Market makers with naked shorts1 Aug 2018 21:47
For those who have not seen this article I have taken the liberty to copy and paste over here. It seems SCAP are short and wanted Matt to take a low ball placing to help them out. I am sure they are currently trying to unwise their position with as minimal damage as possible
There was talk on Twitter yesterday about Matt Lofgran, Chief Executive Officer of Nostra Terra (NTOG), speaking during an interview about a market maker contacting the company, hoping to acquire stock in a discounted placing, allowing them to balance their books against a short position.
This is the first time I have ever heard a CEO speak about this openly and on record. I was very pleased to listen. I hold no shares in the company but will aim to do some research over the coming weeks as the honesty of directors combined with their understanding of how AIM works is something that is important to me.
Of course, to give a balanced view, as you always need to consider all angles of unknown information, it is also possible that this is a new attempt by a CEO of an AIM company to push their shares higher. That said the concept of market makers short selling and participating in placings is one that does warrant a discussion as it happens frequently.
Market Makers
Private investors love to moan about market makers but without them liquidity would be non-existent. The SETS system used by larger stocks just would not work on AIM as with some exceptions the liquidity on many stocks is not present to allow the direct matching of buyers and sellers.
With that said I do think that with a few tweaks to what is allowed would make the market much better and go some of the way to making AIM more weighted towards private investors without which there would also be no market.
Two of the most significant changes that I think would benefit the AIM market are imposing a maximum allowed MM short position (it's currently 10% before disclosure) and not allowing participation in placings.
Short Selling
The argument for allowing a market maker to be short on a stock is that they are duty bound to make a market and with a fast-moving stock they will often have an in balance. They are not confined by the usual FCA 0.5% disclosure as it is an activity that is normal within their role as opposed to an investor looking to take a short position against a particular stock.
However, if the maximum short position was reduced or perhaps more realistically limited to say a few hours or days it would have a massive knock on to the true price of shares trading on AIM. Currently there is little to stop a market maker selling stock to private investors with a disproportionate advantage to the investor on the basis that the stock will be acquired in due course.
I have previously done well from investing in companies where it is obvious that the market is short of stock and when you are able to find a "short squeeze" it does offer a good opportunity, but without some tweaks to
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