BUSINESS CONTINUITY PLAN DISCLOSURE
Velocity Clearing, LLC (“Velocity”) has developed and implemented a Business Continuity Plan (“BCP”) to protect its operations in the event of a significant business disruption (“SBD”). Since the timing and impact of disasters and disruptions are unpredictable, we allow for flexibility in responding to actual events. This plan assumes that all effort is to be placed to recover our trading and clearing abilities. With that in mind, we are providing you with this information on our BCP. Our BCP is designed to enable Velocity Clearing to quickly recover and resume business operations after an SBD by safeguarding our employees and property, making financial and operational assessments, protecting the Firm’s books and records, and allowing our traders and customers to transact business. Our BCP addresses the following areas: responsible parties; data backup and recovery; service and component redundancies; all mission critical systems and business processes; financial and operational assessments; alternative communications with counterparties, business constituents, employees, and regulators; alternate physical location of employees; critical vendor, contractor, bank and counterparty impact; and regulatory reporting. We maintain backup records electronically in addition to maintaining our main data facility and backup data facilities off-site. While every emergency poses unique problems based on external factors, such as time of day and the severity of the disruption, we have been advised by our technology service providers that their objective is to restore our critical services within the same business day. Varying Disruptions and/or SBDs, can differ in their scope, such as only our Firm, a single building housing our Firm, the business district where our Firm is located, the city where we are located, or the whole region. Within each of these areas, the severity of the disruption can also vary from minimal to severe. In a disruption to only our Firm or a building housing our Firm, we will transfer our operations to a local site when needed and expect to recover and resume business within the same day. In a disruption affecting our business district, city, or region, we will transfer our operations to a site outside of the affected area and recover and resume business within 24 hours. In either situation, we plan to continue business and notify you using the most practical and expedient means of communication available. Velocity Clearing’s website ( www.velocityclearing.io ) can serve as general notification to external interested parties and contacts. The BCP is subject to changes and modifications. Velocity Clearing reviews the plan, at least annually, and updates the plan as business conditions and technology change. For more information or questions about our business continuity planning, please feel free to contact us at firstname.lastname@example.org.
Velocity Clearing, LLC (“Velocity Clearing” or the “Firm) is committed to maintaining the confidentiality, integrity and security of personal information about our current and prospective customers. We understand that privacy is an important issue for you, and we also want you to understand how we protect your privacy when we collect personal information about you.
INFORMATION WE COLLECT
The personal information we collect from you comes from information you supply to us in account opening applications (whether written or electronic), or in other forms you may provide to us. This information may include your name, address, social security number or tax identification number, account number, account balances and financial information about you.
INFORMATION WE MAY SHARE
Velocity Clearing may share personal information about our current and former customers with our affiliated companies and service providers. We may share the information for everyday business purposes, including to process your transactions, to assist us in providing services, or for marketing purposes to offer products and services that may be of interest to you. We may also share personal information with non-affiliated companies that are required to process your transactions such as clearing firms or provide other services. We do not sell your information or provide it to non-affiliated parties for marketing purposes. We may also disclose information about current or former customers in order to cooperate with legal or regulatory authorities or pursuant to a court order or subpoena. In addition, we may disclose personal information as necessary to perform credit checks, collect debts, enforce our legal rights or otherwise protect our interests and property.
HOW WE PROTECT YOUR INFORMATION
It is our policy not to release your personal information except as permitted by law, with your consent, as requested by you or set forth below. Within Velocity Clearing, we restrict access to your personal information to those who require it to provide products or services to you. To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.
OPT OUT NOTICE
The law allows you to “opt out” of our sharing nonpublic personal information about you in certain circumstances with affiliated and nonaffiliated companies; that is, you may direct us to not make such disclosures. We do not currently share information about you with any affiliate or third party that triggers this opt-out right. Therefore, there is no need for you to opt out. If in the future we desire to disclose your information in a way that is inconsistent with this policy, we will notify you in advance and provide you with the opportunity to opt out of such disclosure. THIS PRIVACY NOTICE IS PROVIDED TO YOU FOR INFORMATIONAL PURPOSES ONLY. YOU DO NOT NEED TO CALL OR TAKE ANY ACTION IN RESPONSE TO THIS NOTICE. WE RECOMMEND THAT YOU READ AND RETAIN THIS NOTICE FOR YOUR PERSONAL RECORDS.
You can contact us about this privacy statement by writing or emailing us at the address below: Velocity Clearing, LLC 1301 Route 36, Suite 109 Hazlet, NJ 07730 Website: www.velocityclearing.io Email: email@example.com
AGREEMENT BETWEEN USER AND VELOCITY CLEARING
The Velocity Clearing Web Site is comprised of various Web pages operated by Velocity Clearing. The Velocity Clearing Web Site is offered to you conditioned on your acceptance without modification of the terms, conditions, and notices contained herein. Your use of the Velocity Clearing Web Site constitutes your agreement to all such terms, conditions, and notices.
Velocity Clearing reserves the right to change the terms, conditions, and notices under which the Velocity Clearing Web Site is offered, including but not limited to the charges associated with the use of the Velocity Clearing Web Site.
LINKS TO THIRD PARTY SITES
The Velocity Clearing Web Site may contain links to other Web Sites (“Linked Sites”). The Linked Sites are not under the control of Velocity Clearing and Velocity Clearing is not responsible for the contents of any Linked Site, including without limitation any link contained in a Linked Site, or any changes or updates to a Linked Site. Velocity Clearing is not responsible for webcasting or any other form of transmission received from any Linked Site. Velocity Clearing is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement by Velocity Clearing of the site or any association with its operators.
NO UNLAWFUL OR PROHIBITED USE
As a condition of your use of the Velocity Clearing Web Site, you warrant to Velocity Clearing that you will not use the Velocity Clearing Web Site for any purpose that is unlawful or prohibited by these terms, conditions, and notices. You may not use the Velocity Clearing Web Site in any manner which could damage, disable, overburden, or impair the Velocity Clearing Web Site or interfere with any other party’s use and enjoyment of the Velocity Clearing Web Site. You may not obtain or attempt to obtain any materials or information through any means not intentionally made available or provided for through the Velocity Clearing Web Sites.
USE OF COMMUNICATION SERVICES
The Velocity Clearing Web Site may contain services, chat areas, news groups, forums, and/or other message or communication facilities designed to enable you to communicate with the other Velocity Clearing Web Site users or Velocity Clearing Customer Service employees (collectively, “Communication Services”), you agree to use the Communication Services only to post, send and receive messages and material that are proper and related to the particular Communication Service. By way of example, and not as a limitation, you agree that when using a Communication Service, you will not:
- Defame, abuse, harass, stalk, threaten or otherwise violate the legal rights (such as rights of privacy and publicity) of others.
- Publish, post, upload, distribute or disseminate any inappropriate, profane, defamatory, infringing, obscene, indecent or unlawful topic, name, material or information.
- Upload files that contain software or other material protected by intellectual property laws (or by rights of privacy of publicity) unless you own or control the rights thereto or have received all necessary consents.
- Upload files that contain viruses, corrupted files, or any other similar software or programs that may damage the operation of another’s computer.
- Advertise or offer to sell or buy any goods or services for any business purpose, unless such Communication Service specifically allows such messages.
- Conduct or forward surveys, contests, pyramid schemes or chain letters.
- Download any file posted by another user of a Communication Service that you know, or reasonably should know, cannot be legally distributed in such manner.
- Falsify or delete any author attributions, legal or other proper notices or proprietary designations or labels of the origin or source of software or other material contained in a file that is uploaded.
Restrict or inhibit any other user from using and enjoying the Communication Services.
- Violate any code of conduct or other guidelines which may be applicable for any particular Communication Service.
- Harvest or otherwise collect information about others, including e-mail addresses, without their consent.
- Violate any applicable laws or regulations.
Velocity Clearing reserves the right to review materials posted to a Communication Service and to remove any materials in its sole discretion. Velocity Clearing reserves the right to terminate your access to any or all of the Communication Services at any time without notice for any reason whatsoever.
MATERIALS PROVIDED TO VELOCITY CLEARING OR POSTED AT ANY VELOCITY CLEARING WEB SITE
Velocity Clearing does not claim ownership of the materials you provide to Velocity Clearing (including feedback and suggestions) or post, upload, input or submit to any Velocity Clearing Web Site or its associated services (collectively “Submissions”). However, by posting, uploading, inputting, providing or submitting your Submission you are granting Velocity Clearing, its affiliated companies and necessary sublicensees permission to use your Submission in connection with the operation of their Internet businesses including, without limitation, the rights to: copy, distribute, transmit, publicly display, publicly perform, reproduce, edit, translate and reformat your Submission; and to publish your name in connection with your Submission. No compensation will be paid with respect to the use of your Submission, as provided herein. Velocity Clearing is under no obligation to post or use any Submission you may provide and may remove any Submission at any time in Velocity Clearing’s sole discretion. By posting, uploading, inputting, providing or submitting your Submission you warrant and represent that you own or otherwise control all of the rights to your Submission as described in this section including, without limitation, all the rights necessary for you to provide, post, upload, input or submit the Submissions.
Velocity Clearing reserves the right, in its sole discretion, to terminate your access to the Velocity Clearing Web Site and the related services or any portion thereof at any time, without notice. GENERAL To the maximum extent permitted by law, this agreement is governed by the laws of the State of New York, U.S.A. and you hereby consent to the exclusive jurisdiction and venue of courts in New York, New York, U.S.A. in all disputes arising out of or relating to the use of the Velocity Clearing Web Site. Use of the Velocity Clearing Web Site is unauthorized in any jurisdiction that does not give effect to all provisions of these terms and conditions, including without limitation this paragraph. You agree that no joint venture, partnership, employment, or agency relationship exists between you and Velocity Clearing as a result of this agreement or use of the Velocity Clearing Web Site. Velocity Clearing’s performance of this agreement is subject to existing laws and legal process, and nothing contained in this agreement is in derogation of Velocity Clearing’s right to comply with governmental, court and law enforcement requests or requirements relating to your use of the Velocity Clearing Web Site or information provided to or gathered by Velocity Clearing with respect to such use. If any part of this agreement is determined to be invalid or unenforceable pursuant to applicable law including, but not limited to, the warranty disclaimers and liability limitations set forth above, then the invalid or unenforceable provision will be deemed superseded by a valid, enforceable provision that most closely matches the intent of the original provision and the remainder of the agreement shall continue in effect. Unless otherwise specified herein, this agreement constitutes the entire agreement between the user and Velocity Clearing with respect to the Velocity Clearing Web Site and it supersedes all prior or contemporaneous communications and proposals, whether electronic, oral or written, between the user and Velocity Clearing with respect to the Velocity Clearing Web Site. A printed version of this agreement and of any notice given in electronic form shall be admissible in judicial or administrative proceedings based upon or relating to this agreement to the same extent an d subject to the same conditions as other business documents and records originally generated and maintained in printed form. It is the express wish to the parties that this agreement and all related documents be drawn up in English.
COPYRIGHT AND TRADEMARK NOTICES:
All contents of the Velocity Clearing Web Site are: Copyright 2010 by Velocity Clearing, LLC and/or its suppliers. All rights reserved.
The names of actual companies and products mentioned herein may be the trademarks of their respective owners. Any rights not expressly granted herein are reserved.
NOTICES AND PROCEDURE FOR MAKING CLAIMS OF COPYRIGHT INFRINGEMENT
Pursuant to Title 17, United States Code, Section 512(c)(2), notifications of claimed copyright infringement under United States copyright law should be sent to Service Provider’s Designated Agent. ALL INQUIRIES NOT RELEVANT TO THE FOLLOWING PROCEDURE WILL RECEIVE NO RESPONSE. See Notice and Procedure for Making Claims of Copyright Infringement.
IMPORTANT INFORMATION YOU NEED TO KNOW ABOUT OPENING A NEW ACCOUNT WITH VELOCITY CLEARING, LLC.
When you open an account, your firm is required to collect the following information:
- Date of birth
- Identification number:
- U.S. citizen: taxpayer identification number (Social Security number or employer identification number).
- Non-U.S. citizen: taxpayer identification number; passport number and country of issuance; alien identification card number; or government-issued identification showing nationality, residence and a photograph of you.
Your firm may not be able to open an account or carry out transactions for you. If your firm has already opened an account for you, they may have to close it.
You should consider the following points before engaging in a day-trading strategy. For purposes of this notice, a “day-trading strategy” means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.
Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
Day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
Day trading requires knowledge of a firm’s operations. You should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Day trading will generate substantial commissions, even if the per trade cost is low. Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
Day trading on margin or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day- trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
Minimum Equity Requirement Pattern day trading rules requires that a pattern day trader have deposited in his or her account minimum equity of $25,000 on any day in which the customer day trades. The required minimum equity must be in the account prior to any day trading activities. If the customer meets the pattern day trading criteria and does not have the minimum equity in his or her account, the firm will issue an equity deficiency call and will only allow the entry of closing orders. This call is separate and distinct from the day trading margin call.
Day Trading Margin Calls In the event a day trading customer exceeds his or her trading buying power, firms are required to issue a day trading margin call to pattern day traders that exceed their day trading buying power. Customers have five business days to deposit funds to meet this day trading margin call. The day trading account is restricted to day trading beginning on the trading day after the day trading buying power is exceeded until the earlier of when the call is met or five business days. If the day trading margin call is not met by the fifth business day, the account must be further restricted to trading only on a cash basis for 90 days or until the call is met.
Two Day Holding Period Requirement The rule requires that funds used to meet the day trading minimum equity requirement or to meet a day trading margin call must remain in the customer’s account for two business days.
Potential Registration Requirements Persons providing investment advice for others or managing securities accounts for others may need to register as either an “Investment Advisor” under the Investment Advisors Act of 1940 or as a “Broker” or “Dealer” under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
Your Broker and Your Account Velocity will be the broker on record and can receive compensation on the trades executed on your behalf. Your day trading account may have significant execution costs and Velocity may receive a large portion of trading commissions for this day trading strategy. Trading commissions can be significant as day trading is highly speculative and all investors who implement this type of trading strategy must have a high-risk tolerance. This account will be used for unsolicited trades only. Trade execution may vary from broker to broker in the same security on the same day. Other brokers may trade in the same security on the same day; execution times and prices can vary significantly.
This statement is required by the U.S. Securities and Exchange Commission (SEC) and contains important information on penny stocks. You are urged to read it before making a purchase or sale.
Penny stocks can be very risky Penny stocks are low-priced shares of small companies not traded on an exchange or quoted on NASDAQ. Prices often are not available. Investors in penny stocks often are unable to sell stock back to the dealer that sold them the stock. Thus, you may lose your investment. Be cautious of newly issued penny stock.
Information you should get Before you buy penny stock, federal law requires your salesperson to tell you the “offer” and the “bid” on the stock, and the “compensation” the salesperson and the firm receive for the trade. The firm also must mail a confirmation of these prices to you after the trade.
You will need this price information to determine what profit, if any, you will have when you sell your stock. The offer price is the wholesale price at which the dealer is willing to sell stock to other dealers. The bid price is the wholesale price at which the dealer is willing to buy the stock from other dealers. In its trade with you, the dealer may add a retail charge to these wholesale prices as compensation (called a “markup” or “markdown”).
The difference between the bid and the offer price is the dealer’s “spread.” A spread that is large compared with the purchase price can make a resale of a stock very costly. To be profitable when you sell, the bid price of your stock must rise above the amount of this spread AND the compensation charged by both your selling and purchasing dealers. If the dealer has no bid price, you may not be able to sell the stock after you buy it and may lose your whole investment.
Brokers’ duties and customer’s rights and remedies If you are a victim of fraud, you may have rights and remedies under state and federal law. You can get the disciplinary history of a salesperson or firm from FINRA at 1-800-289-9999 or via http://brokercheck.finra.org/, and additional information from your state securities official, at the North American Securities Administrators Association’s central number: (202) 737-0900. You also may contact the SEC with complaints at (202) 272-7440.
THE SECURITIES BEING SOLD TO YOU HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. MOREOVER, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR THE MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN ANY PROSPECTUS OR ANY OTHER INFORMATION PROVIDED BY AN ISSUER OR A BROKER OR DEALER.
Generally, penny stock is a security that:
- Is priced under five dollars
- Is not traded on a national stock exchange or on NASDAQ (the NASD’s automated quotation system for actively traded stocks).
- May be listed in the “pink sheets” or the FINRA OTC Bulletin Board.
- Is issued by a company that has less than $5 million in net tangible assets and has been in business less than three years, by a company that has under $2 million in net tangible assets and has been in business for at least three years, or by a company that has revenues of $6 million for 3 years.
USE CAUTION WHEN INVESTING IN PENNY STOCKS
- Do not make a hurried investment decision. High-pressure sales techniques can be a warning sign of fraud. The salesperson is not an impartial advisor but is paid for selling stock to you. The salesperson also does not have to watch your investment for you. Thus, you should think over the offer and seek outside advice. Check to see if the information given by the salesperson differs from other information you may have. Also, it is illegal for salespersons to promise that a stock will increase in value or is risk-free, or to guarantee against loss. If you think there is a problem, ask to speak with a compliance official at the firm, and, if necessary, any of the regulators referred to in this statement.
- Study the company issuing the stock. Be wary of companies that have no operating history, few assets, or no defined business purpose. These may be sham or “shell” corporations. Read the prospectus for the company carefully before you invest. Some dealers fraudulently solicit investors’ money to buy stock in sham companies, artificially inflate the stock prices, then cash in their profits before public investors can sell their stock.
- Understand the risky nature of these stocks. You should be aware that you may lose part or all of your investment. Because of large dealer spreads, you will not be able to sell the stock immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. New companies, whose stock is sold in an “initial public offering,” often are riskier investments. Try to find out if the shares the salesperson wants to sell you are part of such an offering. Your salesperson must give you a “prospectus” in an initial public offering, but the financial condition shown in the prospectus of new companies can change very quickly.
- Know the brokerage firm and the salespeople with whom you are dealing. Because of the nature of the market for penny stock, you may have to rely solely on the original brokerage firm that sold you the stock for prices and to buy the stock back from you. Ask the National Association of Securities Dealers, Inc. (NASD) or your state securities regulator, which is a member of the North American Securities Administrators Association, Inc. (NASAA), about the licensing and disciplinary record of the brokerage firm and the salesperson contacting you. The telephone numbers of the FINRA and NASAA are listed on the first page of this document.
- Be cautious if your salesperson leaves the firm. If the salesperson who sold you the stock leaves his or her firm, the firm may reassign your account to a new salesperson. If you have problems, ask to speak to the firm’s branch office manager or a compliance officer. Although the departing salesperson may ask you to transfer your stock to his or her new firm, you do not have to do so. Get information on the new firm. Be wary of requests to sell your securities when the salesperson transfers to a new firm. Also, you have the right to get your stock certificate from your selling firm. You do not have to leave the certificate with that firm or any other firm.
Disclosures to you. Under penalty of federal law, your brokerage firm must tell you the following information at two different times-before you agree to buy or sell a penny stock, and after the trade, by written confirmation:
The bid and offer price quotes for penny stock, and the number of shares to which the quoted prices apply. The bid and offer quotes are the wholesale prices at which dealers trade among themselves. These prices give you an idea of the market value of the stock. The dealer must tell you these price quotes if they appear on an automated quotation system approved by the SEC. If not, the dealer must use its own quotes or trade prices. You should calculate the spread, the difference between the bid and offer quotes, to help decide if buying the stock is a good investment. A lack of quotes may mean that the market among dealers is not active. It thus may be difficult to resell the stock. You also should be aware that the actual price charged to you for the stock may differ from the price quoted to you for 100 shares. You should therefore determine, before you agree to a purchase, what the actual sales price (before the markup) will be for the exact number of shares you want to buy.
The brokerage firm’s compensation for the trade. A markup is the amount a dealer adds to the wholesale offer price of the stock and a markdown is the amount it subtracts from the wholesale bid price of the stock as compensation. A markup/markdown usually serves the same role as a broker’s commission on a trade. Most of the firms in the penny stock market will be dealers, not brokers.
The compensation received by the brokerage firm’s salesperson for the trade. The brokerage firm must disclose to you, as a total sum, the cash compensation of your salesperson for the trade that is known at the time of the trade. The firm must describe in the written confirmation the nature of any other compensation of your salesperson that is unknown at the time of the trade.
In addition to the items listed above, your online brokerage firm must send to you:
Monthly account statements. In general, your brokerage firm must send you a monthly statement that gives an estimate of the value of each penny stock in your account, if there is enough information to make an estimate. If the firm has not bought or sold any penny stocks for your account for six months, it can provide these statements every three months.
A Written Statement of Your Financial Situation and Investment Goals. In general, unless you have had an account with your brokerage firm for more than one year, or you have previously bought three different penny stocks from that firm, your brokerage firm must send you a written statement for you to sign that accurately describes your financial situation, your investment experience, and your investment goals, and that contains a statement of why your firm decided that penny stocks are a suitable investment for you. The firm also must get your written consent to buy the penny stock.
Legal remedies. If penny stocks are sold to you in violation of your rights listed above, or other federal or state securities laws, you may be able to cancel your purchase and get your money back. If the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration. You may wish to contact an attorney. The SEC is not authorized to represent individuals in private litigation.
However, to protect yourself and other investors, you should report any violations of your brokerage firm’s duties listed above and other securities laws to the SEC, FINRA or your state securities administrator at the telephone numbers on the first page of this document. These bodies have the power to stop fraudulent and abusive activity of salespersons and firms engaged in the securities business. Or you can write to the SEC at 450 Fifth St., NW., Washington, DC 20549; the FINRA at 1735 K Street, NW., Washington, DC 20006; or NASAA at 555 New Jersey Avenue, NW., Suite 750, Washington, DC 20001. NASAA will give you the telephone number of your state’s securities agency. If there is any disciplinary record of a person or a firm, the FINRA NASAA, or your state securities regulator will send you this information if you ask for it.
The market for penny stocks Penny stocks usually are not listed on an exchange or quoted on the NASDAQ system. Instead, they are traded between dealers on the telephone in the “over-the-counter” market. The NASD’s OTC Bulletin Board also will contain information on some penny stocks. At times, however, price information for these stocks is not publicly available.
Market domination In some cases, only one or two dealers, acting as “market makers,” may be buying and selling a given stock. You should first ask if a firm is acting as a broker (your agent) or as a dealer. A dealer buys stock itself to fill your order or already owns the stock. A market maker is a dealer who holds itself out as ready to buy and sell stock on a regular basis. If the firm is a market maker, ask how many other market makers are dealing in the stock to see if the firm (or group of firms) dominates the market. When there are only one or two market makers, there is a risk that the dealer or group of dealers may control the market in that stock and set prices that are not based on competitive forces. In recent years, some market makers have created fraudulent markets in certain penny stocks, so that stock prices rose suddenly, but collapsed just as quickly, at a loss to investors.
Mark-ups and mark-downs The actual price that the customer pays usually includes the mark-up or mark-down. Markups and markdowns are direct profits for the firm and its salespeople, so you should be aware of such amounts to assess the overall value of the trade.
The “spread.” The difference between the bid and offer price is the spread. Like a mark-up or mark-down, the spread is another source of profit for the brokerage firm and compensates the firm for the risk of owning the stock. A large spread can make a trade very expensive to an investor. For some penny stocks, the spread between the bid and offer may be a large part of the purchase price of the stock. Where the bid price is much lower than the offer price, the market value of the stock must rise substantially before the stock can be sold at a profit. Moreover, an investor may experience substantial losses if the stock must be sold immediately.
Example: If the bid is $0.04 per share and the offer is $0.10 per share, the spread (difference) is $0.06, which appears to be a small amount. But you would lose $0.06 on every share that you bought for $0.10 if you had to sell that stock immediately to the same firm. If you had invested $5,000 at the $0.10 offer price, the market maker’s repurchase price, at $0.04 bid, would be only $2,000; thus you would lose $3,000, or more than half of your investment, if you decided to sell the stock. In addition, you would have to pay compensation (a “mark-up,” “mark-down,” or commission) to buy and sell the stock.
In addition to the amount of the spread, the price of your stock must rise enough to make up for the compensation that the dealer charged you when it first sold you the stock. Then, when you want to resell the stock, a dealer again will charge compensation, in the form of a markdown. The dealer subtracts the markdown from the price of the stock when it buys the stock from you. Thus, to make a profit, the bid price of your stock must rise above the amount of the original spread, the markup, and the markdown.
Primary offerings Most penny stocks are sold to the public on an ongoing basis. However, dealers sometimes sell these stocks in initial public offerings. You should pay special attention to stocks of companies that have never been offered to the public before, because the market for these stocks is untested. Because the offering is on a first-time basis, there is generally no market information about the stock to help determine its value. The federal securities laws generally require broker-dealers to give investors a “prospectus,” which contains information about the objectives, management, and financial condition of the issuer. In the absence of market information, investors should read the company’s prospectus with special care to find out if the stocks are a good investment. However, the prospectus is only a description of the current condition of the company. The outlook of the start-up companies described in a prospectus often is very uncertain.
Fees Low-priced securities are subject to settlement fees if they are non-DTC-eligible securities. The Depository Trust Company (DTC) provides clearing, settlement and information services for certain securities. Certain low-priced securities are not DTC-eligible or have had their eligibility revoked. As a result, the settlement of these physical positions can carry significant pass-through charges, including execution fees, DTC fees, deposit fees, New York window fees, and transfer agent fees. These fees, which can vary and may be substantial, increase the cost the Firm, passes through for clearing and execution.
Customers who trade penny stocks and non-DTC-eligible securities are responsible for these charges, which can be as high as 10 times the value of the trade. Orders that require executions with multiple contra-parties will result in settlement fees for each separate transaction. Velocity does not mark up any of these fees before they are passed through to customers. These pass-through charges may not be immediately charged to a customer account following a trade in non-DTC-eligible securities, as our clearing firm may receive notice of such fees several weeks following the trade. Velocity reserves the right to withhold funds in a customer account pending potential assessment of fees associated with trading in low-priced securities. It is your responsibility to investigate the eligibility status of a low-priced equity before trading it. You should contact the specific company whose equity you intend to trade to confirm eligibility.
Forced Buy-Ins Your sale of a low-priced security may be reversed with a forced by-in executed at the current market price, leading to potential large losses.
The National Securities Clearing Corporation (NSCC), a subsidiary of DTC, enforces an “Illiquid Requirement” onto the clearing firm when one customer (or more than one customer in the aggregate, across the totality of customers of Velocity’s correspondents) whose account is carried by Velocity sells more than 25% of the average daily trading volume of a security over the last rolling 20 business days. The Illiquid Requirement is a deposit (“charge”) that the Firm is required to post under certain circumstances. The amount of this requirement depends on the percentage of the ADV (Average Daily Volume) represented by the open sales. The requirement has very little relation to the value of the trade and is generally at least ten times the trade value and may be as high as one hundred times the trade value, or even more. This requirement is incurred even if the customer owns the shares and even when Velocity has these shares long in its DTC account. If a Velocity customer creates a NSCC Illiquid Charge greater than $50,000, the offending trade or trades may be bought in on T + 1, without notice to the customer. If a customer creates a second NSCC Illiquid Charge greater than $50,000 in a ninety-day period, in addition to the buy-in, the customer account may be subject to closure for ninety days.
In addition to the amount of the spread, the price of your stock must raise enough to make up for the compensation that the dealer charged you when it first sold you the stock. Then, when you want to resell the stock, a dealer again will charge compensation, in the form of a markdown. The dealer subtracts the markdown from the price of the stock when it buys the stock from you. Thus, to make a profit, the bid price of your stock must rise above the amount of the original spread, the markup, and the markdown.
For more information about penny stocks, buying penny stocks online, trading penny stocks and the risks associated with the penny stock trading, please contact the Office of Filings, Information, and Consumer Services of the U.S. Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549, (202) 272-7440.
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