Navigating Market Manipulation and Overcoming FTD Challenges

This article was originally published on Creatd: https://www.creatd.com/whitepaper/navigating-market-manipulation-and-overcoming-ftd-challenges

As the CEO of Creatd ($CRTD), I feel compelled to share our experiences and some data on what continues to be an abusive environment, particularly in dealing with Fails-to-Deliver (FTDs), and how we have navigated these turbulent waters. It is crucial to bear in mind that my perception of the market is that the multiple of non-reported FTDs to reported FTDs is perhaps as high as 20:1. Some believe I am naive and that the ratio is as much as 100:1. A non-reported FTD means exactly what it sounds like: a market maker shorts the stock without having the borrow and, through layers of protection and loopholes, gets away with being short, essentially illegally and at the expense of the retail investor.

WTF is a FTD?

Fails-to-Deliver (FTDs) represent the aggregate net balance of shares that failed to be delivered as of a particular settlement date. These figures are not daily amounts of fails but a combined figure that includes both new fails on the reporting day and existing fails. This accumulation can be due to various factors such as settlement delays, technical glitches, or strategic trading practices by market participants.

The SEC has recently updated the settlement cycle to T+1 (one business day after the trade). This change is aimed at reducing the risk of settlement failures and increasing market efficiency.

Data Disclosure

The data presented in this article has been meticulously retrieved and analyzed from the SEC's Fails-to-Deliver (FTD), which spans from February 2004 to June 2024. The dataset is available in two periods per month from July 2009 through May 2024, and by quarter from 2004 to June 2009. The first half of a given month is available at the end of that month, while the second half becomes available around the 15th of the following month.

To gather this data, we embarked on a comprehensive data extraction and processing journey. We downloaded over 300 zip files from the SEC’s FTD archive, unzipped them, and converted the resulting text files into CSV format. Leveraging Python, we utilized powerful data manipulation libraries such as Pandas to perform a series of data normalization and parsing operations. This involved filtering out only the tickers associated with Creatd, Inc. (JMDA, CRTD, VOCLD, and VOCL) and aggregating this filtered dataset, which comprised more than 25 million rows. The final step was an in-depth analysis using Python's advanced analytical capabilities to generate the insights shared in this article.

What We Found About Creatd's Reported FTD Data

For Creatd, the issue of Fails-to-Deliver (FTDs) has been a significant challenge. On days when FTDs occur, the average amount of FTDs can reach as high as 100% of the volume reported on the next day. For example, if a total of 2,000 shares trade in a day, the FTDs from the previous day could theoretically be 2,000.

Our stock’s market cap spiked to $150 million in November 2021, leading to increased short selling, FTDs, market instability, and eventually contributing to the collapse of our stock price. This instability has impacted Creatd and most of the middle markets, due to the unchecked pressure from the market-making community.

$CRTD Reported FTDs Analysis

By analyzing Creatd, Inc.’s Fails-to-Deliver (FTD) data, we gain a deeper understanding of the magnitude and impact of these FTDs over the years. Here’s a summary of our annual FTDs, their average price, and their implied value. It is important to note that our market cap today is 12x smaller than the largest year of FTD total value. Analyzing the daily FTDs in relation to the trading volume on the same days, focusing exclusively on shares that are freely tradable in street name or Cede & Co., reveals:

• In 2016, $CRTD experienced a relatively low number of FTDs compared to later years. However, the high Quantity/Volume % of 763.54% indicates that the failures to deliver were significant relative to the trading volume, suggesting early signs of market manipulation despite the low absolute numbers.
• 2017 saw a massive spike in FTDs, with nearly 2 million FTDs and an average daily FTD count of 3,925. The average price was low at $0.18, but the implied value was substantial at $350,200. The extremely high Quantity/Volume % of 1114.16% underscores severe market manipulation and potential abusive trading practices.
• There was a significant reduction in FTDs in 2018 to 335,766, with an average daily FTD count of 672. The average price remained low at $0.15, and the implied value was $51,824. The Quantity/Volume % of 744.41% still indicates considerable market manipulation but shows improvement compared to 2017.
• In 2019, FTDs spiked again to nearly 1.87 million, with an average daily FTD count of 3,732. The average price was $0.16, leading to an implied value of $298,685. The Quantity/Volume % dropped to 213.02%, indicating improved trading volume but continued significant FTD issues.
• 2020 saw a drastic reduction in FTDs to 205,113, with an average daily FTD count of 410. The average price significantly increased to $3.26, resulting in a high implied value of $668,698. The Quantity/Volume % of 3.91% reflects a much healthier market condition compared to previous years.
• 2021 was marked by an unprecedented spike in FTDs, reaching over 15.7 million, with an average daily FTD count of 31,459. The average price was $3.75, leading to an implied value of nearly $59 million. Despite the massive FTDs, the Quantity/Volume % was relatively low at 3.14%, reflecting the high trading volume due to meme stock phenomena and heightened retail trading.
• In 2022, FTDs reduced to around 7.85 million, with an average daily FTD count of 15,694. The average price was $1.07, resulting in an implied value of over $8.4 million. The Quantity/Volume % increased to 4.79%, indicating ongoing market instability and manipulation.
• In 2023, FTDs further reduced to over 4.2 million, with an average daily FTD count of 8,441. The average price was $0.18, leading to an implied value of $764,673. The Quantity/Volume % dropped to 3.37%, showing improved market conditions but persistent FTD issues.
• As of May 2024, the FTD numbers are increasing again to 18,357, with an average daily FTD count matching the total FTDs. The high average price of $3.83 and a significantly high Quantity/Volume % of 23.57% suggest ongoing challenges and a resurgence of market instability. This increase can be attributed to the 500:1 reverse stock split at the end of January 2024, which significantly decreased the number of outstanding shares and invited short sellers, leading to abusive FTD and naked short selling. The high Quantity/Volume % indicates that FTDs are becoming a more substantial issue relative to the trading volume.

How It Happens

The actual short selling activity is often untraceable due to the nature of algorithms and potential collusion between market makers, either inadvertently or deliberately. We believe that the amount of FTDs not reported could be multiples of what the SEC actually reports—possibly 4-5 times higher, especially for small market caps under $50 million.

If, during the initial phase of the small/micro-cap market's adjustment, the rate of unreported FTDs was 4-5 times the reported figures, and considering that our reported FTD percentage was 3-4 times higher than the actual FTD correlation, the current implications are staggering.

Looking at extremities that occur on particular days where the FTDs can run as high as 30% of the volume on a reported basis, and therefore extrapolating at a 10X rate, what is happening in the non-reported FTD gray space is potentially massive. This suggests the potential short interest could be much larger than the shares issued and outstanding, and significantly larger than the freely tradable shares held in street name (Cede & Co). The probability of ever getting factual data is low, given the layers of protection the market makers have and the lack of transparency in their books.

The Danger of Self-Regulated Organizations (SROs)

Self-regulated organizations (SROs) in today’s complex digital trading environment present significant dangers due to their inherent lack of transparency and accountability. Broker-dealers, operating as SROs, have the latitude to engage in numerous questionable practices without sufficient oversight:

• Allowing hedge fund clients to ignore the locate requirement, thereby facilitating naked short selling.
• Creating easy-to-borrow lists that inappropriately include threshold and hard-to-borrow stocks, further enabling shorting activities.
• Hiding FTDs through washed and matched trades by rolling over an FTD to another broker.
• Engaging in illegal stock sales in dark pools off the primary markets to avoid market oversight and maintain anonymity.
• Lack of supervision to ensure that the locate requirement is satisfied for short sales.
• Fraudulently marking short sales as long to hide naked positions.
• Claiming possession of borrowed securities without actual location.
• Failing to make any effort to locate shares prior to short selling.
• Entering into made-up option contracts to obscure naked shorting.
• Using the DTCC stock borrowing program to conceal naked short sales.
• Submitting fake short interest and other reports to regulators.
• Hiding activities by falsely reporting synthetic shares as real shares in broker statements.
• Issuing voting materials to shareholders with nonexistent assets.
• Not complying with requirements to investigate and report suspicious transactions to regulatory authorities.

These practices collectively undermine market integrity and fairness, posing significant risks to investors and the broader financial system.

Advocacy for Regulatory Change

The current regulatory environment poses significant challenges for micro and nano-cap companies. In response, I continue to work on CEOBLOC independently and have recently organized Fuse Investments, LLC, a high-level consulting group dedicated to serving the tactical and strategic needs of small and micro-cap executives. Our goal is to create a fairer system that allows young companies to grow without being suffocated by regulatory burdens. We aim to arm these companies with the advice and resources they need to navigate the labyrinthine, sometimes nefarious forces working to take advantage of them in this space.

We will push for regulations that support transparency and fairness in trading practices, ensuring that companies like Creatd can operate on a level playing field. This includes advocating for measures that address the root causes of FTDs and other forms of market manipulation.

Conclusion

Creatd’s story is far from over, but we are preparing for a war of attrition. While the situation may often seem dire, we see a path to breaking free from this vicious cycle. The resilience that my team and I have developed in this challenging environment will be our strongest asset as we fight to redefine the boundaries of the small, micro, and nano-cap market.

We are committed to building a scalable, defensible, and value-driven enterprise that benefits our shareholders and the broader market ecosystem. Join us on this journey as we navigate the storm, capitalize on opportunities, and advocate for a fairer, more equitable market environment. Together, we can turn the challenges of today into the successes of tomorrow, creating a more transparent and robust financial landscape for small and micro-cap companies.

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