A Trillion Dollar Naked Short Selling Scam: Is Europe Destroying American Companies?

NakedShorts@proton.me

Disclaimer: most of the research was conducted in 2022, it may be outdated. Use the footnotes to draw your own conclusions. The analysis and conclusions are simply the opinions of an activist retail investor.

After submitting dozens of Freedom of Information (FOI) requests[1] to regulators throughout Europe, the Far East and Canada, I was left asking myself that question. This led me to another, even more critical question: Have I discovered the greatest financial regulatory blind spot in history, one that is costing U.S. stock market investors, publicly listed companies and the U.S. government trillions of dollars collectively?

Freedom of Information requests have long been an intrinsic part of Freedom of Expression and Speech. What good is your right to speech if you do not have accurate information? This principle is also fundamental to investing: you need accurate information to ensure your investments are not being subjected to fraud and that there is an equally well-informed and competent regulator to protect your rights as an investor whilst ensuring the rule of law is applied to the broker-dealers, Central Counterparties (CCPs) and Central Securities Depositories. Certainly, “openness and transparency are key ingredients to build accountability and trust, which are necessary for the functioning of democracies and market economies”.[2] Censorship chokes the lifeblood of democracy — without free access to information, the voice of the people fades, and power consolidates in the shadows

Why did I send FOI requests?

GameStop Corp and AMC Entertainment Holdings are two U.S. public companies that are widely held by retail traders worldwide.[3][4] A large contingent of these shareholders actively use social media to communicate with each other, monitoring the trading of these companies globally and reporting in real-time what is occurring locally with the stocks. This unprecedented phenomenon of global market surveillance not seen in the stock market before.

Following what has been described on social media as an ‘international calamity’- the distribution of the GameStop [5] share dividend and the AMC Entertainment Holdings Inc[6] preferred equity dividend “APE”[7] in the summer of 2022- anecdotal evidence outside the U.S. suggested the existence of counterfeit/naked short shares. Many shareholders reported not receiving their dividend in the prescribed form (new shares via a dividend as opposed to their original shares being split) or in a timely manner. Many complained of delays, with some waiting several weeks before receiving their APE shares, being offered cash in lieu of dividend shares, or having their accounts set to “position close only” when shares were allegedly finally delivered.

These issues led me to the hypothesise that these overseas problems might confirm suspicions that the issuance of counterfeit shares may have played a role behind the events and volatility of January 2021: the so-called ‘GameStop Frenzy’[8]. In search of answers, dozens of Freedom of Information (FOI) requests were submitted to financial regulators and central banks for “Failure to Deliver” (FTD) data across the globe. The ensuing hostility, obstructiveness, secrecy and lack of information in some of the responses to them were shocking.

The information that was received challenges the United States Securities and Exchange Commission’s (SEC) ability to enforce the rule of law while protecting investors and issuers. It also raises questions about the conclusions in the ‘GameStop Report’. However, it’s more likely an urgent call for the U.S. government to treat the SEC as a National Security Agency and provide it with the resources it needs to protect U.S. markets from being abused from abroad by powerful cross-border prime brokers, custodian banks and market makers that have potentially captured several foreign regulators.

“Regulatory capture is the result or process by which regulation, in law or application, is consistently or repeatedly directed away from the public interest and toward the interests of the regulated industry, by intent and action of the industry itself.” [9]

What are Short SALES, NAKED Shorts (counterfeit shares) AND FTDs (Failure to Deliver)?

Short Sales occur when a trader, broker or market maker sells stock they don’t own by borrowing shares[10], intending to later acquire them to close-out the transaction. The seller (short seller) anticipates that the current price will fall and plans to profit from the difference when they buy back the shares to return them. Naked Shorting occurs when stock is sold in the market without borrowing it or owning it beforehand. While borrowed short selling (e.g., cost of borrowing, Shortage of shares to borrow, the risk of a forced cover, the risk of the stock jumping in price, having to use proceeds from the short sell as collateral until the position is closed), there are no constraints to Naked short selling.[11]

In most cases, it is illegal to sell an equity security without borrowing it or having ‘reasonable’ grounds to believe they can be borrowed. However, there are exemptions for the requirement to borrow a security before executing a short sale. Market makers (including broker-dealers that register as market makers) do not have to borrow shares on short sales for ‘bona-fide market-making activities’; and, for “Transactions in security futures”[12], among others

If a seller to a transaction does not deliver to the buyer within the normal T+1 (sale date plus one day), they have “failed to deliver” (FTD), which if often an indication of a naked short sale[13] or fraud for most people during the purchase of any other asset. Market makers are allowed three extra days to deliver, when acting as a bona fide market maker for the security.[14]

Although FTDS are often indicative of naked shorting they can on occasion be the result of innocuous administrative reasons. However, where there are persistent FTDS red flags should be observed.

The lack of public FTD reports in the United States does not rule out naked shorting either. There must be an actual obligation, or arrangement, to report them, and currently, only the NSCC (National Securities Clearing Corporation) does so.[15][16] However, the NSCC’s Continuous Net Settlement (CNS) system is said to obfuscate the true number of FTDs by its nature. CNS accommodates settlement failures to promote market liquidity, by delaying transfers through a netting process. This allows broker-dealers and the clearinghouse to offset transactions among multiple counterparties, possibly reusing of the same share for covering multiple FTDs. This process, called multiplicity, conceals the true number of FTDs[17].

International Central Securities Depositories in Europe use algorithms that automatically lend shares from one member to another when they don’t have shares to deliver[18] avoiding FTD reports. Additionally, broker-dealers and clearing firms have also engaged in creative but Illegal Options’ Trading in the past to reset REG SHO Close-Out obligations which also has the effect of concealing FTDs in the options’ chain[19]. A significant amount of trading is carried out directly between broker to broker and settled via private contract which is called ex-clearing[20] — the NSCC facilitates a maintenance service for these fails but does not disclose it to the public[21]. The Depository Trust Company (DTC) clears and settles trades between its participants and it doesn’t disclose any FTDs between them[22]. “Ex Parte” settlement occurs where a market maker wholesaler — that may be using its ‘bona fide’ market making exemption, or abusing it, by naked short selling directly to a PFOF broker or other market participants — internalises the settlement on its own books[23]. Obviously, FTDs are not an accurate measure of naked shorting abuse in any meaningful way, and it ignores the possibility of fraudulent entries made to the digital ledgers at the share depositories and settlement internalisers, however, they are the only means an investor has to determine whether their investment is a target of it, so their disclosure is of utmost importance.

I would define counterfeit shares, to include a situation where a transaction is entered into where a seller wilfully or negligently sells a security they do not currently own and have not borrowed, with no intention or bona fide effort to locate a borrowable share and does not deliver within the legal timeframe, instead concealing the resulting failure to deliver (FTD) by utilizing an offshore jurisdiction with lax reporting requirements, thereby evading regulatory oversight from their home jurisdiction (e.g., SEC); or any other wilful, or negligent action that obscures, conceals or prevents the production of a FTD report where one would have been produced otherwise, in an effort to avoid detection by the appropriate regulatory body in their home jurisdiction.

Consequences of Naked Shorting

Naked shorting exposes many important questions for retail investors: what exactly any of them has purchased- if anything- if they don’t receive any purchased or borrowed shares? “In this case, the brokers will place a marker or pledge to deliver the shares on the investors’ accounts, which are made by the seller’s clearing firm”.[24] Abusive and unchecked naked shorting can lead to a loss of shareholder rights, including disenfranchisement by overvoting and the resulting throwing out of votes by brokers to conceal the breadth of the naked shorting problem[25] which could also lead to fraudulent vote results orchestrated by broker-dealers instead of shareholders; the multiplicity of shares can lead to significant financial losses to investors and issuing companies because the traded float may be many times the authorised and outstanding (the share price is artificially diluted)[26], which can lead to companies desperate for capital having to agree to dilute their shareholders further and unnecessarily, agree to predatory debt arrangements if they could not raise the appropriate levels of liquidity via a share offering or go bankrupt, in which case short-sellers would never have to close their short position. Unchecked and unsupervised Naked Shorting could be considered a financial weapon of mass destruction to capital formation, innovation, investors, and companies that fall victim to it, or used to manipulate the options chain, the so-called, “max pian”[27] hypothesis. However, it also could represent an existential threat to the financial markets, where excessive uncollateralized/unmargined naked short positions could cause default contagion within a clearing house, which could spread to others if the market moved against one, or more of those positions.

US LAWS TO ‘PREVENT’ ABUSIVE NAKED SHORTING: SEC REGULATION on Short Selling “Reg SHO” / close-out obligations and FTDs

Rule 204 of Regulation SHO[28]

“The SEC adopted Regulation SHO to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling, e.g., the sale of securities that an investor does not own or has not borrowed. What most people consider fraud.

Accordingly, Rule 204(a) of Regulation SHO requires broker-dealers to take action to close out fail-to-deliver positions (fails or FTDs) resulting from short sales in equity securities by borrowing or purchasing securities of like kind and quantity by the beginning of regular trading hours on the settlement day following the settlement date.

A violation of Rule 204 of Regulation SHO is also a violation of FINRA Rule 2010, which requires members to observe high standards of commercial honour and just and equitable principles of trade in the conduct of their business”.[29]

Bi-monthly the SEC publishes FTD (Failure to Deliver) data collected from securities clearing and settlement carried out through the National Securities Clearing Corporation (NSCC)[30] in the United States and Canada. The NSCC is registered with the SEC, however, was only recently granted permission to do so in the European Union[31] and is a minor player there. The reason the SEC requires disclosure of FTD data is to be able to monitor and enforce its rules as adopted under Regulation SHO — Regulation of Short Sales[32] to discover if there has been any naked short abuse, or persistent FTD that is causing harm to capital formation for companies and loss of capital gains by retail investors.

What the SEC doesn’t publish is FTDs of US-issued equity securities that were traded and settled abroad- where significant trading of these securities takes place. Nor does the SEC publish FTD data of direct participants of the Depository Trust Company (DTC) in the United States that transfers equities to and from many international banks and broker-dealers to facilitate the use of U.S. equities for the purposes of collateral use and trading of U.S. equities in foreign markets, or from settlement internalisers.

CENTRAL COUNTERPARTIES (CCPs) & CENTRAL SECURITIES’ DEPOSITORIES (CSDs)

To understand naked shorting, you need to understand the full cycle of stock trading.

Stock exchanges such as the NYSE, or NASDAQ are just venues where a sale is agreed upon. The exchange of cash and shares, or lack thereof (FTDs), happens behind the scenes. Central Counterparties (CCPs) and Central Securities Depositaries[33] (CSDs) facilitate the exchange of cash and securities to each party that agreed to sell and buy on the exchange[34].

In the United States, the DTCC [35] owns the NSCC (National Securities Clearing Corporation)[36], a Central Counterparty, and the DTC (Depository Trust Company)[37], a Central Securities Depository (CSD. The DTCC has an almost virtual monopoly of clearing and settlement for equities in the country. They settled $152 Trillion in securities in 2021 and provided custody and asset-serving for $87.1 trillion in securities.[38]

To facilitate vast amounts of trades, CCPs act as counterparties to each buy and sell order. They liaise with CSDs to transfer securities from one account to another in the “settlement” process. CCPs and CSDs sometimes work together or separately to pool cash (composed of collateral requirements by brokers and other financial institutions that are participants of the CCP and/or CSD) and securities (through lending and settling algorithms between CCP and CSD members) of their members (broker-dealers, market makers) to fulfil the orders whilst spreading the risk of default of one or more members amongst them.

During this settlement period, between the transaction and the settlement of cash and securities, price volatility can cause potential losses to all members if one or more parties do not deliver. As the NSCC and DTC in the U.S. are self-governing bodies, and the ownership is made up of broker-dealers, market makers and exchanges, this creates an obvious conflict of interest. Members and owners could feasibly conspire to work together to avoid or mitigate the negligence and losses of another member to protect their overall liability[39] or to avoid increasing collateral requirements of all members at times of increased market volatility.

In January 2021, several brokers restricted retail traders from trading in GameStop, AMC Entertainment, and other companies[40]. This shut out retail traders from the markets to nullify the volatility that was inevitably causing all members of their respective CCPs and CSDs both potential liability and increased collateral requirements. It caused significant losses to retail traders while certainly preventing losses to the participants of the DTC and members of the NSCC.

Given CCPs and CSDs’ fundamental importance to the financial infrastructure of the entire U.S. financial system, Congress mandated that all clearing agencies must register with the SEC or seek an appropriate exemption. Both registration and conditional exemption involve thorough examination by the SEC, including stress tests, risk management, inspections, and a multitude of disclosures[41]. Section 17A of the Securities Act 1934 mandates the SEC to ensure any registration or exemptions is consistent with the public interest, the protection of investors, […] including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds[42].

Irrespective of the conflicts of interest inherent in the members’ and owners’ self-interest, CCPs and CSDs are the best placed to monitor and report FTDs to regulators and other stakeholders (investors and companies) to ensure transparency, accountability, and trust in the US and other financial markets — provided they are required to do so. The Regulation on Short Selling (Reg SHO) and Section 17A registration for CCPs and CSDs work together to ensure ‘protection’ to the U.S. issuers of Securities and their investors, albeit flimsily.

However, that is the traditional clearing and settlement system as largely pertains to on-exchange trading. There is a great deal of trading executed off-exchange in the dark markets -internally at brokers, prime brokers, wholesalers and on alternative trading venues[43], which may be settled outside the DTCC altogether.

Is there contemporary evidence of pervasive Naked Shorting in the USA?

On October 3, 2022, UBS Securities LLC acknowledged that over a ten-year period, they failed to take effective action to clear Failures to Deliver (FTDs) on 5300 occasions[44] and executed a further 71000 short sales while already having outstanding FTDs in the securities sold short[45]. This is clear case of naked shorting and FTD abuse on a significant scale, likely involving many billions of dollars. The punishment for UBS? A mere $2.5 million fine, a ‘censure,’ and disgorgement was not ordered according to the file. There was no compensation to the many shareholders affected by the illegal dilution of their investments, nor any compensation for the share issuers. This incident also raises critical questions: How many corporate votes were manipulated? How many companies may have had to enter predatory debt arrangements because they couldn’t raise enough capital on the markets due to their share price being suppressed by naked shorting and FTDs?

In another recent FINRA enforcement case, “Wedbush Securities INC[46] failed to timely close out approximately 2056 fail-to-deliver (FTD) positions as required by RULE 204 (a), and on approximately 390 occasions failing to place securities in the ‘penalty box’ as required by RULE 204 (b)”. Despite this being Wedbush’s second offence in five years for naked short abuse, they were fined a minuscule sum of $900 000 and continued to operate as a business despite it being plausible, they caused significant damage to retail investors and U.S. companies. Are computer systems that hard to program to prevent this ?

On August 5th, 2022, Gar Wood Securities, LLC[47] accepted it had breached Rule 203(b)(1) of Regulation SHO of the Securities Exchange Act of 1934 and FINRA Rule 2010 by accepting approximately 2,000 short sale orders without obtaining locates (borrowing) between May 2016 and May 2019. Despite potentially causing millions of damages to retail investors and US issuers, Gar Wood was sanctioned a paltry $100 000.

These cases illustrate significant naked short and FTD abuse- whether through negligence or intentional misconduct- that took place under the supervision of the SEC and FINRA in the United States, despite these practices being forbidden under the REG SHO Rules.

U.S. Securities Laws and Rules the SEC Has Failed or Been Prevented from Enforcing

The Securities and Exchange Commission (SEC) is the custodian of the Securities Exchange Act of 1934, mandated to protect investors, issuers, uphold the Public Interest, and enforce the rule of law. This includes ensuring that broker-dealers, Central Counterparties (CCPs), Central Securities Depositories (CSDs) meet stringent criteria, provide disclosures, and undergo examinations to be registered with the SEC for conducting financial services involving U.S.-issued securities or are suitable for an appropriate exemption. Critically, the SEC is empowered by Section 30 (a) to ensure brokers are not permitted to circumvent the rules it makes by trading on foreign markets.

SEC. 30. (a) It shall be unlawful for any broker or dealer, directly or indirectly, to make use of the mails or of any means or instrumentality of interstate commerce for the purpose of effecting on an exchange not within or subject to the jurisdiction of the United States, any transaction in any security the issuer of which is a resident of, or is organized under the laws of, or has its principal place of business in, a place within or subject to the jurisdiction of the United States, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors or to prevent the evasion of this title. Securities Exchange Act of 1934[48]

Given this section of the Exchange Act, the investing public will be shocked to discover that not one financial regulator abroad — or at least one that will admit it and disclose under FOI requests- is monitoring U.S.-issued equity securities’ FTDs on an individual company basis. This lack of oversight stands in stark contrast to the principles of open and transparent markets. The SEC and FINRA have either naively — or perhaps purposefully- absconded or been obstructed from their duty to protect investors and issuers of U.S.-issued securities investors by allowing these securities to be traded overseas without any protections against naked shorting or abusive FTDs.

Freedom of Information Findings

Method:

A concise FOI template was used, identifying GME, AMC and APE by their ISIN[49] rather than CUSIP[50], and requesting anonymous fail data for approximately the last 2-years.[51] This approach was used to ensure compliance with confidence laws and clarity so that any reasonable person could use to identify the data requested. The FOI requests were submitted to the National Competent Authorities that supervise Central Securities Depositories (CSD) and CCPs (Central Counterparties), as well as the European Securities and Markets Authority (ESMA).[52] Follow-up requests were made for historical trading volume in some instances.

Findings:

European Union (EU) [53]

The EU operates under a supranational financial regulator, European Securities and Markets Authority (ESMA), alongside individual domestic regulators in each member state (National Competent Authorities). U.S. based companies can be secondary listed in Europe without their knowledge or consent by any individual via a “specialist”[54] with the support of a “designated sponsor”[55]/ market maker [56].

Failures to Deliver (FTDS) in Europe: “Settlement Fails”

In Europe, Failures to Deliver (FTDs) are referred to as “Settlement Fails”. Two significant pieces of legislation regulate short-selling and clearing and settlement within the EU:

1: Regulation 236/2012/EU — Short Selling Regulation (SSR)[57], which is very similar to REG SHO in the United States; and,

2: CENTRAL SECURITIES DEPOSITORIES REGULATION (CSDR)[58] This legislation governs settlement, including management of settlement fails of securities (FTDs).

RULES AGAINST NAKED SHORTING IN THE EUROPEAN UNION (“uncovered short sales”)

There aren’t any. At least for U.S.-issued shares or depository receipts that are traded in the European Union. Article 16 (1) of the European Union’s Short Selling Regulation (SSR) exempts any restrictions on naked shorting where the principal venue for trading of shares is in a third country (outside the European Union and EEA)[59]. According to Article 1 of the Short-selling Regulation, the exemption applies to shares once they are admitted to trading on a trading venue within the EU. Once admitted to a trading venue, the naked short exemption applies regardless of whether the trading occurs on a trading venue (Regulated Market (RM)[60], Multilateral Trading Facility[61] (MTF)) or off-exchange,[62] such as a Systematic Internaliser (SI)[63].

If this wasn’t shocking enough, Article 7 (13) of the Central Securities Depositories Regulation (CSDR) exempts broker-dealers and market makers from having to pay any penalties regarding failing to deliver U.S.-issued equity securities when using a Central Securities Depository,[64]creating the possibility of “Forever Fails” that could permanently dilute the floats of U.S. companies without authorization. It also exempts the CSDs from compiling reports of foreign shares’ (U.S., Canadian etc.) settlement fails and reporting them to the regulator. These exemptions also appear to apply to “Settlement Internalisers”.

A Settlement Internaliser settles trades “in its own books and not through a securities settlement system”[65][66], outside the traditional Central Securities Depository system. The supervision of settlement fails within this system is somewhat non-existent on an individual financial instrument basis, as the reports to the competent authorities in the European Union (ESMA and the Member State regulators), if reported, are aggregated without identifying any individual financial instrument by its ISIN. Settlement Internalisers seem to also be exempted from including settlement fails of US-issued securities in these reports[67], nor apply, or incur, penalties for settlement fails; or apply, or be compelled, to buy-in securities to close the settlement fails. “Forever fails” are a significant risk at Settlement internalisers given human nature and the lack of any mechanism or supervision that would compel the resolution of settlement fails. The lack of cross-border surveillance of these settlement internalisers, that likely have entities in multiple states around the world, leaves the possibility of spreading the abuse (or evidence thereof) of naked short selling securities and settlement abuse across multiple jurisdictions to avoid detection by any one regulator.

A list of Settlement Internalisers could not be located. However, cross-border Prime brokers, and market makers, often provide a range of services to hedge funds and other institutional clients, including Clearing, Settlement and Custodian Services[68], and, some whole sale market makers in receipt of order flow are almost certainly settlement internalisers.

ESMA justifies the naked short and short position reporting exemptions is that the SSR aims at limiting the ‘duplication of obligations’ connected to short-selling activities.[69] “ESMA’s preliminary view was that the current Article 16 of SSR still permits an adequate monitoring of the relevant shares in most cases”[70]. How?

If the SEC only monitors FTDs from NSCC members, this isn’t true.

ESMA further justifies the exemption by stating that each Member State regulator has the power to enter into an agreement of cooperation with the U.S. regulators to ensure that these exemptions are not abused.[71]However, when ESMA was asked how many member states had entered into an agreement with the SEC or FINRA, ESMA disclosed not a single country within the European Union had done so.[72] ESMA seemingly in crisis mode that the whistle was blown on their non-existent regulatory structure for the short-selling of U.S. securities trading in Europe, spun that the reason no country had entered into any agreement to supervise naked short selling was that U.S. and European regulators could use the IOSCO (International Organization of Securities Commissions) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of information.[73] But this agreement contains no mention of ongoing exchanges of information to monitor short-selling, FTDs or naked shorting of U.S. stocks. The continued existence of the naked short exemption was reviewed and affirmed by ESMA’s Securities and Markets Stakeholder Group (ESMA SMSG)[74] in 2022, which has at least two American corporate representatives: Citadel/Citadel Securities[75] , and ICE Endex (owned by Intercontinental Exchange, Inc ).[76]

ESMA has recently touted publicly that they have very strict rules against naked shorting[77], but this turns out to be a misrepresentation for investors of U.S. and other foreign stocks trading on EU trading venues, or off-exchange. Could this be a case of unintentional misrepresentation to the public and other international regulators such as the SEC…? Were they misled themselves by cunning and skilled lobbyists to include these series of exemptions, who had a plan to abuse the exemptions later?

EXTRAORDINARY HIGH SETTLEMENT FAILS IN EUROPE (*2022)

Settlement fails (FTDs) across a number of asset classes in Europe are significant, which makes this lack of supervision of U.S. stock trading even more pertinent. Among European Central Securities Depositories (CSDs) with direct or indirect links to the Depository Trust Company (DTC) in the United States:

· Euroclear Bank (an International CSD with a direct link to DTC[78]) reported 183 trillion Euros in settlement fails in 2022, with an 8% fail rate on volume and a 15% fail rate on value.[79] Euroclear attributes most of this to a lack of securities.[80]

· Clearstream Banking S.A.[81] (the international CSD based in Luxembourg, which has an indirect link to the DTC)[82], reported 576 trillion Euros in settlement fails in 2022, with 7.75%% fail rate on volume and a 50.43% fail rate on value.[83]

· Clearstream Banking AG, the domestic German CSD (receiving and requesting standard link to the DTC[84] ), reported 27.5 trillion Euros in settlement fails in 2022 with 23.42% fail rate on value and an 8.99% fail rate on volume.[85]

· Monte Titoli (also known as Euronext), which has a standard receiving link to DTC[86] reported 9 trillion Euros in settlement fails in 2022, 6.21% fail rate on volume and 5.92% fail rate on value. [87]

· Euroclear UK and international (with a direct link to DTC) are not required to disclose a settlement fail report, as the United Kingdom declined to retain this European Union requirement post-Brexit.[88] However, given that the city of London is a major financial hub, it also has potential to have extraordinarily high figures for settlement fails, consistent with the high rates of its contemporaries on continental Europe. Provided it was legally mandated to provide accurate figures.

To be clear, these fails are not all due to equities. The settlement reports EU CSDs must disclose include transferable securities, money-market instruments, units in collective investment undertakings, emission allowances,[89] and when these securities are used in ‘free of payment deliveries’ for securities lending transactions, securities deposits as collateral or to meet a margin call[90] within the operations of the CSDs. Despite requests to CSDs in Europe for a breakdown of the fails per asset class or specific companies none of them would provide any clarity in that regard. ESMA did provide some vague data regarding settlement fails for equities in Europe: across all their CSDs (29 included on ESMA’s register[91]) there was a 6–12% rolling weekly average on value in 2022.[92] One could presume the rate of fail for foreign securities (U.S., Canadian etc) would be much higher given there are no supervision, transparency, or penalties regarding naked shorting of these securities.

The value of the settlement fails in Europe is staggering and difficult to grasp. It appears that many institutions that are significantly under-collateralized from time to time, which may be a significant risk to the global economy. I have sought an explanation to rationalize these figures, and I am told off the record that they’re mainly due to free-of-payment securities settlement, which could be collateral movement of securities, securities lending, or margin.

The most astonishing aspect of this lacklustre and ambiguous approach to transparency for settlement fails in Europe is that these annual settlement failure reports from the CSDs are exempt from including fail data on equities of U.S. companies or any other foreign companies equities ‘settling’ in Europe.[93]

On the face of it, the incidence of settlement fails for equities seems to be much higher in Europe than in the United States. Chair Gary Gensler of the SEC has quoted a 1% figure for FTDs in the United States on volume[94]. However, this figure may not fully represent the situation, as the DTC doesn’t disclose its own settlement fails/FTDs amongst its participants for equities, despite settling between custodian banks and broker-dealers.[95] it’s unclear whether these fails are included in the NSCC figures as well.

Settlement fails at settlement internalisers in the U.S, particularly at market maker wholesalers seem to be completely opaque, especially if the market maker has a global footprint and trades U.S.-issued equities in multiple offshore jurisdiction. The same lack of transparency applies to European settlement internalisers outside of the CSD settlement system. This raises a few existential risk management questions for the U.S. and European Markets:

1: What are the true FTD numbers within the U.S. at the DTC and settlement internalisers?

2: What are the true settlement failure figures in Europe if U.S. and other foreign stocks were included, and what is the full extent of settlement fails incurring at the settlement internalizers?

With U.S. and other foreign companies having no protections against naked shorting, it is plausible the true figures are significantly higher in Europe. More worrying is the apparent lack of mechanisms- such as fail penalties, collateral or margin requirements — to force settlement and prevent U.S. stocks from failing in perpetuity in Europe: “Forever Fails”.

SHORT INTEREST REPORTING IN THE EUROPEAN UNION OF US-ISSUED EQUITY SECURITIES’ EXEMPTION

An additional exemption exists that allows for the non-reporting of short positions to both regulators (Article 5) and the public (Article 6[96]). Typically, significant short interest positions in equity securities across European Union must be reported to the Relevant Competent Authority [97] that includes depository receipts and derivatives.[98] However, once U.S.-issued equity securities traded on these venues are admitted to the “List of exempted shares (having their principal trading venue located in a third country)” [99] it enables short positions to be opened in U.S. securities with no reporting requirement- GameStop, AMC and APE are on this list, along with another 2000 plus U.S. based companies[100].

While this provision is inherently susceptible to abuse, the proliferation of global trading systems — where powerful algorithms make routing and trading decisions based on the parameters and benefits of the trading venue to execute on[101] — and the existence of complex group company structures (with many subsidiaries around the world under a parent company) suggest it is potentially already being exploited by FINRA members in the United States. Otherwise, it wouldn’t have become a Frequently Asked Question (FAQ) on FINRA’s website.[102]

The short interest reporting exemption, along with the naked short selling one, coupled with the lack of penalties and reporting requirements for failures-to-deliver (FTD), could have significant knock-on effects on the SEC’s enforcement of Regulation SHO and particularly in relation to Section 30 (a) of the Securities Exchange Act.[103]It is also raises the possibility of cross-market manipulation, whereby entities agree to execute trading off the consolidated tape and NBBO feeds[104] offshore, to spoof[105] the market in the U.S that there is relatively low demand for an equity, or other financial instrument. Without ignoring the real possibility of cross-product manipulation[106], where the use of regulatory arbitrage to circumvent the United States’ rules on naked shorting and close-out obligations whilst trading off “the SIPS”,[107] could lead to proving the “max pain” hypothesis in options contracts where market manipulation drives underlying stock prices toward levels that maximize losses for options holders at expiration[108].

Many American market makers, dealer-brokers and prime brokers use separate European legal entities (e.g., Citadel Securities (Ireland) Limited, Goldman Sachs International Bank, Goldman Sachs Bank Europe SE, Morgan Stanley Europe, Susquehanna International Securities Limited, Virtu Financial Ireland Limited…) to conduct business in the European Union. In addition to being able to utilize the naked short and short interest reporting exemption for foreign stocks trading in Europe they have also registered with the EU to rely on similar exemptions (naked shorting and short interest reporting) for market-making activities for European stocks.[109] Notably, Virtu Financial Limited, Susquehanna International Securities Limited, Interactive Brokers and Citadel Connect Europe are also listed as systematic internalisers[110] that could be “Settlement internalisers” outside the regulated settlement system of CCPs and CSDs[111]- much like the U.S. wholesaler market.

There are hundreds of brokers and market makers exempt from the ‘ban’ on naked shorting in the European Union and are also not required to report short positions for European stocks.[112]Consequently, Europe’s reputation for stringent regulations on naked shorting and transparency may be overstated. Without any meaningful supervision and given the ability to engage in naked shorting without reporting, it is highly unlikely the exemptions are not being abused.

REGULATION S exempted UNITED STATES’ ISSUED shares sold abroad

While European regulators face criticism for their lax and potentially hazardous regulations due to exemptions, the SEC’s adoption of Regulation S in 1990 also has significant implication for transparency and accountability. Regulation S provides a safe harbour from the registration requirements of Section 5 of the Securities Act 1933 for offshore offers and sales of US-issued securities.[113] On the surface, accessing international markets and investors appears beneficial to issuers. However, the extent of the exemptions is not widely known to companies and investors. In reality, Regulation S creates a substantial opportunity to conduct large scale abuse, destroying capital formation for U.S. companies and capital gains to investors. Once Regulation S is used to issue securities, they have become exempt, they lose the thorough disclosure requirements (13d and f) [114] the SEC would require of Broker-Dealers, CCPs and CSDs when handling registered US securities- including individual company FTD disclosures from the CCPs and CSDs that are required in the United States to monitor for signs of infringing Regulation SHO to ensure single companies are not the target of predatory naked short selling.

The number of entities that can rely on Regulation S is numerous:

U.S. Issuers; Foreign Issuers; Distributors (underwriters and broker-dealers); Affiliates of the issuer (both U.S. and Foreign); Any person acting on behalf of the aforementioned persons; Non-US resident purchasers (including dealers); foreign CCPs and CSDs and, U.S. residents (including dealers) who are not offering participants with purchases of securities on the trading floor of an established foreign securities exchange that is located outside the United States or through the facilities of a designated offshore securities market. [115] Depository receipts can also be used for Regulation S offerings which AMC Entertainment utilized for their special equity dividend (APE) via Citibank as their agent who offers their expertise in depository receipts. [116]

Given the exemptions for naked short selling, short interest reporting and any enforcement measures for failing to deliver securities, I pursued Freedom of information requests for FTD data directly from individual European member state regulators and globally for transparency. I am particularly averse to ambiguity.

European Securities and Markets Authority (ESMA)

I requested information from ESMA, which disclosed that they do not maintain specific settlement fail data individual companies. [117] instead, all fail data is aggregated and reported in total, not broken down by specific companies.

GERMANY

In Germany, U.S. stocks such as GameStop and AMC are listed on multiple trading venues- 15 for GameStop[118]; 15 for AMC [119], and, 13 for APE.[120][121]. Furthermore, Brazilian Depository Receipts (BDRs)[122] with AMC common stock allegedly as the underlying, was registered by UBS in its role as a systematic internaliser on MIC CODE: UBSI (instrument identification code: BRA2MCBDR002). Often, U.S. companies are secondary listed in Germany without their knowledge or consent by private citizens with the support of a market maker (“designated sponsor”)[123], and this initial registration can extend on other trading venues throughout the European Union.

The Frankfurt exchange (MIC CODE: FRAB) confirmed that the trades and volume of the U.S. stocks trading there are not fed into the NYSE Consolidated tape[124][125], Tradegate in Berlin (MIC CODE: XGAT ) alleged they only report their trade data to Bloomberg and Reuters.[126] This was also confirmed with the NYSE[127]; and, FINRA subsequently confirmed that the trading outside the United States is also not captured on the Consolidated Audit Trail (CAT)[128], which indicates that the SEC and FINRA in the United States are not aware or monitoring this trading as only the Consolidated Tape and CAT were referenced in the SEC’s GameStop report. How this ‘off-radar’ trading of U.S. Stocks effects- if at all- price discovery in the United States is unclear.

Germany is also home jurisdiction for Deutsche Borse Group (DGB) which owns Luxembourg based Clearstream Banking S.A. a major International CSD, LuxCSD[129] and Clearstream Banking AG in Germany- DBG also owns several trading venues.[130] Clearsteam S.A. (International Central Securities Depository) doesn’t seem to have ever been granted permission to offer clearing and settlement for U.S. issued corporate equity securities for its customers from the SEC, only U.S. government securities[131]; however, Clearstream Banking AG (the German-based CSD) has a standard link (requesting and receiving) link to the DTC in the United States[132], of which the ICSD seems to be utilizing indirectly[133].

Trading Volume is not insignificant for the many U.S.-issued equity securities trading on trading venues in Germany, across ten exchanges where data could be obtained, in the month of January 2021, approximately 58.5 million shares of AMC and 28.5 million shares of GameStop were traded.[134] This is likely just a sample of the volume, as it doesn’t include any trading off-exchange at systematic internalisers.

The German Federal Financial Supervisory Authority, BaFin[135], disclosed that they follow the minimum standard EU model: only monitoring FTDS (settlement fails) on an aggregate basis of all fails, not individual[136] , therefore cannot provide any information on FTDs for a specific company. Although Germany’s Central Bank, Deutsche Bundesbank has dual oversight responsibilities of their CSD[137], they also reported having no company specific settlement fail data.

BaFin provided the legal basis for not providing the data, [Pursuant to Article 7 (1) of Regulation (EU) 909/2014 (CSDR)[138] in conjunction with Article 14 (1) of Regulation (EU) 2018/1229 (Settlement Discipline)[139], a Central Securities Depository (CSD) shall, inter alia, report the number of failed settlements to the competent authority on a monthly basis. However, the failed settlements are not reported for each ISIN (Company), but are aggregated for the respective type of financial instrument (e.g. for all transferable securities within the meaning of Article 4 (1) no. 44 (a) of Directive 2014/65/EU[140] (Article 13 (1) © no. i of the Settlement Discipline)) ] so there is no way to request FTD data for specific companies as private companies (CSDs) are not obligated to respond to freedom of information requests.

Additional Analysis

However, after further analysis, these are minimum standards the EU passed for reporting of settlement fails (FTDs) from member state CSDs, there is nothing precluding member states from implementing far more robust disclosures to ensure basic transparency and fraud prevention standards. According to Paragraph 14 of DelReg 2018/1229, National Competent Authorities are entitled to request additional information on settlement fails or more frequent reporting as necessary to perform their tasks.[141] Under Article 13 (1) of the same DelReg 2018/1229 Depositories are already required to collect detailed information on each fail, how long it lasted and the known reason. [142] This aggregate reporting of settlement fails is very opaque and leaves one to ask many questions, in particular, what safeguards are in place to ensure that one or more companies are not the victims of predatory short-selling and persistent FTDs that are hidden in the aggregate data. When an investor researches an investment, they’re hardly going to be interested in the aggregate amounts of fails for all securities, they want accurate information specific to the company they’re investing in, so too do CEOs and CFOs when they want to raise capital via a share offering without needlessly diluting shareholder value. I followed up with BaFin.

I asked BaFin specifically what safeguards there are, if any, to ensure that the aggregate data did not hide excessive FTDs in regard to one or more companies that may be subject to predatory short-selling. Verbatim response:

“although the number of settlement fails are being reported in aggregate on the level of the financial instrument, the CSD has to identify and report the top 10 participants with the highest rates of settlement fails (see Art. 14(1) DelReg 2018/1229 in connection with Annex I). According to Art. 13(2) DelReg 2018/1229 the CSD shall establish working arrangements with those top 10 participants to analyse the main reasons for the settlement fails.

According to Art. 22 Reg. 909/2014 the CSDs NCA can conduct audits to ensure CSDR-compliance”

To be clear the top ten participants are brokers and market makers, in other words, there aren’t any safeguards to protect individual companies or their investors from excessive and persistent FTDs that may be indicative of naked shorting, especially if spread across multiple CSDs and Settlement Internalisers across the European Union, and globally for that matter. There is no way for investors, or companies potentially targeted to carry out due diligence to determine whether this is a problem or not. This is not in the public interest, not to benefit of capital formation, not in the best interests of investors when the EU and German regulators are not carrying out sufficient protections of investors and companies while supervising their Broker-Dealers, CCPs and CSDs.

BELGIUM

Belgium is the home jurisdiction of Euroclear Bank one of the largest International CSDs in the world, they also were never granted permission by the SEC to settle registered U.S.-issued equities on the buy and sell side, only for the mobilisation of collateral backed by the pledging of U.S.-issued securities.[143] They have a direct link to the DTC and their 2022 Settlement Fail report included 183 trillion Euros of settlement fails across all financial instruments. [144]

UNITED KINGDOM

In the United Kingdom, GameStop was registered to trade on two trading venues (MIC CODE: XLOM and EXSI[145]) and AMC on another (MIC CODE: IMCE). Additionally, Brazilian Depository Receipts (BDRs) with AMC as the underlying were registered to trade by UBS on MIC CODE: UBSY (*they’ve since been terminated from trading).

Despite the United Kingdom’s exit from the European Union at the end of January 2020[146], it retained the EU rules on short selling, including the naked short and short position reporting exemptions for foreign securities.

The UK’s settlement system, CREST (Certificates Registry for Electronic Share Transfer), differs from continental Europe’s. at least when using a CSD, U.S.-issued securities cannot be directly settled in CREST as only securities constituted under the laws of England and Wales, Scotland and Northern Ireland are permitted to use CREST. However, the UK regulations allow securities constituted under English law that represent an interest in international securities to use the CREST system. These independent securities that represent U.S.-issued securities are called “dematerialised depository interests”, or CDIs. The CREST Depository (CREST Depository Limited, a subsidiary of Euroclear UK International) issues CDIs which represent an entitlement to the underlying international securities. The underlying U.S.-issued securities are held by CREST International Nominees Limited as a participant of the Depository Trust Company (DTC) in the U.S..[147] The CDIs are marked, where possible, by the underlying ISIN. [148] The CREST system is owned and operated by EUROCLEAR UK and International (EUI).[149]

FOI requests for settlement fails were submitted to both the Financial Conduct Authority (FCA)[150] and the Bank of England[151]. The FCA informed me that had no information and that it was the Bank of England that monitored FTDs.

The Bank of England “confirm[ed] that the bank holds certain information provided by Bank-regulated financial market infrastructures (such as central securities depositories) which may relate to trading in US securities. Such information comprises daily reports in relation to ‘trades’ in securities”[152] that may include FTDs but would not disclose it because it would take them too much time (more than 18 hours). I appealed it on the grounds that they’re digital records, easily disseminated by someone competent with software and felt their response was an attempt to obstruct the FOI request. The internal review was denied again on costs, they stated it would take them 70 hours to complete the task, much more than the 18 hours allowed under the FOI ACT.

A subsequent request was made to the Bank of England that refined considerably the dates requested for FTDs, this was also denied on the grounds it would identify the Central Securities Depository that ‘may’ report the U.S. stock trading data to them, which is Euroclear UK and International Limited. [153] But the request concerned settlement fail data reported by the members/participants of the CSDs which is made up of many dozens of firms and therefore wouldn’t identify the entities disclosing the settlement fails. This type of anonymous aggregated information is usually allowable under UK law as it’s not considered confidential, especially when it’s been made public elsewhere[154]. This is the same approach the SEC took when disclosing the FTDs as reported by members of the NSCC, as the members reporting them were not identifiable. The Bank of England has again denied disclosure of settlement fail data because it would likely identify Euroclear UK and International Limited which is publicly known and available on their website.

That denial was subject to an appeal to the First-tier Tribunal (General Regulatory Chamber) in the United Kingdom. The Tribunal agreed with the Information Commissioner’s argument that notwithstanding the SEC’s policy in the United States to disclose FTDs to the public of US-Issued equites, there were no grounds for the disclosure in the United Kingdom, as it took place outside the jurisdiction.

Whether it is legally justified, or not, the lack of transparency by the Bank of England should be viewed as a denial of transparency to every U.S. company, investor and global markets at large given they’re not prepared to offer the simplest form of transparency to ensure accountability and that the rule of law is being observed.

BULGARIA

One exchange in Bulgaria has registered to trade AMC (MIC CODE: JBUL), the regulator there, Financial Supervision Commission disclosed they had no records of FTDs for AMC and were reluctant to provide daily volume figures for AMC for every day since it started trading there. Bulgaria has only one CSD with no link to the DTC and it’s not approved for the clearing or settlement of U.S.-issued securities by the SEC. However, as discussed earlier, being listed on a trading venue, facilitates the trading and short selling of US-issued equities off-exchange at systematic internalisers.

FRANCE

One exchange (MIC: TPIR[155]) has registered to trade GameStop in France. FOI was made to both the Banque De France[156] and The Autorité des Marchés Financiers (AMF)[157]. Banque De France responded “Unfortunately, we are unable to answer your request”,[158] no letter outlining why, or an appeals’ process was offered. The Autorité des Marchés Financiers (AMF) responded simply “We are unable to provide you with this information”, again no official letter outlining why they were not able to or any appeals process. The Settlement fail rate at Euroclear France (2.68% on volume; 2.17% on value) is much better than those reported elsewhere in Europe, but the total value is still a staggering 14.8 trillion Euros[159]. Given the value of settlement fails and total hostility to transparency in France, it is another jurisdiction in Europe where the vibrancy of life for the rule of law does not bode well.

AUSTRIA

AMC and GME have only recently (December 21, 2022) been admitted to trading in Austria (MIC CODE: WBDM[160]). A FOI was submitted to the Austrian regulator, Finanzmarktaufsicht (FMA) for FTDs, they were hostile to providing any financial data given their traditional financial secrecy laws.

Other European Member States

There have been multiple cases of AMC and GME investors based in other EU Member States (Italy, Netherlands, Poland, Czech Republic, Slovenia, Malta, Cyprus, Croatia, Finland, Spain, Portugal) that complained of not receiving their dividends in the prescribed form or at all. As neither GME nor AMC is registered to trade in those states, presumably their trades are being routed through other trading venues based in Europe or OTC via intra-broker trading: “ex-clearing” or “ex parte clearing”. I sent FOI requests to all the regulators in those countries, each disclosing that they had no records of settlement fails for GME, AMC and APE. Another example of little to no oversight of intra-broker trading.

CANADA

FOI requests for FTD data were made to the Bank of Canada, Ontario Securities Commission, British Columbia Securities Commission, and the Autoritie des marches financiers (AMF) in Quebec, each of which stated they had no data on FTD of U.S. securities. Only the AMF was helpful in any meaningful way, stating that any failure to deliver data regarding U.S.-issued securities held by Canadian residents, would be reported in the United States given they don’t trade on any venue in Canada. The AMF also seemingly confirmed what many suspected in the case of the GameStop dividend[161], that the DTCC may have committed securities fraud in instructing their members to facilitate a forward split instead of issuing their accounts with new shares issued from GameStop via a dividend. This would dilute the GameStop float illegally by creating more shares on top of those issued via the dividend.

The AMF confirmed that the DTCC was the competent authority when issuing the GME dividend to Canadians “The issuances [GME, AMC and APE] specifically mentioned in your previous correspondence are listed solely in the US and as such, would be cleared through a US clearing house, in this case through The Depository Trust & Clearing Corporation (“DTCC), irrespective of the residence of the end client. DTCC is the parent company of The Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). It is also to note that CDS [Clearing and Depository Services Inc.] offers a link service to DTCC, which is called the New York Link Service…. Through the New York Link Service, CDS does not substitute itself to the clearing and settlement functions of DTCC. DTCC effectively clears and settles the trades submitted through New York Link Service”[162].

In emails from a broker in Canada, Wealthsimple[163] to its clients, Wealthsimple said they receive “processing information from our clearing brokerage on how to execute corporate action”; “our brokerage is CDS”; “To add more context as to why it was processed as a stock split, well there was no capital increase or change on the company’s retained earnings to treat the event as a stock dividend. Moreover, with the split, the original shares were split into four but it did not change the fundamentals of the company”.

If this is all true, then the instructions likely came directly from the DTCC, in contravention of a duly taken corporate action as approved by the GameStop board and implemented under U.S. and Delaware Securities law where GameStop is based. WealthSimple’s bizarre and seemingly illegal explanations for why they were not ensuring delivery of new shares owed to its clients seem to be a brazen example of securities fraud perpetrated by either the DTCC, the CDS, Wealthsimple or a conspiracy between them all- perhaps an effort to conceal previous naked shorting of GameStop in the past and mitigate liability to the DTCC’s owners and members, which brings up a question that could bring the markets into disrepute entirely: if the instructions did come from the DTCC, how regularly is the DTCC providing fraudulent instructions in regard to share dividends, forward splits and reverse splits; and, how long has it been happening?

JAPAN

There were many complaints in Japan regarding shareholders not receiving their APE dividend and being offered cash in lieu, or only being allowed to sell the APE shares on their account, not buy. FOI was sent to the FSA[164] and SEC[165]in Japan, each of which disclosed they had no records of FTDs for GME, AMC or APE. Presumably, the trading of U.S. Stocks in Japan is done OTC, or intra-broker without any oversight of the local regulators.

AUSTRALIA AND NEW ZEALAND

Presumably, the trading of U.S. Stocks in Australia and New Zealand is also done OTC and intra-broker without any oversight of the local regulators. Central Banks and regulators were contacted in both countries, none of which had any FTD data, despite numerous complaints of Aussies and Kiwis not receiving their dividends properly.

GameStop Report and Congressional Report on events in January 2021

That absence of disclosed records for settlement fails (FTDs) at European CSDs, over two years, despite significant trading on European trading venues, is deeply troubling. Given the substantial trading and options activity, it is highly likely that unreported settlement fails were prevalent, and especially at systematic internalisers that may have been acting as settlement internalisers. This lack of transparency is particularly concerning when considering the events of January 2021 in the United States, were so dangerous and damaging to retail investors, brokers and the economy that it resulted in a Congressional enquiry and report [166] and an official SEC report- the so-called ‘GameStop report [167]’.

Even more concerning is that the SEC, when tasked with investigating the events of January 2021 and assessing the presence of significant naked short positions, relied solely on failed-to-deliver data provided by the NSCC.[168] This data does not account for any of the trading, additional borrowing and failed to delivers during this period in the European Union, where the NSCC was not approved to operate[169] , or between direct participants of the DTC or intra-broker in the many countries that GameStop is traded. The SEC’s analysis was also limited to trading activity and volume from the Consolidated Audit Trail and Consolidated Tape, which does not capture trading in Europe. The omission represents a flawed analysis at best, if not purposefully misleading. The Congressional report similarly failed to address any of the trading activities in Europe and how naked shorting there could intertwine with trading in the United States, potentially contributing to the volatility and the decision to restrict retail traders’ ability to purchase shares. Both need the SEC and Congress need to urgently revisit this issue, as this regulatory blind spot that is likely conceals significant fraud and systemic risk across global financial markets.

The truth of what happened in January 2021 may be obscured by the fact that Europe’s lax rules on naked shorting and FTDs have created an infinite amount of liability for certain members of CCPs and CSDs or a connected settlement internaliser. These entities may have participated in a coordinated effort to manipulate the market — potentially even contributing to the removal of the “buy button”- to mitigate their collective negligence and liability while concealing their culpability.

It could have been relatively straightforward for the SEC and Congress to determine the extent of any problem and who is at fault, if their regulatory colleagues in Europe assisted, as the European Union implemented the Transaction Reporting Exchange Mechanism (TREM)[170] which obligates trading venues to collect significant detailed data on each trade[171] which would identify any party that may be using the European naked short exemption in contravention of the SEC’s Reg Sho and Section 30 (a) of the Exchange Act 1934. It would also lead to identifying any Clearing Agency and or Central Securities Depository that is performing the functions of a clearing agency of registered U.S.-issued securities without being registered or exempted from the SEC via Section 17A Securities Exchange Act 1934. In addition, CSDs in Europe must report their participation in trading venues which could further elucidate if any of them are unlawfully acting as Clearing Agencies for registered U.S.-issued securities.[172] That is of course whether the National Competent Authorities in each Member State of the EU are enforcing the law on trading venues and uploading the trading data to the TREM system, which might not always be the case.

To be fair to the SEC and Chair Gensler, they have expressed suspicions there some important trading activities may not have been reported to the Consolidated Tape for their analysis[173], I would submit these suspicions have arisen due to market activity they can’t readily explain, and it may be due to the offshore activity of dealer-brokers and market makers that are not reporting this activity to the SEC or being appropriately monitored by regulators overseas for impropriety.

A blind spot of this magnitude might seem farfetched to some readers. However, consider a recent case involving JP Morgan, a major prime broker, and international bank. In their 2023 annual report, filed on February 16, 2024, they revealed that while responding to U.S. government inquiries about their trading on overseas trading venues[174], they ‘self-declared’ that they had inadvertently failed to monitor for signs of market manipulation and fraud on behalf of its clients. These clients had been granted “sponsored client access”[175] by JP Morgan and had executed billions of transactions over a period of at least 9-years on global trading venues.

JP Morgan was subsequently fined 98 million by the Federal Reserve[176], 250 million by the Office of the Comptroller of the Currency (OCC)[177];and 200 Million USD (100 Million offset by payments made to the OCC) by The Commodity Futures Trading Commission (CFTC)[178], for these ‘self-declared’ surveillance deficiencies discovered while responding to government inquiries. The CFTC stated in their settlement that JP Morgan became aware of the lack of surveillance to detect market abuse in 2021. However, there is no mention of this in JP Morgan’s 2022[179]or 2021 10-K filings[180]. Therefore, it seems likely that the U.S. government’s inquiries played a role in uncovering the full scope of the unsupervised trading, rather than JP Morgan’s ‘self-identification’ alone.

The CFTC order mentioned that the surveillance gaps affected trading on “multiple products,” and that “most of the missed order activity implicated a U.S. designated contract market (referred to as “DCM-1”) and certain registered foreign boards of trade open to trading by U.S. customers.” The order also notes that JPM failed to monitor “billions of order messages” on DCM-1. Given the CFTC’s jurisdiction, and no action from the SEC thus far, it’s probable that DCM-1 is a futures exchange, and the unsupervised transactions likely involved futures contracts. The “multiple products” reference may suggest that other derivatives or even cash products might also have been affected.

Keep in mind that Rule 203(b)(2)(iv) of Regulation SHO[181] exempts “Transactions in security futures” from the locate and delivery requirements that apply to short sales of other securities. Consequently, if these trades were executed overseas, the likelihood of detecting abuse would be low, especially if failures to deliver (FTDs) were not reported to regulators as they are occurring within a foreign CSD, or Settlement Internaliser, like JP Morgan, particularly given the years of unsupervised sponsored access granted to its clients (“significant HFT trading firms”). A common short-selling strategy often discussed on “fintwit”[182] involves shorting an equity during market hours and closing the position by purchasing a futures contract, extending the delivery of the purchased shares by up to 35 days.[183]

The OCC and Federal Reserve orders don’t specify the types of financial instruments involved, focusing instead on the deficiencies in JPM’s trade surveillance program, which they concluded was unsafe banking. JP Morgan was also ordered to review the unsupervised trades for any wrongdoing. As of the time of writing, nothing has been released publicly regarding the results of their review.

How many more billions of transactions involving U.S.-issued securities overseas are transpiring without any supervision? Are algorithms programmed to rout and execute trades of US-issued securities offshore to avoid being discovered by other algorithms when not added to the consolidated tapes, or other readily available proprietary data feeds? Is settlement occurring offshore? Are active managers abusing the exemptions to manipulate the price of equities in the United States, and thereby committing cross-product manipulation of the options chain? How many of these unsupervised transactions overseas were connected to the events of January 2021, when retail traders lost billions? Was there any evidence of front-running related to the buying restrictions imposed during the GameStop frenzy?

I have tried to answer these questions myself but have encountered significant unwillingness from certain regulators and trading venue operators to adhere to transparency laws.

Conclusions

“Regulatory capture is the result or process by which regulation, in law or application, is consistently or repeatedly directed away from the public interest and toward the interests of the regulated industry, by intent and action of the industry itself.” [184]

There is no justification for the naked short selling, short interest reporting, and enforcement of settlement fail penalty exemptions of U.S.-issued securities in the European Union. These exemptions remove the incentives or obligations for financial institutions to settle their debts on time- or at all- potentially leading to major financial losses for companies, investors, and even spark a global financial crisis. There is no supervision of these exemptions, which could undoubtedly lead to excessive uncollateralized/unmargined naked short positions accumulating in the shadows. These positions could cause default contagion within a clearing house, which could spread to others if the market moved against one or more of those positions.

This kind of cross-jurisdictional regulatory arbitrage, or “race to the bottom”, was precisely what the Chair of the Supervisor Board of the European Central Bank warned about in 2017, aiming to prevent another catastrophic financial crisis.[185] It could undoubtably lead to cross-market and cross-product market manipulation, affecting multiple products — equities, bonds and their derivatives.

Transparency rules in Europe already require the disclosure of significant short positions to regulators and the public [186], and while naked shorting of European stocks is forbidden, and settlement failure penalties enforced (albeit flimsily), U.S. and other foreign companies are not afforded the same protections. The exemptions are broad enough to conceal any wrongdoing, especially since U.S. companies can be listed in Europe without their permission or knowledge, and the trading in Europe is not recorded on the Consolidated Tape or Consolidated Audit Trail (CAT). This situation could lead one to wonder if there’s an organized crime apparatus lobbied for by nefarious financial institutions that have taken advantage of, or captured the bodies (e.g., ESMA) that advocated for the exemptions. With over 2000 US companies listed on the naked short exemption list, how many of them are being abused? No regulator can answer that, because none of them are watching, or willing to provide the information necessary for the public to assess for themselves.

Given the trillions of dollars in settlement fails in Europe with no transparency and protections for U.S. and other foreign companies, there is enormous potential abuse and harm to U.S. investors, companies and the U.S. government’s ability to raise tax dollars for its programs. This is a rational deduction, especially considering significant examples of naked shorting and FTD abuse by UBS Securities LLC, Wedbush Securities LLC and Gar Wood Securities LLC in the United States- despite being supervised and prohibited from such actions. In Europe, U.S. stocks can fail without any penalty whatsoever, creating a potential “Forever Fail”.

As the former governor of the Bank of England noted, “Sadly, the growth of trading led to an erosion of ethical standards” “Bad behaviour by talented young men is often associated with the sporting world. But it applies equally to the world of finance and is not a recent phenomenon”[187]. Thus, there should be no illusions about the moral character of financial institutions being infallible enough not to resist abuse these exemptions.

Given the staggering volume and value settlement fails in Europe, the unequivocal conclusion is that Europe’s reputation for transparency and stringent rules regarding naked short selling and trading is illusory. Instead, it has undone its good work with a handful of exemptions, that has created a regulatory regime perfect for fostering and concealing large-scale fraud, at least concerning the trading of foreign equity securities ‘settling’ at CSDs and Settlement internalisers in the European Union.

To protect U.S. companies, the economy, investors, and national security, the SEC could request that the European Union use existing powers to suspend these exemptions. They could require National Competent Authorities in Europe to compel brokers and individuals to report Net-Short positions, prohibit the naked shorting of U.S. companies’ stocks on their trading venues and off-exchange entities, enforce penalties for settlement fails involving U.S. stocks and publicly report the FTDs of U.S. companies held by European Union CCPs, Custodial Banks and CSDs. [188] [189]

Additionally, the SEC should ensure that FINRA imposes on its members with foreign subsidiaries or parent companies to report all short positions of U.S.-issued securities regardless of if they are Regulation S issued, or not, within the group structure, no matter where they are traded.

U.S. companies and their investors can also reach out to the National Competent Authorities in Europe where they are traded to demand they use their powers under Article 18–26 of the Short Selling Regulation (SSR), specifically Chapter V, POWERS OF INTERVENTION OF COMPETENT AUTHORITIES. They should express that the total lack of transparency regarding naked shorting, FTDs and short interest reporting is a “serious threat to financial stability and market confidence”, especially given the lack of supervision by the SEC, FINRA or European regulators. This situation represents an existential threat to the markets and these companies which could be festering in the shadows. A request to freeze further shorting until market transparency is achieved is both reasonable and within the authorities’ powers[190] .

ESMA also has its own powers of intervention under Article 28 of Chapter 5 SSR, which investors and companies can request they use if the National Competent Authorities fail to implement transparency and accountability to the markets.

The SEC should immediately remove the broker-dealer exemptions of disclosure regarding the intra-broker dealings and holdings of Regulation S — U.S. issued securities, and others. Additionally, the SEC should ensure that Failures to Deliver (FTDs) are also disclosed on an intra-broker basis, between participants of the DTC and all global custodians of US-issued equities

To enhance transparency, a straightforward solution would be for all CSDs, Custodian Banks and any other Settlement Internaliser to report the total shares of any individual stock on its ledgers to ensure they’ve not been tampered with, and any outstanding FTDS.

The lack of transparency and enforcement regarding naked shorting and FTDs brings the entire system of security (equities)-based swaps and other equity-based derivatives potentially into disrepute.

The SEC should act swiftly to investigate whether the DTC is engaging in practices that embezzle the share dividends of investors, or artificially inflate company floats, as was allegedly the case with the GameStop share dividend. In this instance, the DTC reportedly passed fraudulent corporate action instructions to a Canadian dealer-brokers. The SEC needs to inform the public if this is a standard business practice by the DTC to cover up and mitigate the naked shorting and FTDs of its members.

U.S. companies may want to reconsider any form of stock split -reverse, forward or share dividend- if the DTC is routinely, negligently, or purposefully m forwarding fraudulent corporate-action instructions, or if foreign brokers are fabricating false instructions on their behalf.

Unrestrained Sunshine and a level playing field for all market participants (no exemptions for the powerful) will cure almost all these gaps- protecting issuers, investors and establishing trust!

[1] “Information Policy Around the World”, By Harold Relyea, FOIA Update, Vol. II, №4, 1981, U.S. Department of Justice

https://www.justice.gov/oip/blog/foia-update-information-policy-around-world

[2] Angel Gurria, Secretary-General of the OECD, “Openness and Transparency — Pillars for Democracy, Trust and Progress” https://www.oecd.org/about/secretary-general/opennessandtransparency-pillarsfordemocracytrustandprogress.htm

[3] https://www.thestreet.com/memestocks/gme/gamestop-stock-how-much-ownership-do-retail-investors-have

[4] https://www.thestreet.com/memestocks/amc/who-owns-the-most-amc-stock

[5] https://news.gamestop.com/stock-split#:~:text=On%20July%206%2C%202022%2C%20GameStop,record%20on%20July%2018%2C%202022.

[6] https://s25.q4cdn.com/472643608/files/doc_downloads/2022/AMC-Preferred-Dividend-IRS-Form-8937-Signed.pdf

[7] ISIN: US00165C2035

[8] “Reader’s Guide: Everything You Need to Know About the GameStop Frenzy

Small investors, in a battle with hedge funds, bid up shares in a number of companies, including GameStop.” New York Times, October 18, 2021

https://www.nytimes.com/2021/02/02/business/gamestop-stock-trading.html

[9] Pg 13, “Preventing Regulatory Capture Special Interest Influence and How to Limit It”, D. Carpenter, Harvard University; D.A.Moss, Harvard University, Cambridge University Press, 2014

[10] Short sales.

(1) A broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has:

(i) Borrowed the security, or entered into a bona-fide arrangement to borrow the security; or

(ii) Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and (iii) Documented compliance with this paragraph (b)(1).

17 CFR 242.203(b)

[11] Pg 46–47, 2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdfnumber

[12] 17 CFR § 242.203 — Borrowing and delivery requirements.

(b) Short sales.

(1) A broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has:

(i) Borrowed the security, or entered into a bona-fide arrangement to borrow the security; or

(ii) Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and

(iii) Documented compliance with this paragraph (b)(1).

(2) The provisions of paragraph (b)(1) of this section shall not apply to:

(i) A broker or dealer that has accepted a short sale order from another registered broker or dealer that is required to comply with paragraph (b)(1) of this section, unless the broker or dealer relying on this exception contractually undertook responsibility for compliance with paragraph (b)(1) of this section;

(ii) Any sale of a security that a person is deemed to own pursuant to § 242.200, provided that the broker or dealer has been reasonably informed that the person intends to deliver such security as soon as all restrictions on delivery have been removed. If the person has not delivered such security within 35 days after the trade date, the broker-dealer that effected the sale must borrow securities or close out the short position by purchasing securities of like kind and quantity;

(iii) Short sales effected by a market maker in connection with bona-fide market making activities in the security for which this exception is claimed; and

(iv) Transactions in security futures.

https://www.law.cornell.edu/cfr/text/17/242.203

[13] pg. 47, Pg1–2, 2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdf

[14] § 242.204(a)(3): If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in any equity security that is attributable to bona fide market-making activities by a registered market maker, options market maker, or other market maker obligated to quote in the over-the-counter market, the participant shall by no later than the beginning of regular trading hours on the third consecutive settlement day following the settlement date, immediately close out the fail to deliver position by purchasing or borrowing securities of like kind and quantity.

https://www.law.cornell.edu/cfr/text/17/242.204

[15] https://www.dtcc.com/about/businesses-and-subsidiaries/nscc

[16] https://www.sec.gov/data/foiadocsfailsdatahtm

[17]pg. 3–4, Joseph Borg, NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. https://www.sec.gov/comments/s7-12-06/jpborg7410.pdf; paragraph 4, pg. 52, 2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdf

[18] “Settlement and tripartite management services many include a securities lending arrangement to enable a counterparty that must deliver securities that it does not hold in its portfolio to borrow said securities to be able to subsequently deliver them- and, thus, to avoid a delivery fail- and to enable securities lenders to optimize the income from their portfolios.” “some CSDs (and in particular international CSDs (ICSDs): see below Section 4.1) have developed so-called “automatic securities lending” services: an algorithm integrates the prerequisites if both “potential securities lenders” and potential “securities borrowers” and based on this information, sets up automatic securities lending (i.e. with no ad hoc intervention by market participants), if needed by a market participant who has previously declared itself and been accepted by the system operator as a potential securities borrower (e.g. to allow the release of a pending securities delivery instruction).”paragraph 5 Pg 199, Payments and market infrastructure in the digital era, Banque de France, https://publications.banque-france.fr/sites/default/files/media/2021/01/07/payments_market.pdf

[19] “Strengthening Practices for Preventing and Detecting Illegal Options Trading Used to Reset Reg SHO Close-out Obligations”, https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf

[20] Paragraph, 3, pg. 5, “An undetermined amount of settlement occurs outside the NSCC. These trades are known as “ex-clearing” and are handled directly between brokers in a private contractual setting. Currently, no data are available on the magnitude or persistence of ex-clearing FTDs.5 SEC Regulation SHO, discussed below, does not govern non-CNS trades”

THE OPTIONS MARKET MAKER EXCEPTION TO SEC REGULATION SHO By Thomas Stratmann and John W. Welborn; №12–23 August 2012; Mercatus Centre or George Mason University

[21] https://www.dtcc.com/clearing-services/equities-clearing-services/ow

[22] “DTC provides securities movements for NSCC’s net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker/dealers), as well as money market instruments”

https://www.dtcc.com/about/businesses-and-subsidiaries/dtc

[23] “What Is Payment for Order Flow (PFOF)?”

https://www.investopedia.com/terms/p/paymentoforderflow.asp

[24] paragraph 9, pg. 47, 2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdf

[25] Paragraph 4, pg. 56, 2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdf

[26]2008 “The Naked Truth: Examining Prevailing Practices in Short Sales and the Resultant Voter Disenfranchisement” Robert Brooks and Clay M. Moffett

https://csbweb01.uncw.edu/people/moffettc/about/Research%20Papers/IIJ-JOT-BROOKS.pdf

[27] “What Is Max Pain?

Max pain, or the max pain price, is the strike price with the most open options contracts (i.e., puts and calls), and it is the price at which the stock would cause financial losses for the largest number of option holders at expiration.

The term max pain stems from the maximum pain hypothesis, which states that most traders who buy and hold options contracts until expiration will lose money.

Understanding Max Pain

According to the maximum pain hypothesis, the price of an underlying stock tends to gravitate towards its “maximum pain strike price” — the price where the greatest number of options (in dollar value) will expire worthless.

The maximum pain hypothesis states that option writers hedge their contracts. In the case of the market maker, the hedging is done to remain neutral in the stock. Consider the market maker’s position if they must write an option contract without wanting a position in the stock.

As the option expiration approaches, option writers will try to buy or sell shares of stock to drive the price toward a closing price that is profitable for them, or at least to hedge their payouts to option holders. For instance, call writers will want the share price to go down while put writers would like to see share prices go up.

About 60% of options are traded out, 30% of options expire worthless, and 10% of options are exercised. Max pain is the point where option owners (buyers) feel “maximum pain,” or will stand to lose the most money. Option sellers, on the other hand, may stand to reap the most rewards.

The maximum pain hypothesis is controversial. Critics are divided over whether the tendency for the underlying stock’s price to gravitate towards the maximum pain strike price is a matter of chance or a case of market manipulation.”

OPTIONS AND DERIVATIVES STRATEGY & EDUCATION

“Max Pain Explained: How It’s Calculated, With Examples”

By ADAM HAYES Updated July 29, 2024

Reviewed by GORDON SCOTT

https://www.investopedia.com/terms/m/maxpain.asp#:~:text=Investopedia%20%2F%20Michela%20Buttignol-,What%20Is%20Max%20Pain%3F,of%20option%20holders%20at%20expiration.

[28] https://www.law.cornell.edu/cfr/text/17/242.204#

[29] https://www.finra.org/sites/default/files/2022-10/UBS-Securities-AWC-100422.pdf

[30] 1 paragraph, “This text file contains the date, CUSIP numbers, ticker symbols, issuer name, price, and total number of fails-to-deliver (i.e., the balance level outstanding) recorded in the National Securities Clearing Corporation’s (“NSCC”) Continuous Net Settlement (CNS) system aggregated over all NSCC member”

https://www.sec.gov/data/foiadocsfailsdatahtm

[31] https://www.esma.europa.eu/sites/default/files/library/third-country_ccps_recognised_under_emir.pdf

[32] https://www.ecfr.gov/current/title-17/chapter-II/part-242#subject-group-ECFR1607681c7b4f78d

[33] “the dematerialisation and immobilisation of securities, as well as the increase in the volume of securities trades, both domestically and internationally, have made it necessary to set up securities settlement systems (SSS) which are managed by central securities depositories(csds)” pg., 212 , Chapter 13, Securities Settlement Systems, “Payments and market infrastructure in the digital ere” , Banque de France, 2018, https://publications.banque-france.fr/sites/default/files/media/2021/01/07/payments_market.pdf

[34] https://www.sec.gov/tm/clearing-agencies

[35] https://www.dtcc.com/about/businesses-and-subsidiaries

[36] https://www.dtcc.com/about/businesses-and-subsidiaries/nscc

[37] https://www.dtcc.com/about/businesses-and-subsidiaries/dtc

[38] https://www.dtcc.com/settlement-and-asset-services

[39] “the Commission has observed that owners and participants may have structural incentives that differ from one another, leading to differing views as to the efficacy of certain risk management tools and the potential for divergent interests in the risk management of the clearing agency. For example, owners and participants may have differing views as to the scope of products cleared by the clearing agency, the minimum standards required for participation in the clearing agency, and the size, timing, and nature of financial resource requirements applied as part of the risk management framework.

Fundamentally, an owner’s interest in protecting the equity and continued operation of the clearing agency diverges from a participant’s interest in avoiding the allocation of losses from a defaulting participant. Paragraph 2–3 Pg.16; paragraph 1, pg. 17, Clearing Agency Governance and Conflicts of Interest, [Release №34–95431; File No. S7–21–22], Securities and Exchange Commission

[40] Pg, 26 Clearing Agency Governance and Conflicts of Interest, [Release №34–95431; File No. S7–21–22], Securities and Exchange Commission

[41] “The SEC exercises oversight in a number of ways most notable by supervising various market intermediaries, including central counterparties (CCPs), securities depositories, and other service providers that facilitate clearance and settlement, through a regulatory framework that includes registration requirements and standards for governance, operations, and risk management” Staff Report on the Regulation of Clearing Agencies, U.S. Securities and Exchange Commission, by Division of Trading and Markets, Office of Compliance Inspections and Examinations, October 1, 2020, https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf

[42] [Section 17 A], Securities Exchange ACT 1934

(b)(1) Except as otherwise provided in this section, it shall be unlawful for any clearing agency, unless registered in accordance with this subsection, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to any security (other than an exempted security). The Commission, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any clearing agency or security or any class of clearing agencies or securities from any provisions of this section or the rules or regulations thereunder, if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of this section, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds. A clearing agency or transfer agent shall not perform the functions of both a clearing agency and a transfer agent unless such clearing agency or transfer agent is registered in accordance with this subsection and subsection © of this section. Pg 269, Securities Act of 1934 https://www.govinfo.gov/content/pkg/COMPS-1885/pdf/COMPS-1885.pdf

[43] Pg 7, 9–12, Staff Report on Algorithmic Trading in U.S. Capital Markets As Required by Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 This is a report by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. August 5, 2020

https://www.sec.gov/files/marketstructure/research/algo_trading_report_2020.pdf

[44] Paragraph 1, page 3, NO. 2016050211701 https://www.finra.org/sites/default/files/2022-10/UBS-Securities-AWC-100422.pdf

[45] Paragraph 4, page 3, https://www.finra.org/sites/default/files/2022-10/UBS-Securities-AWC-100422.pdf

[46]https://www.finra.org/sites/default/files/fda_documents/2019061872201%20Wedbush%20Securities%2C%20Inc.%20CRD%20877%20AWC%20lp%20%282022-1666916413754%29.pdf

[47]https://www.finra.org/sites/default/files/fda_documents/2019061062701%20Gar%20Wood%20Securities%2C%20LLC%20CRD%20138033%20AWC%20geg%20%282022-1664065207433%29.pdf

[48] SEC. 30. (a) It shall be unlawful for any broker or dealer, directly or indirectly, to make use of the mails or of any means or instrumentality of interstate commerce for the purpose of effecting on an exchange not within or subject to the jurisdiction of the United States, any transaction in any security the issuer of which is a resident of, or is organized under the laws of, or has its principal place of business in, a place within or subject to the jurisdiction of the United States, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors or to prevent the evasion of this title. Securities Exchange Act of 1934

[49] All internationally traded securities issuers are urged to use the ISIN numbering scheme, which is now the accepted standard by virtually all countries. Both the United States and Canada use a similar scheme, known as a CUSIP number

https://www.investopedia.com/terms/i/isin.asp

[50] https://www.isin.net/difference-between-isin-and-cusip/

[51] To Whom It May Concern:

Re: [ Freedom of / Access to Information request: Cross-border Failed Trades / Failure to delivers of equities]

Could I please request a copy/access to data provided to you by any Clearing and Depository Service , Broker-dealer, or other legal entity as it pertains to failed trade deliveries (FTD) of the US security listed below that were purchased by, or on behalf of [Country’s nationals] , Foreign nationals, legal entities using British based or foreign based brokers or legal entities, from January 1, 2021 to present day ( November,21 , 2022) for the trade tickers AMC (AMC Entertainment Holdings Inc, NYSE,(ISIN: US00165C1045)), APE (AMC Entertainment Hldg Pref Equity Units Depositary Share Rep 1 100th Int Convertible Prf Shs Series A

NYSE: APE ISIN: US00165C2035)), & GME (GameStop Corp.

NYSE: GME (ISIN: US36467W1099)).

Daily, monthly, yearly breakdown would be appreciated. I do not require personal information, only the information as to how many failed trades (FTD) there has been in the past and currently for each ticker.

I do not want the names of companies reporting the failure to deliver data, only the amount of failed trade deliveries (FTD) in summary form so the request should not be considered confidential information. Much like how the regulator in the USA publishes FTD data: just the fail numbers. https://www.sec.gov/data/foiadocsfailsdatahtm

I’d be grateful for your assistance.

[52] https://www.esma.europa.eu/about-esma/esma-in-brief

[53] (Comprised of 27 Member States: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden).

[54] https://www.xetra.com/xetra-en/trading/trading-venue-boerse-frankfurt/specialists

[55] https://www.xetra.com/xetra-en/trading/trading-models/liquidity-through-designated-sponsors

[56] “Dual Listing (DL)

A second listing on an exchange that isn’t the company’s domestic bourse

With a dual listing, also called a secondary listing, a company’s shares are placed on an exchange other than its domestic exchange. This can happen at the behest of the company or a market maker. A second listing is therefore not an initial public offering: It isn’t the worldwide debut of the company’s shares or a public offer, and the company is not required to produce a prospectus”. https://www.boerse-frankfurt.de/en/know-how/glossary/dual-listing-dl

[57]https://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF#:~:text=short%20positions%20in%20sovereign%20debt&text=A%20natural%20or%20legal%20person%20who%20has%20a%20net%20short,for%20the%20sovereign%20issuer%20concerned.

[58] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014R0909

[59] CHAPTER IV

EXEMPTIONS Article 16

Exemption where the principal trading venue is in a third country.

1. Articles 5, 6, 12 and 15 shall not apply to shares of a company admitted to trading on a trading venue in the Union where the principal venue for the trading of the shares is located in a third country.

2. The relevant competent authority for shares of a company that are traded on a trading venue in the Union and a venue located in a third country shall determine, at least every 2 years, whether the principal venue for the trading of those shares is located in a third country.

The relevant competent authority shall notify ESMA of any such shares identified as having their principal trading venue located in a third country.

Every 2 years ESMA shall publish the list of shares for which the principal trading venue is located in a third country. The list shall be effective for a 2-year period.

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32012R0236

[60] Regulated Market Definition provided in Article 4(21) (MIFID), Article 54 and Article 55 outline the provisions for regulated markets, including their compliance and arrangements for clearing and settlement (MIFID); DIRECTIVE 2014/65/EU

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065

[61] Articles related to the operation and definition of MTFs are found in Article 4(22) (MIFID) DIRECTIVE 2014/65/EU, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065

[62] “CHAPTER I GENERAL PROVISIONS Article 1 Scope 1. This Regulation shall apply to the following: (a) financial instruments within the meaning of point (a) of Article 2(1) that are admitted to trading on a trading venue in the Union, including such instruments when traded outside a trading venue”

REGULATION (EU) No 236/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 March 2012 on short selling and certain aspects of credit default swaps

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012R0236

[63] The operation of systematic internalisers is described in DIRECTIVE 2014/65/EU (MIFID II), Article 4(20) ‘systematic internaliser’ means an investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system;

The frequent and systematic basis shall be measured by the number of OTC trades in the financial instrument carried out by the investment firm on own account when executing client orders. The substantial basis shall be measured either by the size of the OTC trading carried out by the investment firm in relation to the total trading of the investment firm in a specific financial instrument or by the size of the OTC trading carried out by the investment firm in relation to the total trading in the Union in a specific financial instrument. The definition of a systematic internaliser shall apply only where the pre-set limits for a frequent and systematic basis and for a substantial basis are both crossed or where an investment firm chooses to opt-in under the systematic internaliser regime;

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065

[64] Article 7 CSDR

Measures to address settlement fails

1. For each securities settlement system it operates, a CSD shall establish a system that monitors settlement fails of transactions in financial instruments referred to in Article 5(1). It shall provide regular reports to the competent authority and relevant authorities, as to the number and details of settlement fails and any other relevant information, including the measures envisaged by CSDs and their participants to improve settlement efficiency. Those reports shall be made public by CSDs in an aggregated and anonymised form on an annual basis. The competent authorities shall share with ESMA any relevant information on settlement fails.

2. For each securities settlement system it operates, a CSD shall establish procedures that facilitate settlement of transactions in financial instruments referred to in Article 5(1) that are not settled on the intended settlement date. These procedures shall provide for a penalty mechanism which will serve as an effective deterrent for participants that cause settlement fails.

13. This Article shall not apply where the principal venue for the trading of shares is located in a third country. The location of the principal venue for the trading of shares shall be determined in accordance with Article 16 of Regulation (EU) No 236/2012.; REGULATION (EU) No 909/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014R0909

[65] Article 1 For the purposes of this Regulation the following definitions apply: (1) ‘Internalised settlement instruction’ means an instruction by a client of the settlement internaliser to place at the disposal of the recipient an amount of money or to transfer the title to, or interest in, a security or securities by means of a book entry on a register, or otherwise, which is settled by the settlement internaliser in its own books and not through a securities settlement system.

(2) ‘Failed internalised settlement instruction’ means non-occurrence of settlement, or partial settlement, of a securities transaction at the date agreed by the parties concerned due to a lack of securities or cash, regardless of the underlying cause

COMMISSION DELEGATED REGULATION (EU) 2017/391 of 11 November 2016 supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory technical standards further specifying the content of the reporting on internalised settlements

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0391

[66] Article 2

Definitions

1. For the purposes of this Regulation, the following definitions apply:

(11) ‘settlement internaliser’ means any institution, including one authorised in accordance with Directive 2013/36/EU or with Directive 2014/65/EU, which executes transfer orders on behalf of clients or on its own account other than through a securities settlement system;

REGULATION (EU) No 909/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

of 23 July 2014

on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0909

[67] Article 7

Measures to address settlement fails

13. This Article shall not apply where the principal venue for the trading of shares is located in a third country. The location of the principal venue for the trading of shares shall be determined in accordance with Article 16 of Regulation (EU) No 236/2012.

REGULATION (EU) No 909/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

of 23 July 2014

on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0909

[68] JP Morgan Prime Services: https://www.jpmorgan.com/prime-services; Goldman Sachs Prime Access: https://www.goldmansachs.com/primeaccess/

https://www.goldmansachs.com/what-we-do/ficc-and-equities/prime-services ; Scotiabank Prime Services: https://www.gbm.scotiabank.com/en/services/prime-services.html.html ; RBC Prime Services: https://www.rbccm.com/en/expertise/prime-brokerage.page ; BNY Pershing: https://www.pershing.com/us/en/solutions/clearing-custody-and-settlement.html https://www.pershing.com/us/en/solutions/prime-brokerage.html# ; Citigroup Prime Services: https://www.citigroup.com/global/business es/services/securities-services

; Bank of America Prime Brokerage: https://markets.ml.com/login/ml-prime-contact-us

[69] Paragraph 261, Final Report Review of certain aspects of the Short Selling Regulation, 22 March 2022 | ESMA70–448–10

https://www.esma.europa.eu/sites/default/files/library/esma70-448-10_final_report_-_short_selling_regulation_review.pdf.

[70] Paragraph 262, Final Report Review of certain aspects of the Short Selling Regulation, 22 March 2022 | ESMA70–448–10https://www.esma.europa.eu/sites/default/files/library/esma70-448-10_final_report_-_short_selling_regulation_review.pdf

[71] PG. 49, “259. Article 16 of SSR has to be read in conjunction with Article 38(1) of SSR that foresees that RCAs shall, where possible, conclude cooperation arrangements with supervisory authorities of third countries that should specifically address the exchange of information to ensure that RCAs can efficiently carry out their duties under SSR.

260. RCAs make use on an ongoing basis of these type of arrangements that in many cases operate on the basis of ‘ad hoc’ requests between the relevant authorities”.

Final Report Review of certain aspects of the Short Selling Regulation, 22 March 2022 | ESMA70–448–10 https://www.esma.europa.eu/sites/default/files/library/esma70-448-10_final_report_-_short_selling_regulation_review.pdf

[72] “Thank you for reaching out to ESMA.

Firstly, we would like to inform you that your request dated 18 December 2022, given its formulation, content and scope, targets specific information rather documents and should thus be qualified and treated as such, within 2 months as envisaged in the ESMA Code of Good Administrative Behaviour.

With respect to your specific query, please be aware that none of the EU National Competent Authorities (NCAs) have entered into cooperation arrangements under Article 38 of the Short Selling Regulation with supervisory authorities in the United States” Freedom of Information response, 9 February 2023.

[73] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD386.pdf

[74] Paragraph 268, pg. 50, “The vast majority of responses, including the SMSG, rejected that RCA’s should take any other qualitative but specific parameter into account in the identification of the shares subject to the full set of SSR obligations” Final Report Review of certain aspects of the Short Selling Regulation, 22 March 2022 | ESMA70–448–10 https://www.esma.europa.eu/sites/default/files/library/esma70-448-10_final_report_-_short_selling_regulation_review.pdf

[75] https://www.esma.europa.eu/sites/default/files/cv_saade.pdf

[76] https://www.esma.europa.eu/sites/default/files/cv_pieter_schuurs.pdf

[77] Tweet after the 2022 short selling review, indicating there is no naked shorting https://x.com/ESMAComms/status/1510923230852390914?s=20

[78] Pg 86, ESMA CSD REGISTER, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[79]https://my.euroclear.com/users/en/login.html?resource=%2Fcontent%2Foperations%2Fguest%2Fen%2Fcsdr-sdr-public-disclosures%2Fcsdr-settlement-discipline-regime---public-disclosures.html&$$login$$=%24%24login%24%24&j_reason=unknown&j_reason_code=unknown#

[80] “There are several reasons for failing, but it is clear that the majority of settlement fails are due to lack of securities. The second largest reason for fails in Euroclear Bank is late matching” Marije Verhelst, Head of Business Development — Securities Lending & Collateral Management at Euroclear

https://www.euroclear.com/newsandinsights/en/Format/Articles/settlement-efficiency-and-market-volatility.html

[81] https://www.clearstream.com/clearstream-en/about-clearstream

[82] Page 73, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[83] https://deutsche-boerse.com/dbg-en/media/press-releases/Clearstream-launches-data-solutions-to-predict-settlement-failures-and-to-foster-settlement-efficiency-3153546

[84] Pg 69, ESMA CSD REGISTER, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[85] https://www.clearstream.com/resource/blob/3419736/19bfba386fc6e3a8ac9949e94e02df4f/cbf-sett-rep-2022-data.xlsx

[86] Pg, 113, ESMA CSD REGISTER, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[87] https://www.euronext.com/en/post-trade/euronext-securities/milan/intermediaries/statistics-operational-data/settlement

[88] https://questions-statements.parliament.uk/written-statements/detail/2020-06-23/HCWS309

[89] Article 5

Intended settlement date

Any participant in a securities settlement system that settles in that system on its own account or on behalf of a third-party transactions in transferable securities, money-market instruments, units in collective investment undertakings and emission allowances shall settle such transactions on the intended settlement date.

Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0909

[90] pg. 213–214 “Payments and market infrastructures in the digital era” , (2018) Banque De France, https://publications.banque-france.fr/sites/default/files/media/2021/01/07/payments_market.pdf

[91] https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[92]page 29, Graph A.143, TRV Statistical Annex ESMA Report on Trends, Risks and Vulnerabilities №1, 2023 https://www.esma.europa.eu/sites/default/files/library/ESMA50-165-2406_TRV%201-23%20Statistical%20annex.pdf

[93] Article 7

Measures to address settlement fails

(13) This Article shall not apply where the principal venue for the trading of shares is located in a third country. The location of the principal venue for the trading of shares shall be determined in accordance with Article 16 of Regulation (EU) No 236/2012.

Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0909

[94] WeTheInvestors, 2nd Q&A With SEC Chair Gary Gensler, 22 February 2023, @ 10 minute, 06-second mark

Twitter Spaces https://www.youtube.com/watch?v=a2Ao3DjvjB4

[95] “DTC provides securities movements for NSCC’s net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker/dealers), as well as money market instruments”

https://www.dtcc.com/about/businesses-and-subsidiaries/dtc

[96] CHAPTER IV

EXEMPTIONS — Article 16

Exemption where the principal trading venue is in a third country.

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32012R0236

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps Text with EEA relevance

1. Articles 5, 6, 12 and 15 shall not apply to shares of a company admitted to trading on a trading venue in the Union where the principal venue for the trading of the shares is located in a third country.

[97] CHAPTER II TRANSPARENCY OF NET SHORT POSITIONS Article 5 Notification to competent authorities of significant net short positions in shares 1. A natural or legal person who has a net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue shall notify the relevant competent authority, in accordance with Article 9, where the position reaches or falls below a relevant notification threshold referred to in paragraph 2 of this Article. 2. A relevant notification threshold is a percentage that equals 0,2 % of the issued share capital of the company concerned and each 0,1 % above that. https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF

[98] Part 1 of Delegated Regulation №826/2012 https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:251:0001:0010:en:PDF

[99] Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March on short selling and certain aspects of credit default swaps (the Regulation) requires the relevant competent authorities to identify shares having their principal trading venue located in a third country. Under Article 16(2) of the Regulation the relevant competent authorities notify ESMA of such shares. On the basis of these notifications, ESMA publishes the compiled list of exempted shares to which provisions of the Regulation relating to net short position transparency (Articles 5 and 6), to the restriction of uncovered short sales (Article 12). https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_mifid_shsexs

[100] https://www.fca.org.uk/publication/documents/uk-exempted-shares-list.xlsx

[101] “At its most general level, an algorithm is a finite, deterministic, and effective problem-solving method suitable for implementation as a computer program.5In modern equity and debt markets, many problems are solved and decisions made in this computational, algorithmic manner. Today, algorithms address many of the problems and decisions that have long been central to the business of trading. What instrument(s) should be invested in or traded? What price should be bid or offered? What order size is optimal? What should be the response to a request for a quotation? What risk will be taken on by facilitating a trade? How does that risk change with the size of the trade? Is the risk of a trade appropriate to a firm’s available capital? What is the relationship between the price of different but related securities or financial products? To what market should an order be sent? Is it more effective to provide liquidity or demand liquidity? Should an order be displayed or non-displayed? To which broker should an order be sent? When should an order be submitted to a trading center? In general, algorithms utilize a rich array of market information to very quickly assess the state of the market, to determine when, where, and how to trade, and then to implement the resulting trading decision(s) in the marketplace. As described in more detail below, algorithms are broadly used in contemporary securities markets, and the range of uses differs across asset classes and across the roles and investment objectives of market participants. In light of the wide diversity of algorithms in modern trading, it is not a goal of this report to define a single type of trading or activity as uniquely algorithmic. Rather, this staff report attempts to describe many dimensions of the contemporary secondary markets for equity and debt securities that operate algorithmically. The types of trading described in more detail below each fundamentally depend upon computerized algorithms, and the data and technological infrastructure through which they operate, to address the types of problems and tasks described above. The staff’s approach differs from the more narrow approaches taken in much of the literature on algorithmic trading, which generally seek to examine a specific type of algorithmic activity. For example, one study defines algorithmic trading as “a tool for professional traders that may observe market parameters or other information in real-time and automatically generates/carries out trading decisions without human intervention.”

Pg 5–7, Staff Report on Algorithmic Trading in U.S. Capital Markets As Required by Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 This is a report by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. August 5, 2020

https://www.sec.gov/files/marketstructure/research/algo_trading_report_2020.pdf

[102] Q8. Is a firm required to report short interest positions that are held overseas at a separate legal entity and are not reflected on the firm’s books and records?

A8. No. FINRA member firms only are required to report all short positions that are held in each individual firm or customer account, including the account of a broker-dealer, that are reflected on the firm’s books and records, as described in Rule 4560. https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest/faq

[103] SEC. 30. (a) It shall be unlawful for any broker or dealer, directly or indirectly, to make use of the mails or of any means or instrumentality of interstate commerce for the purpose of effecting on an exchange not within or subject to the jurisdiction of the United States, any transaction in any security the issuer of which is a resident of, or is organized under the laws of, or has its principal place of business in, a place within or subject to the jurisdiction of the United States, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors or to prevent the evasion of this title. Securities Exchange Act of 1934

[104] The National Best Bid and Offer (NBBO) figures are indeed compiled and supplied to the market by the Consolidated Tape Association (CTA). The CTA consolidates and disseminates real-time quote and trade information from multiple exchanges, ensuring that the best bid and offer across these exchanges are displayed to market participants.

This system allows for greater transparency and efficiency in the trading process by ensuring that market participants have access to the best available prices for buying and selling securities.

https://www.nyse.com/data/cta

https://www.ctaplan.com/index

UTP PLAN provides quotes and transactions for Nasdaq listed securities that trade on US based trading platforms.

https://www.utpplan.com/participants

[105] “This is where spoofing goes beyond being a genuine trading strategy, and, instead, becomes fraudulent or, as in some countries including the United States, explicitly illegal. Because it creates a false impression of the supply and demand in the market, spoofing can be seen as a form of market manipulation.” Pg 4, “A Model to Quantify the Risk of Cross-Product Manipulation: Evidence from the European Government Bond Futures Market, University of Portsmouth Faculty of Business, Working Papers in Economics and Finance, №2023–06, Alexis Stenfors, Kaveesha Dilshani, Andy Guo, Peter Mere.

https://repec.port.ac.uk/EconFinance/PBSEconFin_2023_06.pdf

[106] “Cross-product manipulation involves manipulation of one financial product with the intent to profit from the subsequent reaction to a different but related product”, pg 1, “A Model to Quantify the Risk of Cross-Product Manipulation: Evidence from the European Government Bond Futures Market, University of Portsmouth Faculty of Business, Working Papers in Economics and Finance, №2023–06, Alexis Stenfors, Kaveesha Dilshani, Andy Guo, Peter Mere.

https://repec.port.ac.uk/EconFinance/PBSEconFin_2023_06.pdf

[107] “Currently, there are three equity market data plans: the CQ plan (for quotations in securities not listed on Nasdaq), the CTA plan (for transaction reports in securities not listed on Nasdaq), and the UTP Plan (for both quotation and transaction reports in Nasdaq-listed equities).

important regulatory messages from exchanges. Currently, there are three equity market data plans: the CQ plan (for quotations in securities not listed on Nasdaq), the CTA plan (for transaction reports in securities not listed on Nasdaq), and the UTP Plan (for both quotation and transaction reports in Nasdaq-listed equities). These plans together are often referred to as the “SIPs.”

Pg, 21, Staff Report on Algorithmic Trading in U.S. Capital Markets As Required by Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 This is a report by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. August 5, 2020

https://www.sec.gov/files/marketstructure/research/algo_trading_report_2020.pdf

[108] “What Is Max Pain?

Max pain, or the max pain price, is the strike price with the most open options contracts (i.e., puts and calls), and it is the price at which the stock would cause financial losses for the largest number of option holders at expiration.

The term max pain stems from the maximum pain hypothesis, which states that most traders who buy and hold options contracts until expiration will lose money.

Understanding Max Pain

According to the maximum pain hypothesis, the price of an underlying stock tends to gravitate towards its “maximum pain strike price” — the price where the greatest number of options (in dollar value) will expire worthless.

The maximum pain hypothesis states that option writers hedge their contracts. In the case of the market maker, the hedging is done to remain neutral in the stock. Consider the market maker’s position if they must write an option contract without wanting a position in the stock.

As the option expiration approaches, option writers will try to buy or sell shares of stock to drive the price toward a closing price that is profitable for them, or at least to hedge their payouts to option holders. For instance, call writers will want the share price to go down while put writers would like to see share prices go up.

About 60% of options are traded out, 30% of options expire worthless, and 10% of options are exercised. Max pain is the point where option owners (buyers) feel “maximum pain,” or will stand to lose the most money. Option sellers, on the other hand, may stand to reap the most rewards.

The maximum pain hypothesis is controversial. Critics are divided over whether the tendency for the underlying stock’s price to gravitate towards the maximum pain strike price is a matter of chance or a case of market manipulation.”

OPTIONS AND DERIVATIVES STRATEGY & EDUCATION

“Max Pain Explained: How It’s Calculated, With Examples”

By ADAM HAYES Updated July 29, 2024

Reviewed by GORDON SCOTT

https://www.investopedia.com/terms/m/maxpain.asp#:~:text=Investopedia%20%2F%20Michela%20Buttignol-,What%20Is%20Max%20Pain%3F,of%20option%20holders%20at%20expiration.

[109] https://www.esma.europa.eu/sites/default/files/library/list_of_market_makers_and_primary_dealers.pdf

[110] According to Article 15(1) of Regulation (EU) No 600/2014 (MiFIR) ESMA shall establish a list of all systematic internalisers (SIs) in shares, depository receipts, ETFs, certificates and other similar financial instruments in the Union. According to Article 18(4) of MiFIR ESMA shall establish a list of all SIs in bonds, structured finance products, emission allowances and derivatives in the Union. The list contains in addition some information on the type of asset classes in which the investment firm is a systematic internaliser but does not include information on an instrument-by-instrument basis. https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_upreg#

[111] CHAPTER IV

Internalised settlement

Article 9

Settlement internalisers

1. Settlement internalisers shall report to the competent authorities of their place of establishment on a quarterly basis the aggregated volume and value of all securities transactions that they settle outside securities settlement systems.

Competent authorities shall without delay transmit the information received under the first subparagraph to ESMA and shall inform ESMA of any potential risk resulting from that settlement activity.

2. ESMA may, in close cooperation with the members of the ESCB, develop draft regulatory technical standards further specifying the content of such reporting.

Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 Text with EEA relevance

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0909

[112] https://www.esma.europa.eu/sites/default/files/library/list_of_market_makers_and_primary_dealers.pdf

[113] ttps://www.sec.gov/rules/final/33-7505.htm

[114] Pg 111, REGISTRATION REQUIREMENTS FOR SECURITIES

SEC. 12. (a) It shall be unlawful for any member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange in accordance with the provisions of this title and the rules and regulations thereunder. The provisions of this subsection shall not apply in respect of a security futures product traded on a national securities exchange.

Securities Exchange Act 1934 https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.pdf

[115] Pg 1–2 “What’s the Deal ? Regulation S”, A.T. Pinedo, B. Berman, R.S. Clements, Mayer Brown. https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/03/whatsthedealregulation_s.pdf?la=en

[116] https://www.mayerbrown.com/-/media/files/perspectives-events/events/2020/02/200225nycwebinarcapmktsdepositaryslides.pdf

[117] Freedom of information response from ESMA: “We would like to refer to the request you sent to ESMA on 22 September 2022 relating to “[Failed Trades / Failure to delivers]”. In particular you requested the following: “[…] a copy/access to data provided to you by any Clearing and Depository Service and or Broker-dealer as it pertains to failed trades of the US securities listed below that were bought by EU nationals, foreign nationals & companies using EU member state or EEA based brokers or corporations — from January 1, 2021 to present day (September, 20, 2022) for the trade tickers AMC (AMC Entertainment Holdings Inc, NYSE,(cusip: 0001411579)), APE (AMC Entertainment Hldg Pref Equity Units Depositary Share Rep 1 100th Int Convertible Prf Shs Series A NYSE: APEcusip : 00165C203)) & GME ( GameStop Corp. NYSE: GME (cusip : 36467W109) ) . Daily, monthly, yearly breakdown would be appreciated. I do not require personal information, only the information as to how many fails there has been & continues to be for each ticker.”. ”Against this background, please note that ESMA does not hold this level of data granularity (ISIN based) from the reports it receives pursuant to Regulation (EU) No 909/2014. Consequently, ESMA does not possess the requested information” We trust this response addresses your request in full. With kind regards Enrico Gagliardi

[118] (MIC CODE: XETV, DUSB, MUNB, DUSD, FRAV, XETB, FRAB, HAMN, STUB, HAMB, XGAT STUD, STUF, BERB, MUND); UK FIRDS SEARCH

[119] (MIC CODE :STUD, HAMB, DUSB,FRAV, XGAT, XETV, DUSD, XETB, STUB, MUND, FRAB, HAMN, BERB, STUF, MUNB) UK FIRDS SEARCH

[120] (MIC CODE: STUD, STUB, FRAV, XETB, XGAT, DUSB, FRAB, DUSD, MUNB, MUND, HAMN, BERB, XETV )

[121] Use ISIN to search on UK FIRDS: https://data.fca.org.uk/#/viewdata

[122] https://www.b3.com.br/en_us/products-and-services/solutions-for-issuers/bdrs-brazilian-depositary-receipts/#:~:text=Brazilian%20Depositary%20Receipts%20(BDRs)%20are,capital%20market%20in%20Latin%20America.

[123] https://www.xetra.com/xetra-en/trading/trading-models/liquidity-through-designated-sponsors

[124] Good morning,

Thank you for your email.

Please be informed, that we do not feed the trading volume and orders into the NYSE

consolidated tape.

Best regards,

Börse Frankfurt Support

www.boerse-frankfurt.de, email

[125] https://www.nyse.com/data/cta

[126] Tradegate Exchange publishes history of its prices and number of trades via stock exchange

information systems such as Bloomberg or Reuters only. For information on how to get access to

these commercial service providers please contact your custodian bank.

Kind regards

Freundliche Grü.e vom Tradegate-Team

Tradegate Exchange GmbH

Kurfürstendamm 119

10711 Berlin

Internet: http://www.tradegate.de

E-Mail: info@tradegate.de

Gesch.ftsführer: Thorsten Commichau Simone Kahnt-Eckner

Sitz der Gesellschaft: Berlin

Handelsregister. Amtsgericht Berlin-Charlottenburg HRB 11429 B

USt.-Id.-Nr.: DE 260 816 545

zuständige Aufsichtsbehörde: Senatsverwaltung für Wirtschaft, Technologie und Forschung des

Landes Berlin, Referat II E — Börsenaufsichtsbehörde

[127] All SEC-registered American exchanges and market centers that trade Network A or

Network B securities send their trades and quotes to a central consolidator where the

Consolidated Tape System (CTS) and Consolidated Quote System (CQS) data streams are

produced and distributed worldwide via the Consolidated Tape feeds. Trading Volume from

Europe is not added to the Consolidated Tape feeds if not reported through an American

exchange and market center.

Regards,

NYSE Market Data Operations

NYSE

marketdataops@nyse.com

03-Mar-2023 11:08:03 EST

[128] That is correct. Foreign entities that are not members of a US exchange or US national

securities association are not subject to CAT reporting.

Thank you,

FINRA CAT

Sent: Monday, March 6, 2023 5:19 PM

[129] https://www.luxcsd.com/luxcsd-en/about-luxcsd/who-we-are

[130] https://deutsche-boerse.com/dbg-en/our-company/deutsche-boerse-group

[131] Paragraph 5, Pg 9231, “Securities Covered by the Exemption, In its application for exemption, Cedel requested that it be permitted to provide clearance and settlement, securities lending, and GCSS services for transactions involving all U.S. securities, including equity and debt. As the comment letters generally indicated, the ability to provide clearance, settlement, and collateral management services for transactions involving U.S. Treasuries appears to be the most critical element of Cedel’s proposed services, especially GCSS. In addition, at this time Cedel has linkages with U.S. entities necessary to provide services for transactions involving U.S. government securities but has not yet developed the necessary linkages that would enable to provide for clearance and settlement of all U.S. debt and equity securities. Based on these considerations, this Order grants Cedel authority to provide clearance, settlement, and collateral Fedwire-eligible U.S. government securities and (ii) mortgage backed pass-through securities that are guaranteed by the Government National Mortgage Association (“GNMAs”) (collectively, eligible U.S. government securities”) The Commission believes that this limitation is necessary and appropriate because it will facilitate operation of the GCSS system and permit Cedel to offer securities processing services for very liquid U.S. government securities and will provide Cedel with the opportunity to request that the exemption be broadened when it develops the necessary linkages and facilities to provide securities processing services for other U.S. securities” Clearstream Banking S.A. exemption (Deutsche Borse Group) https://www.govinfo.gov/content/pkg/FR-1997-02-28/pdf/97-5027.pdf

[132] Pg 69, CSD Register, European Securities Market Authority, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[133] Pg 73, CSD Register, European Securities Market Authority, https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[134] https://www.ariva.de/gamestop-aktie/kurse/historische-kurse?go=1&boerse_id=131&month=2021-06-30&currency=&clean_split=1&clean_bezug=1

[135] https://www.bafin.de/EN/DieBaFin/AufgabenGeschichte/aufgabengeschichte_node_en.html

[136] “BaFin does not receive any information on failed settlements of individual financial instruments from the CSDs subject to reporting requirements, so there is already no official information that I could provide to you.

Pursuant to Article 7 (1) of Regulation (EU) 909/2014 (CSDR) in conjunction with Art. Article 14 (1) of Regulation (EU) 2018/1229 (Settlement Discipline), a CSD shall, inter alia, report the number of failed settlements to the competent authority on a monthly basis. However, the failed settlements are not reported for each ISIN, but aggregated for the respective type of financial instrument (e.g. for all transferable securities within the meaning of Article 4 (1) no. 44 (a) of Directive 2014/65/EU (Article 13 (1) © no. i of the Settlement Discipline))” Translation from German to English. Freedom of Information request response, 27 October 2022 from BaFin, Federal Financial Supervisory Authority

[137] https://www.bundesbank.de/en/tasks/payment-systems/oversight/central-securities-depositories-626478

[138] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0909

[139] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.230.01.0001.01.ENG

[140] https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32014L0065

[141] Paragraph 14 “CSDs should send monthly reports on settlement fails to their competent authorities and relevant authorities. Competent authorities should also be entitled to request additional information on settlement fails or more frequent reporting as necessary so that they can perform their tasks. Such additional information or reports should be shared by the requesting competent authorities with the relevant authorities without undue delay.” https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.230.01.0001.01.ENG

[142] Article 13- Details of the system monitoring settlement fails

CSDs shall establish a system that enables them to monitor the number and value of settlement fails for every intended settlement date, including the length of each settlement fail expressed in business days. That system shall, for each settlement fail, collect the following information:

the reason for the settlement fail, based on the information available to the CSD;

any settlement restrictions such as the reservation, blocking or earmarking of financial instruments or cash that make those financial instruments or cash unavailable for settlement. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.230.01.0001.01.ENG

[143] “EB’s clearing agency functions under the U.S. Equity Clearing Agency Activities will therefore entail only the movement of U.S. Equity Securities for collateral management purposes, as opposed to the relatively broader range of clearing agency functions permitted under the U.S. Government Securities Clearing Agency Activities. For example, the U.S. Government Securities Clearing Agency Activities include the settlement of purchase and sale transactions in the U.S. Government Securities as well as the movement of U.S. Government Securities for collateral management purposes”. Paragraph 5, pg 2 (pg. 93995, Federal Register /Vo,. 81, №246 / Thursday, December 22, 2016) https://www.govinfo.gov/content/pkg/FR-2016-12-22/pdf/2016-30853.pdf

[144] https://my.euroclear.com/guest/en/csdr-sdr-public-disclosures/csdr-settlement-discipline-regime---public-disclosures.html

[145] https://www.exane.com/corporate/our-businesses/cash-equities

[146] https://commonslibrary.parliament.uk/research-briefings/cbp-7960/

[147] Pg 9 , CREST International Manual, EUROCLEAR, December 2020, https://www.crh.com/media/3360/crest-international-manual-including-crest-deed-poll-december-2020.pdf

[148] Pg 10, CREST International Manual, EUROCLEAR, December 2020, https://www.crh.com/media/3360/crest-international-manual-including-crest-deed-poll-december-2020.pdf

[149] https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm131020#:~:text=The%20CREST%20system%20is%20a,certificates%20or%20stock%20transfer%20forms.

[150] https://data.fca.org.uk/#/homepage

[151] https://www.bankofengland.co.uk/payment-and-settlement

[152] Deputy Secretary at the Bank of England, 21 November 2022

[153] https://www.bankofengland.co.uk/financial-stability/financial-market-infrastructure-supervision

[154] 48Restrictions on disclosure of confidential information by [F1FCA, PRA] etc.

(1) Confidential information must not be disclosed by a primary recipient, or by any person obtaining the information directly or indirectly from a primary recipient, without the consent of —

4)Information is not confidential information if —

(a)it has been made available to the public by virtue of being disclosed in any circumstances in which, or for any purposes for which, disclosure is not precluded by this section; or

(b)it is in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.

Financial Services and Markets Act 2000

https://www.legislation.gov.uk/ukpga/2000/8/section/348

[155] https://tpicap.com/tpicap/

[156] https://www.banque-france.fr/en/financial-stability/market-infrastructure-and-payment-systems/oversight-tasks/oversight-financial-market-infrastructures

[157] https://www.amf-france.org/en/amf/our-missions

[158] Nous ne sommes malheureusement pas en mesure de répondre à votre demande.

Cordialement,

L’équipe en charge du support sur le périmètre et la méthodologie données publiées par la Banque de France

[159] https://my.euroclear.com/guest/en/csdr-sdr-public-disclosures/csdr-settlement-discipline-regime---public-disclosures-euroclear-france.html

[160] https://www.wienerborse.at/

[161] https://www.sec.gov/ix?doc=/Archives/edgar/data/0001326380/000132638022000100/gme-20220706.htm

[162] Authoite des marches financiers,

[163] https://www.wealthsimple.com/en-ca

[164] https://www.fsa.go.jp/en/

[165] https://www.fsa.go.jp/sesc/english/

[166] “Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Regulatory and Legislative Reform.”https://financialservices.house.gov/uploadedfiles/6.22_hfsc_gs.report_hmsmeetbp.irm.nlrf.pdf

[167] Staff Report on Equity and Options Market Structure Conditions in Early 2021https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf

[168] See footnote 81, pg. 29, “Staff conducted this analysis using data provided by the NSCC” “Staff Report on Equity and Options Market Structure Conditions in Early 2021https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf

[169] Entry 22, NSCC first authorised to operate in the European Union on March 8, 2022, https://www.esma.europa.eu/sites/default/files/library/third-country_ccps_recognised_under_emir.pdf

[170]Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (Text with EEA relevance)

Article 25 Obligation to maintain Records

1. Investment firms shall keep at the disposal of the competent authority, for five years, the relevant data relating to all orders and all transactions in financial instruments which they have carried out, whether on own account or on behalf of a client. In the case of transactions carried out on behalf of clients, the records shall contain all the information and details of the identity of the client, and the information required under Directive 2005/60/EC of the European Parliament and of the Council. ESMA may request access to that information in accordance with the procedure and under the conditions set out in Article 35 of Regulation (EU) No 1095/2010.

2. The operator of a trading venue shall keep at the disposal of the competent authority, for at least five years, the relevant data relating to all orders in financial instruments which are advertised through their systems. The records shall contain the relevant data that constitute the characteristics of the order, including those that link an order with the executed transaction(s) that stems from that order and the details of which shall be reported in accordance with Article 26(1) and (3). ESMA shall perform a facilitation and coordination role in relation to the access by competent authorities to information under this paragraph.

3. ESMA shall develop draft regulatory technical standards to specify the details of the relevant order data required to be maintained under paragraph 2 of this Article that is not referred to in Article 26.

Those draft regulatory technical standards shall include the identification code of the member or participant which transmitted the order, the identification code of the order, the date and time the order was transmitted, the characteristics of the order, including the type of order, the limit price if applicable, the validity period, any specific order instructions, details of any modification, cancellation, partial or full execution of the order, the agency or principal capacity.

ESMA shall submit those draft regulatory technical standards to the Commission by 3 July 2015.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010.

https://www.esma.europa.eu/publications-and-data/interactive-single-rulebook/mifir/article-25-obligation-maintain-records

[171] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A32017R0580&from=EN

[172] Pg 3, “In addition, institutions shall report their participation in the trading venues. .. the use of intermediaries (such as correspondent or custodian banks) should also be reported.”

https://www.srb.europa.eu/system/files/media/document/2021-09-29_2022-Guidance_on_the_FMIR-v1.0.pdf

[173] Paragraph 27, “While there is fragmentation amongst trading platforms, past reforms and new technologies may have led to more segmented markets and higher concentration amongst market makers. Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. One firm has publicly stated that it executes nearly half of all retail volume.[] Further, I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges”.

Securities and Exchange Commission Chair Gary Gensler’s Testimony Before the United States Senate Committee on Banking, Housing, and Urban Affairs, September 14, 2021

https://www.sec.gov/news/testimony/gensler-2021-09-14

[174] FORM 10-K, JPMorgan Chase & Co.

Annual report pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934,For the fiscal year ended December 31, 2023

Notes to consolidated financial statements

Note 30 — Litigation

Contingencies

“Trading Venues Investigations. The Firm has been responding to government inquiries regarding its processes to inventory trading venues and confirm the completeness of certain data fed to trade surveillance platforms. The Firm self-identified that certain trading and order data through the CIB was not feeding into its trade surveillance platforms. The Firm has completed enhancements to the CIB’s venue inventory and data completeness controls, and other remediation is underway. The Firm has also performed a review of the data not originally surveilled, which is nearly complete, and has not identified any employee misconduct, harm to clients or the market. While the identified gaps represent a fraction of the overall activity across the CIB, the data gap on one venue, which largely consisted of sponsored client access activity, was significant. The Firm is dedicated to maintaining rigorous controls and continuously enhancing the reliability of its trade infrastructure. The Firm expects to enter into resolutions with two U.S. regulators that will require the Firm to, among other things, complete its remediation, engage an independent consultant, and pay aggregate civil penalties of approximately $350 million. The Firm is also in advanced negotiations with a third U.S. regulator, but there is no assurance that such discussions will result in a resolution. The Firm does not expect any disruption of service to clients as a result of these resolutions”

https://www.sec.gov/ix?doc=/Archives/edgar/data/19617/000001961724000225/jpm-20231231.htm

[175] “Sponsored Access refers to the practice in which a bank or brokerage firm offers a client direct market access to an exchange without any pre-trade risk management present.[1] Sponsored access allows high frequency traders to access low-latency markets with pre-execution controls provided by the exchange.[2][3][4]

Sponsored access has many different meanings for market participants, and is often misunderstood. Its origin can be traced back to the practice of direct market access (DMA), in which a broker who is a member of an exchange provides its market participant identification (MPID) and exchange connectivity infrastructure to a customer interested in sending orders directly to the exchange.[5]

In a December 2009 report on sponsored access, Aite Group defined it as when a non-member entity (i.e., a sponsored participant) gains direct access to market centers by using the MPID of a member broker/dealer, leveraging access infrastructure not owned by the sponsoring broker.

Firms may decide to go through a sponsored access arrangement for many reasons, including reduced latency, additional revenue opportunities, and hitting volume discounts. [6]”

https://www.marketswiki.com/wiki/Sponsored_Access

“Sponsored Access allows Nasdaq Nordic members to give their clients the ability to connect directly to the Nasdaq Nordic matching engine and trade under their membership identity.”

https://www.nasdaq.com/solutions/connectivity-sponsored-access

[176] “WHEREAS, the Firm maintains a global trade surveillance program to monitor employee and customer trading activities throughout the Firm for potential violations of laws and regulations, including those relating to market misconduct and other manipulative behaviors;

WHEREAS, the Board of Governors and the Office of the Comptroller of the Currency (“OCC”) have conducted investigations into the practices of JPMC and its direct and indirect subsidiaries relating to global trade surveillance;2

WHEREAS, from 2014 through 2023 (the “Relevant Period”), JPMC failed at various points in time to adequately surveil certain trading and order activity throughout the Firm’s Corporate and Investment Bank (“CIB”) on at least 30 global trading venues, which include systems or electronic platforms operated by investment firms or market operators that bring together third party buying and selling interests in financial instruments to conduct transactions;

WHEREAS, the Federal Reserve Bank of New York (“Reserve Bank”) identified areas where JPMC’s trade surveillance program operated without adequate data oversight and reconciliation processes to achieve effective and comprehensive trade surveillance for CIB;

WHEREAS, as a result of the deficiencies described above, JPMC engaged in unsafe and unsound banking practices;”

UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C. In the Matter of JPMORGAN CHASE & CO.

New York, New York, Docket Nos. 24–007-B-HC , 24–007-CMP-HC

Order to Cease and Desist and Order of

Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended

https://www.federalreserve.gov/newsevents/pressreleases/files/enf20240314a1.pdf

[177] COMPTROLLER’S FINDINGS

The Comptroller finds, and the Bank neither admits nor denies, the following:

(1) Since at least 2019, the Bank’s trade surveillance program has operated with certain deficiencies that have compromised its effectiveness.

(2) The Bank has failed to establish adequate governance over trading venues on which it is active. Trading venues are systems or electronic platforms, operated by investment firms or market operators, that bring together multiple third party buying or selling interests in financial instruments to perform a transaction.

(3) In addition, the Bank’s trade surveillance program has operated with gaps in venue coverage and without adequate data controls required to maintain an effective program. The consequences of these deficiencies include the Bank’s failure to surveil billions of instances of trading activity on at least 30 global trading venues.

(4) Based on the foregoing, the Bank has engaged in unsafe or unsound practices that constitute a pattern.

UNITED STATES OF AMERICA

DEPARTMENT OF THE TREASURY

OFFICE OF THE COMPTROLLER OF THE CURRENCY In the Matter of:

JPMorgan Chase Bank, N.A.

Columbus, Ohio, AA-EC-2023–49

Cease and Desist Order (PDF):

https://www.occ.gov/static/enforcement-actions/eaAA-EC-2023-50.pdf

Civil Money Penalty (PDF):

https://www.occ.gov/static/enforcement-actions/eaAA-EC-2023-49.pdf

[178] Release Number 8914–24, May 23, 2024

“CFTC Orders J.P. Morgan to Pay $200 Million for Supervision Failures”

“CFTC Finds J.P. Morgan Failed to Surveil Billions of Client Orders on a U.S. Designated Contract Market”

The Commodity Futures Trading Commission

https://www.cftc.gov/PressRoom/PressReleases/8914-24

[179] UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2022, JPMorgan Chase & Co.

https://www.sec.gov/ix?doc=/Archives/edgar/data/0000019617/000001961723000231/jpm-20221231.htm

[180] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000019617/000001961722000272/jpm-20211231.htm

[181] 17 CFR § 242.203 — Borrowing and delivery requirements.

https://www.law.cornell.edu/cfr/text/17/242.203

[182] “fintwit”

(Internet slang) That part of the Twitter microblogging community that tweets about finance and stock markets.

https://en.wiktionary.org/wiki/fintwit

[183] § 242.204(a)(2): If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in any equity security resulting from a sale of a security that a person is deemed to own pursuant to § 242.200 and that such person intends to deliver as soon as all restrictions on delivery have been removed, the participant shall, by no later than the beginning of regular trading hours on the thirty-fifth consecutive calendar day following the trade date for the transaction, immediately close out the fail to deliver position by purchasing securities of like kind and quantity.

This section indicates that if the fail to deliver is due to the participant not being able to deliver the security because of restrictions, the participant has up to the beginning of regular trading hours on the thirty-fifth consecutive calendar day following the trade date to close out the position.

https://www.law.cornell.edu/cfr/text/17/242.204

[184] Pg 13, “Preventing Regulatory Capture Special Interest Influence and How to Limit It”, D. Carpenter, Harvard University; D.A.Moss, Harvard University, Cambridge University Press, 2014

[185] “Such regulatory arbitrage is, of course, a problem. Rules are put in place for a reason and working around them defeats that purpose. As you know, we have just emerged from the worst financial crisis since the Great Depression. That’s why we have made these rules stronger: to make such crises less likely. Whenever a bank tries to get around rules, it increases the risk of another crisis” “Gaming the rules or ruling the game? — How to deal with regulatory arbitrage” Speech by Daniele Nouy, Chair of the Supervisory Board of the ECB, at the 33rd SUERF, Colloquim, Helsinki, 15 September 2017, https://www.bankingsupervision.europa.eu/press/speeches/date/2017/html/ssm.sp170915.en.html

[186] CHAPTER II TRANSPARENCY OF NET SHORT POSITIONS,

Article 5 Notification to competent authorities of significant net short positions in shares 1. A natural or legal person who has a net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue shall notify the relevant competent authority, in accordance with Article 9, where the position reaches or falls below a relevant notification threshold referred to in paragraph 2 of this Article. 2. A relevant notification threshold is a percentage that equals 0,2 % of the issued share capital of the company concerned and each 0,1 % above that.

Article 6 Public disclosure of significant net short positions in shares 1. A natural or legal person who has a net short position in relation to the issued share capital of a company that has shares admitted to trading on a trading venue shall disclose details of that position to the public, in accordance with Article 9, where the position reaches or falls below a relevant publication threshold referred to in paragraph 2 of this Article. 2. A relevant publication threshold is a percentage that equals 0,5 % of the issued share capital of the company concerned and each 0,1 % above that.

https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:086:0001:0024:en:PDF

REGULATIONS REGULATION (EU) No 236/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 March 2012 on short selling and certain aspects of credit default swaps

[187] Pg 99–100 “The End of Alchemy, Money, Banking, And The Future of The Global Economy”, Mervyn King, 2016, W.W. Norton & Company Independent Publishers

[188] https://www.esma.europa.eu/sites/default/files/library/ccps_authorised_under_emir.pdfprinter

[189] https://www.esma.europa.eu/sites/default/files/library/esma70-155-11635_csds_register_-_art_21.pdf

[190] Under Article 20 of SSR, RCAs can prohibit or impose conditions to natural or legal person entering into short sales or increasing their NSPs where: a) “there are adverse events or developments which constitute a serious threat to financial stability or to market confidence in the Member State concerned or in one or more other Member States; and

b) the measure is necessary to address the threat and will not have detrimental effect on the efficiency of financial markets which is disproportionate to its benefits”