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(NEW YORK)–New clearing rules imposed by Alpine Securities last week could spell the end of the “toxic note” scourge, and possibly mean a short-term short cover rally in the most beating down issues.
Alpine Securities, which is one of the last clearing firms to clear shares in small micro-cap issues, imposed new rules Friday on clearing shares to market that some have labeled the “Friday the 13th of Notes Massacre“.
Alpine joined the likes of COR Clearing to impose new rules that all but kills the toxic note industry. In short the new rules as we see them is no note conversion deposits will be accepted for issues that trade below $0.01 per share, and may not exceed 20% of the previous 20-day volume average in the stock in question.
This new rule will be a big move in killing the toxic note industry that has destroyed so many micro cap issues over the past few years. But short-term some micro cap plays could see their stocks rise in what they call short covering rallies.
Some note holder shorted the issues they were funding knowing they could always use the conversions of the notes they hold to cover any short positions on the way down. Now this may only be a small % of funders who did this execution, but if notes are no longer able to be cleared like before these shorters, or market makers, will be required to cover said positions with their own cash now, or risk major losses.
Short-term this is a very positive move for micro cap issues as this may remove extreme selling pressure in some of these issues. For shareholders this is even a bigger win as this will now control the level of sharp dilution growth in any one issue over a set period of time.
Longer-term though this could be a real death nail for some smaller micro cap issues as this will all but dry up emergency funding sources for this sector, and could mean a total revamp of how these small stocks fund themselves.
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