sale.
This was done because IIROC believes that the use of the SME order designation allows them to separately monitor the trading activities of those accounts which are actively buying and selling the same security without taking a directional position and that of actual short sale activity on accounts that may have adopted a “directional” position.
While this may have good intentions, it actually makes it easier for firms selling short to manipulate the price of stocks.
- Spoof Trading
Here is Bloomberg’s take on
Spoof Trading: “Spoofing is when a trader enters deceptive orders tricking the rest of the market into thinking there’s more demand to buy or sell than there actually is.”
In the case of short selling, a trader would show pressure on the sell side through stacked sell orders, but remove them if the market begins to move higher.
These stacked sell orders are often viewed – especially by retail investors with a lack of market data – as weakness in a stock.
You may be wondering: What happens if buyers come into the market? Wouldn’t the sell orders be on the hook to buy the stock?
You see, these sell orders are often in small board lots (usually 100 shares) so that anytime the lead sell order is hit, the firm only has to sell a few shares short.
When this happens, the computers automatically adjust their sell orders higher, while still maintaining pressure on the stock by maintaining the multiple stacked sell orders – often times behind a real sell order.
This allows the short sellers to put downward pressure on a stock without having to declare a short because they remain “neutral” by buying just enough shares to end up with a flat position in the account at the end of the trading day.
And because the uptick rule was removed, short funds can now downtick a stock and still short the next day.
- What is Downticking?
Downticking is when a trader sells stock so that the most recent change in the share price is negative. This is usually done right before the market closes using very small amounts.
And since stock charts only follow the closing price of a stock, you can see how easy it is for a short seller to create a nasty looking downward chart by spoofing and down-ticking.
These practices are illegal but happen to many Canadian stocks.
Just ask the
Ontario Securities Commission. Most retail investors don’t see this type of activity because most trade without the use of Level II data. They only see the last bid/ask price, which as I already mentioned earlier, may not even be correct.
The next time you see a stock in the green for the whole day, only to end up in the red with less than a minute to go, you now know what could have happened.
The problem for Canadian regulators is that they can’t keep an eye on the thousands of stocks that trade every day. Even when they do catch it, it’s extremely difficult to find the culprit behind the trades since the short sellers have multiple accounts at different financial brokerages and often work with other short sellers. Furthermore, regulators often rely on complaints.
But how can a retail investor make a complaint if they don’t even see this “spoofing” or the down ticking because of the lack of mandate for consolidated market data?
Retail investors don’t get to see the Level 2 data because it’s expensive. How can an investor react to this type of predatory short selling?
How can an investor report manipulative trading to IIROC or the Canadian Securities Administrators (CSA) if they don’t have access to the data?
If there was a regulatory mandate to provide consolidated market data in Canada, we could make much more informed investment decisions.
If Regulators could mandate market data transparency with new short sale regulations such as the re-implementation of the uptick rule and more frequently updated short reports (currently only reported semi-monthly), then maybe we could prevent the Canadian market from failing.
I bought into VP a few weeks back and will continue to hold and buy on the dips… Good luck to all the longs... the shorts are playing on very thin ice… IMO!
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