Sunday, April 3, 2011

And A Friend

Unknown to him, the parking lot in Edward’s four-story low-rise apartment building now contained a “guest” whose naturally beady eyes didn’t overcome a roundish nondescript face. The few people glancing at the denim-clad figure with denim-lined baseball cap, patiently waiting in his economical ’07 blue Chevrolet Aveo, assumed that he was a friend of a resident. His clothes, car and general demeanour gibed with the largely three-part-time-job or blue-collar renters. He fit in.

He had no real worry about Edward debouching ahead of schedule. The independent trader had Flow to track, which had continued up to 34 cents before undulating and getting stuck. Wondering if Roger had bought in, he flipped open his smart phone and got Roger himself instead of his not-here message. As it turned out, both didn’t have much to do.

“Naw, wasn’t worth grabbing at 32. The way I figured, it’s got until 35 before it starts caving again. Might be worth it at the same price you shorted, perhaps a little lower.”

Edward placed his smart phone on a convenient stand that he kept on top of his combo printer on the rightmost, far side of his roomy credenza. Since he had little need to scan or copy documents, and lots of need to gab with his friend while keeping an eye on stocks, the printer made a convenient shelf for his stand. Regretfully, the best fit for it on the desk for use was in front of the picture of his Kaliyah.

But, the placement had compensations. He could still see her behind the miniscule image of his corpulent friend. Making sure the speakerphone doodad was engaged, he glanced at her fetching image.

Seeing his field of vision change to encompass his friend sitting in his well-worn chair with the door to his place in the distant left, Roger relaxed for a hearty talk. He put his own smart phone on a similar stand and engaged a similar attachment. All Edward saw, except for his friend and a small part of Roger’s much shorter desk, was the off-white wall of his friend’s room home.

Edward was getting an idea from his friend’s appetizing talk. Normally, Friday night was date night. He and Kaliyah’s normal date was a movie and a coffee afterwards. Feeling that caffeine jolt after the flick spiced things up for both of them. This time, however, he was in the mood for a surprise.

Granted that he had been cheated out of a major profit. Glancing at his live chart of Flow, he saw 33. Had the Investment Industry Regulatory Organization of Canada not cheated him out of his buy, he could have sold the 300,000 shares he had bought fair and square – assuming that a market sell order for 300,000 shares would have garnered an average price of 32.5 cents – for a nice, clean, well-deserved 12 cents per share. Net of commissions, he could have banked an unprecedented thirty five thousand nine hundred and eighty dollars on his initial investment of $61,509.99. In one day! When added to what was in his chequing account, minus the few hundred dollars he would have had to debit his account to make good on the entire trade, he would have been in six figures! Had the IIROC not cancelled his trade and tried to reprice it at 25 cents, which he had righteously balked at, he would have had a net worth of more than $100,000!

Defocusing on what was eating him, he shifted to eating. Despite he only scoring several hundred on the busted trade, and despite the vengeful short sale only likely to net him a couple of thousand while tying up $60,000 capital, the memory of the finagled-away profit lingered. Apart from being owed by the crooks that ran the IIROC and Flow Resources, he owed himself a taste of the good life. That meant an after-movie splurge at Armitridge’s, a medium-priced bistro. Sure, it would mean he’d be out more than $100 for the evening, bit it was a time like this when he should splurge. Getting a taste of the good life would get the edge off his week.

Roger had done some checking around before he got on the blower. Edward’s fat friend had little interest in life other than food and stocks, his earlier existence as a stereo-system hawker having been truncated by the recent recession. Having made a clean break from his old treadmill life, in which he had managed to be frugal because he had had few friends, he had come into his own in the stock trader world. Like he and Edward, they were typically cheapskates. It came with the territory. There was a day trader who rewarded himself, after making a $20,000 score, with a large pizza. Another went alone to modestly-priced chain restaurants and racked up a bill about the same as for a pizza. Roger found himself in a crowd where social obligations meant filling each other in and occasionally watching out for each other, rather than scratching each other’s backs with mutual expenditures. Finding himself in a subculture with fellow cheapskates, he made friends easily.

Inevitably, his many virtual friends included several stockbrokers. Although hard-core day traders stuck with deep discount services, brokers were part of the scene. A few new ones tried schlepping for clients, usually unsuccessfully, but the more seasoned ones hung around for the tips. And for the chance to take the psychological two-piece suits off their heads.

One of them was Gus Malik. He was with a small shop specializing in Venture penny stocks named Forward Avenue Investments. Forward Avenue was a full-service firm, with commissions to match. But, it had the virtue of allowing short sales of even low-priced penny stocks.

Gus, having been around the Forward block, didn’t buy for a second Roger’s hints about a long and mutually profitable relationship. He held firm on the commission for shorting the shares: $2,000. “Dirty deeds, they ain’t done dirt cheap - as you should know” he had said to Roger with finality. It had taken some delicate negotiation, but Gus had reluctantly agreed to let Edward short 250,000 shares of Flow on a $60,000 cash deposit. “It should be 100% margin, but I can get compliance to bend.” But not on the minimum maintenance requirement.

At Forward Avenue, as was standard for brokerage houses that allowed shorting of penny stocks, the minimum maintenance margin level was an iron-clad non-negotiable 50%. There had to be enough cash, over and above the proceeds for the short sale, to make up half the buy-back price of the shares plus another $2,000 commission for the buy. Edward would be sold out pronto if Flow went from 33 cents to 37.5 cents. Should Flow climb only 13.6%, which it easily could in a day if buyers got excited, Edward’s shares would be dumped and he would be fixed with a minimum $15,000 loss. If Flow spiked up 10 cents, as it had when it crested at 47 on that earlier spectacular strike, Edward would be sold out and lose more than half his stake. It was a very risky trade, which could knock him back to close to where he had started should the stock regain its prior peak of 47 cents. That’s why Forward Avenue was adamant about selling out as soon as the minimum-maintenance margin level was hit. If Flow spiked up to a new high of 55 cents, Edward would be wiped out. Above that, Forward would have to make up the deficit out of its own capital and lean on Edward for it.

Gus had the technique to assure that Forward’s risk was reduced; it would also lessen Edward’s, but it also made it more probable that he would be eating that $15,000+ loss. Gus was quite prepared to insist upon it.



Edward only half-listened to his friend’s spiel: at least, that’s what it sounded like to him. What would a professional independent trader want with a full-service, expensive broker? He had enough problems on his hand. Two thousand? That meant a four-thousand round trip! He paid twenty bucks for a round trip where he was now. What was his friend up to?

Besides, he had something important to take care of now: dinner with Kaliyah. It was still morning, and he was looking for a last-minute reservation for tonight. Armitridge’s Website had an online reservation form. If he were lucky, they’d have a table for 9:30 tonight. That gave them more than enough time to get over from the early evening show.

He was lucky: his reservation was accepted. The table wouldn’t be great, but it’d still be an evening worth remembering.

Seeing that his point wasn’t getting across, Roger waited until his friend had finished fussing with whatever he was poking around with on the Net. Seeing Edward’s image lean back in his chair, looking satisfied, he summed up what he had to say.

“Edward, I told you: with Gus, you can short a quarter of a million shares of Flow with $60,000 backing it. No questions asked.”

“What’d you say?” That part, he had missed.

“All right,” Roger placated, “the guy doesn’t come cheap. But he will let you short a lot more than that piddling 30,000 shares you’ve got going with your own firm. Gus’ firm, Forward Avenue, is quick to sell you out if the short doesn’t go right – but he’ll do the dirty deed. For $2,000 commission each way.”

Now fully focused, Edward got interested despite the expensive cut the firm would take from him. He was sure there was something funny about Flow’s latest drill result, which had pushed the stock up from around a dawdling 15-20 cents to a very active 47 cents. If a stock can suddenly fall out of bed from a previous-day close of 37 cents to 19 at the bottom, as Flow did yesterday, then something was terribly wrong with the company. Never mind that the stock’s two-hour foray below 25 cents was wiped out by an IIROC repricing order. Never mind that it had bounced back from that artificial 25 to 32-33 today. There was no way that a company’s stock collapses unless there was some serious second-guessing of the drill results. There had been other drill samples from Flow’s Aureous Prospect property up somewhere in Ontario. Although finding gold, the values had been nowhere close to spectacular. Its most recent result stuck out, in a great way if one was a hungry bull. But they stuck out as anomalous in another way if one had carefully done the due diligence.

It wasn’t just out of righteousness that Edward was convinced about Flow being way overvalued at 32-33 cents. The stock had caved, and there was reason why.

Besides, he had just made a reservation in a classy restaurant and he needed something to celebrate. 250,000 shares short at 32.5, bought back at his cancelled purchase price of 20.5, meant 12 cents per share profit: thirty thousand dollars minus the four for the commissions. Twenty-six grand. It would be the biggest profit of his life.

So, he agreed to phone up this Gus Malik. It was 11:20.



Said Gus was at his desk when Edward phoned up. As befitting its name, Forward Avenue was electronic. A new client could fill out a PDF new-account form, send in the form by E-mail, and transfer the opening deposit electronically. Forward needed that streamlining to stay in business.

Seeing high-activity day traders flock almost unanimously to discount brokers had been tough for the niche that had traditionally filled the orders for them. In order to say afloat, a firm knee-deep in the penny-stock market had to either trade up to managing more established but conservative accounts or rake in fees from companies for services like brokering private placements. Forward had done both, with limited success. The firm had a third, although risky, alternative: handling risky short sales of penny stocks that discount brokerage firms were too prudent to go near, and charging ample commissions on them.

It was a shade of the olden days before discount brokerages were allowed. Since few firms would undertake such short sales at all, and no discounters would, Forward had a niche in which it could charge a smackeroo of a commission.

After hearing the inquiry from the pleasant-sounding black man at the other end of the phone, Gus explained why Forward was undertaking to broker those trades at all.

“As we both know, shorting penny stocks – particularly exploration stocks, which can more than double in a day if the news is great – carries a lot of risk. I’m one of the few account executives –“ meaning, Forward was one of the few brokerage firms – “who will put through the trade on a stock like Flow. I’m obliged to explain why before I can accept your account.”

Impatiently, Edward nodded with the cordless in his right hand. He was slightly hunched in his chair, looking at Flow touch 32. Unconsciously, he bumped the right side of the chair against the credenza: he doing so added some microscopic wear to the already visible tear in the thin leather.

“In order to do the deal on the terms I discussed with your friend Roger, there are going to have to be two orders. The first is the short of 250,000 if you want to go through with it. The second, which will be entered right after the first, is a stop-loss order at the price where your margin goes down to the 50% minimum-maintenance level. That stop is obligatory. Unless you authorize it, I’m not doing the trade.”

As Gus expected, Edward manned up to the implications. Had he squawked, the broker would have ended the call right then and there. “So that’s to protect you,” Gus heard.

“You as well,” the broker replied flatly.

There are two kinds of dealers in illicit or illegal products or services. The first kind sells to all comers, with a conspiratorial wink or chuckle, and accepts trouble as fated for him. The second, being in the shadows or beyond the borders of the law, takes it upon himself to make the transaction hard so as to deter the trouble. Being a regulated broker in a regulated firm, Gus was very much the second kind. Now looking more serious than usual, which Edward couldn’t see but heard though his voice, he continued.

“There’s something else I have to tell you: a special condition for the stop-loss buy-back order. Since there’s a risk of a premarket news release making the stock shoot up at the open, Forward converts the stop to a live order once the high bid hits the stop price. That includes pre-market, which we monitor.”

As expected, Edward objected. “Hold on. If premarket is 38, and the stock ends up opening at 36, I’m sold out?”

Himself holding the phone right to right side of his face, Gus’ brown eyes blinked rapidly as his moustachioed face nodded. “That’s right. The reason why is, we’ve found that there’s a real risk it’ll open at 40 or 42. The sooner the stop goes live as a market order, the closer to the front of the line you’ll be when bailing out. It’ll make the difference between crumpled at 42 or totalled at 46.

“That’s the risk you’re taking with this trade. If you think it’s onerous, I’d be glad to short you 150,000 or 100,000 shares. Your risk would be far less, and we’d adjust the commission accordingly. Eighty dollars per 10,000 shares each way; minimum 100,000.” He didn’t mind the sliding scale that much. A client that gets away alive could make another trade. A dead account sometimes meant onerous funeral expenses.

“You are worried about yourselves, aren’t you.” Now, Edward’s lips parted with a knowing half-smile. “You’re afraid you’ll have to come after me if it don’t work out.”

“We’re in this together,” Gus answered honestly. “Less risk for us means less risk of being totalled for you.”

Pausing for a moment, Edward briefly considered the chance of him taking a serious loss. Remembering what Roger said about Flow starting to cave at 35, and seeing it make only 34, influenced his decision. But, it was his honour – the need to get back at a company that had ripped money right out of his hands with the repricing – that sealed the deal.

“Okay; I’m in. Send me the form and I’ll get it back to you right away.”

He heard the voice at the other end say “Thank you, sir,” in white-formal, and he supplied his E-mail address when asked. The deal was about to be sealed.

Sure enough, Roger had arranged it in advance. Edward’s E-mail client got the PDF form lickety-split – almost right after he ended the phone call with Gus. On the cover letter was Gus Malik’s full name, address, business number, E-mail and cell: his digital sig. The one sentence at the top just said “Thanks – please fill out and I’ll get approved ASAP. Welcome to the track.” Go-cart track is more like it, Edward thought, but easily. Gus, for a full-service, was a good guy.

Getting busy, he left his alternate computer on idle as he rapidly filled out the form. For estimated income, he put down his profits for the last year. No harm in them thinking he had an outside job.



Gus had gone back to his usual business, but something about Edward and Flow ate at him. Looking at Flow’s chart had made Gus wonder if Edward knew something.

The filled-in PDF form came in about ten minutes later. Gus looked at it, and then called up the news releases for Flow over the last twelve months. That drill result was anomalous, no doubt about it, but in a funny way. It was much better than its peers.

Making a decision, he printed out the completed form and took it physically to the new-accounts desk. Forward being small, it was only a short walk up a floor. Seeing the supervisor, and having collected his thoughts, he asked for a rush to be put on it.

“I’ll do it right now for you,” she replied. Gus being one of the nicer brokers to the back office staff, he got treats because he normally didn’t ask for them – and had never demanded any. As a result, he got the same special service as a broker who felt he had to yell every rush through. And more at times, because he was reasonable.

Form checked and data entered, the account was opened and ready for trading within ten minutes. Gus filled the time, sitting in her visitor’s chair in her cubicle, scanning a few of Flow’s drill results. When she informed him with a bright smile that the deed was done, he was even surer of the rightness behind treating Edward as an honoured guest.

Walking swiftly back to his own desk, he got on the phone and called Edward’s land line – the only number he had supplied. It was the same line that the young man had called him with.

While Gus had been busy, his new client had de-idled the second computer perched on his desk-sized credenza and accessed his account. Flow was now at 32 asked, and the piddling short of 30,000 shares could be closed out with only a 1.5 cent per share loss plus commission. Once done, his account had lost five hundred dollars and was down to $60,794. Since the cash he had used had been there for about two months, he could – oh, great.

That trade he had made yesterday had tied up all his capital. Had it simply been cancelled instead of repriced, he could have withdrawn the money with no questions asked. But, since the trade was effected, he needed to keep the funds until it settled next Tuesday. There was no way he could get his money out until Wednesday, or at the very least Tuesday after the market closed. His short would have to wait, kept in limbo until the three-day settlement process liberated his funds.

“Damn,” he swore as he realized he couldn’t make his move.

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