Save Canadian Mining…Restore the uptick requirement

If someone wanted to destroy the Canadian junior mining industry, that person couldn’t do a better job than is currently being done by banks, brokers, traders and regulatory agencies. Permitting stocks to be shorted on downticks (as a stock is moving down in price) is outrageous. It artificially creates an image of weakness causing legitimate shareholder concern often leading to selling by “spooked” genuine shareholders.

It is not disgruntled shareholders who are selling and certainly have the right to sell their shares, but it is traders who are borrowing the shares of the true shareholders to sell to create weakness in the stock. We also question whether many of the short sellers actually do borrow the shares properly in compliance with the rules.

We are not questioning traders’ rights to short stocks which is standard and an integral part of stock markets functioning smoothly. Shorting is for the most part essential for market makers (specialists) to effectively function. The fact is that market makers(specialists) simply do not have and cannot hold adequate “inventory” positions in stocks and must short to fill buy orders and keep balanced markets. And keep in mind until recent years , they never were permitted to short on downticks,

Today, restoring the uptick rule for short selling is crucial to the survival of the “junior” Canadian mining industry.  We also believe that all Canadian and American stock markets should again prohibit shorting on down-ticks. We are going to report on this very questionable activity until it is addressed by the regulators.

The selling pressure from short sales creates such price weakness particularly for many juniors that they face difficulty in financing despite the fact that on a value of assets basis, they may be severely undervalued. By damaging their images, they create price weakness which offers short sellers cheaper opportunities to cover their short positions. It does nothing to benefit the companies or the industries themselves.

 The question is and always has been “are the markets primarily for the investing public and the publicly traded companies or for the trading desks and banks’ and brokerage profits. “ The answer is very obvious. There is an ugly rumor that investors are last in line when dealing with the banks and brokerages that function primarily for their own profits. In New York, some of the big “esteemed brokerage houses” offering their pathetically inaccurate advice needed to be bailed out eleven years ago just to survive.

1…Explained? The long time rule for shorting restricted short selling if the stock was lower than the price of the previous trade in that stock. It was based upon the prior trade. A trading desk or an investor could only short a stock if it was at the same price or higher than the prior trade. The stock could not be sold at a price lower than the previous trade. It was a regulation that was intended to prevent an unfair imbalance putting artificial selling pressure on stocks.

2…And no, we are not referring to the actions of the market makers (specialists) who must short to fulfill buy orders. They do not have adequate positions in the stocks they make markets in to fill buy orders. The tiny spreads between the bids and offers have ruined profitability for market makers (specialists) so shorting stocks has become a necessity for some former specialists.

3…The Uptick Rule prevented short sellers from illicitly hastening the downward price momentum of a securities price already in a decline. More importantly, short selling was and still is used to create an image of weakness for the stock(s) which often feeds on itself to bring in more selling.

4…Worse yet, with the permitted short selling on downticks the smallest companies are particularly vulnerable. Complying with the proper borrowing requirements (stock loan) of the shorted shares beforehand has often been in question.   In question???????????? We never trusted the regulations being complied with nor the reporting of the short positions being accurate.

5… Generally, we no longer have well financed market makers (specialists) sponsored by brokerage houses that concurrently would issue research that created investor buying interest. Comprehensive research for the vast majority of small cap stocks and juniors is nearly non-existent.

Furthermore, the uptick rule should be re-instituted in the U.S. as well. The flash crash of 2010 was not as many still believe, caused by a trader with a heavy finger; that excuse was just the normal brokerage house hogwash excuses that the industry puts out on a regular basis. The flash crash was short sellers piling  in to sell shares of stock that they did not own that the market could not handle. Non market maker trading desks have no concern for companies’ shares except for their own profitability; never forget that.

                                    Face the facts….we repeat…

Despite the damage to the small cap exploration industry, the banks and brokerage are there for their own profitability. The exploration and small companies take a back seat……way back!

6…A recent news release read “Junior Mining Sector Responds to Predatory Short Selling; Launches “Save Canadian Mining.” While overlooked and unnoticed by many investors, companies and intelligent investors are recognizing that nothing has a greater impact or is more important for the Canadian mining industry than stopping this activity..

Moreover, permitting short selling on down-ticks has a tremendously negative impact for the entire securities industry in Canada and the United States.  Yet nothing has been done to correct the situation. The smaller low cap stocks and juniors are extremely vulnerable.  

7…Often the best and most cost efficient exploration success has been done by juniors. Several managements of Juniors have complained that the bids they have discussed by larger companies are extreme low ball bids due to their weak prices. The larger mining and exploration companies do benefit by the price weakness by being able to make lower price offers for acquisitions of the vulnerable juniors.

8…Presently regulators should be examining and monitoring short sales to confirm that they are executed properly; such as have they properly  borrowed the shares shorted. For years that was not done. So it creates even more weakness……and our suspicion continues that many short positions were done without  having borrowed the shores under the proper procedures if at all.

9…Brokerage houses should be put on notice that most shareholders do not want their shares loaned out for short selling. With that in mind, a mining executive has told me that under no circumstances does he neither want nor will he permit his shares to be loaned out.

                                              Comments from our friends

*A Quebec based money manager said that if the investing public was the concern of the banks and brokerage industry they would not permit shorting on down-ticks.

* A New York based money manager says the same thing. Shorting stocks without upticks or flat ticks permits traders to definitely drive stocks lower and create price weakness. In the past the regulators in our view have been remiss in overseeing that short sales were properly executed.

*A well respected New York Stock Exchange specialist for many years told me that the right to short stocks on downticks can dramatically increase the downward momentum. ­­

*A Canadian former day trader and market maker says that the short selling on down ticks should be illegal and cannot believe that the regulators let it continue. He is now an investor and from that point of view and says that it must stop,

**In 2005, I wrote an article that appeared in two investment newsletters where I explained that market makers no longer supported the stocks it was well received throughout north America. I reported that the market makers (specialists) in the US and Canada no longer kept large positions in the stocks that they made markets in. 

The old tick test regulation should be re-instituted immediately for Canada.  Personally we have been complaining about short selling on down-ticks being allowed for several years. Now it is being addressed by people the mining industry.

We have several comments about this very questionable short selling that we will be putting up in future posts. The priority for the stock market is supposed to be the investing public and the companies themselves…..not trading desks.