Settlement Tightness: A Forensic Investigation into Market Structure Anomalies

Executive Summary

This report presents a forensic analysis of anomalous trading dynamics within U.S. equities. It focuses on a condition termed ‘settlement tightness.’ This state involves an acute imbalance between the supply and demand for borrowable shares. Such imbalances can precipitate significant trade settlement failures and extreme price volatility.

The objective is to provide a clear, evidence-based framework for identifying and investigating potential market manipulation. These findings are critically significant for regulatory bodies, financial institutions, and market researchers. The report is intended for those seeking to understand and mitigate systemic risks to market integrity.

Methodology

This investigation uses a structured, multi-layered analytical framework.

1. It begins by identifying specific corporate actions, like reverse stock splits, that act as catalysts.
2. It then conducts a forensic analysis of empirical data from public sources. These sources primarily include Fails-to-Deliver (FTD) data from the Securities and Exchange Commission (SEC), but also prospectuses, offering documents, and other corporate filings. This data helps diagnose symptoms of market stress.
3. Finally, the framework maps the ecosystem of financial intermediaries. This includes underwriters, placement agents, and ETF sponsors. The goal is to uncover structural interconnections and recurring patterns.

Key Findings

The analysis reveals a repeatable, self-reinforcing mechanism called the ‘flywheel’ effect. This effect drives settlement stress.

• Initiation: The process begins with a reverse stock split that constricts a stock’s public float, creating scarcity.
• Amplification: Concentrated buying pressure then amplifies this scarcity. Critically, the inclusion of the illiquid stock in thematic Exchange-Traded Funds (ETFs) also removes shares from the borrowable market, further intensifying the pressure.
• Result: The resulting ‘settlement tightness’ leads to persistent settlement failures. This, in turn, places both the underlying stock and the related ETF on the Regulation SHO Threshold List. This creates a feedback loop of volatility and risk.

Case Studies

Detailed case studies of Newegg Commerce (NEGG), Intrepid Potash (IPI), and Applied UV (AUVI) illustrate the framework’s application.

• The NEGG case demonstrates the full ‘flywheel’ in action.
• The IPI case serves as a control, distinguishing macro-fundamental drivers from microstructure anomalies. It also highlights the need for specific FTD data to complete the analysis.
• The AUVI case validates the framework’s utility. It shows how public data can be used to assess a company’s own allegations of illegal short selling by outlining the steps for empirical verification.

Conclusion

The evidence indicates that a confluence of factors can create systemic vulnerabilities. These factors include specific corporate actions, modern financial product structures, and the activities of a concentrated network of financial intermediaries. These structural weaknesses can generate extreme volatility detached from fundamental value. They can also propagate settlement risk across the market. The report concludes by recommending further investigation into ETF holdings and the network of financial intermediaries to fully assess the scope of these structural risks.

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Section 1: Introduction and Analytical Framework

This report presents a forensic analysis of anomalous market dynamics in certain U.S. equities. It uses a data-driven framework to investigate the complex interplay between corporate actions, trade settlement mechanics, and the network of financial intermediaries.

The analysis focuses on a condition termed ‘settlement tightness.’ This is a state of acute supply-demand imbalance for borrowable shares. It can lead to significant settlement failures and extreme price volatility.

This investigation examines several key areas. It looks at the role of reverse stock splits as a catalyst. It analyzes Fails-to-Deliver (FTDs) as a key indicator. It also dissects the composition of the Regulation SHO Threshold List to identify systemic patterns.

Through detailed case studies and structural analysis, this report seeks to illuminate the mechanisms that contribute to market dislocations.

1.1 Investigative Methodology

This report’s analytical approach is grounded in a multi-layered, skeptical framework. The methodology moves beyond surface-level explanations for stock price movements. It scrutinizes the underlying market microstructure.

The framework operates on three interconnected levels of analysis:

1. Catalyst Identification. The investigation first identifies corporate actions that alter a security’s trading characteristics, such as high-ratio reverse stock splits. These events are not treated as isolated changes. Instead, they are viewed as potential catalysts that can prime a security for instability by reducing its public float and constraining the borrowing market.
2. Symptom Analysis through Forensic Data Analytics. The framework then examines empirical data from the trade settlement process. It specifically analyzes Fails-to-Deliver (FTDs) as reported by the Securities and Exchange Commission (SEC).¹ Persistent and high levels of FTDs are interpreted as critical symptoms of market stress, or ‘settlement tightness.’ This data provides an objective measure of dysfunction.
3. Ecosystem Mapping. The final layer involves a forensic mapping of the financial ecosystem. The framework identifies and connects key intermediaries by analyzing public filings like prospectuses and offering documents.² This network analysis aims to uncover structural relationships and recurring participants that may contribute to settlement tightness.

This investigation integrates these three layers to construct a coherent, evidence-based narrative. It explains how specific actions can lead to observable settlement failures. It also shows how the market’s structure may contain vulnerabilities. The entire process adheres to strict legal and ethical standards, relying exclusively on publicly available data.

1.2 The Mechanics and Implications of Reverse Stock Splits

A reverse stock split is a corporate action where a company consolidates its outstanding shares.³ This results in a proportional increase in the price per share.³ For example, in a 1-for-10 reverse stock split, a shareholder with 10,000 shares would own 1,000 shares post-split. If the share price were $0.50 before, it would adjust to approximately $5.00 after.³ This action does not alter the company’s market capitalization or a shareholder’s ownership percentage.³

Companies often execute a reverse stock split for defensive reasons. Major exchanges like the NYSE and Nasdaq mandate a minimum bid price, typically $1.00 per share.⁴ A company trading below this threshold for a sustained period risks being delisted.⁴ Delisting curtails liquidity and institutional investment.³ A reverse stock split is therefore a common tool to boost share price and regain compliance.⁴

A reverse stock split also entails technical changes. The exchange temporarily appends a “D” to the ticker symbol, and the company issues a new CUSIP number for the post-split shares.⁵

However, the most critical consequence is the dramatic impact on the public float. A 1-for-20 reverse stock split reduces the available float by 95%. If significant short interest exists, short sellers must locate and borrow shares from a dramatically smaller pool. This dynamic creates a severe supply-demand imbalance for borrowable shares—a condition defined here as ‘settlement tightness.’ This tightness impedes the ability of short sellers to fulfill delivery obligations, creating fertile ground for a surge in Fails-to-Deliver.

1.3 Regulation SHO, Fails-to-Deliver (FTDs), and the Threshold List

A Failure-to-Deliver (FTD) occurs when one party in a securities transaction fails to deliver the asset by the settlement date.⁶ FTDs can arise from both long and short sales due to various factors, including administrative errors or a short seller’s inability to obtain securities.⁷

The SEC implemented Regulation SHO in 2005 in response to concerns about persistent FTDs and potentially abusive “naked” short selling.⁷ This regulation establishes a framework to govern short sales and enforce settlement discipline.

Its key provisions include:

• ‘Locate’ Requirement (Rule 203). This rule mandates that a broker-dealer must have “reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due” before executing a short sale.⁷ An exception exists for bona fide market-making activities.⁷
• ‘Close-Out’ Requirement (Rule 204). This rule imposes strict deadlines for closing out FTD positions.⁸ Broker-dealers must purchase or borrow securities to close out an FTD from a short sale by no later than the beginning of regular trading hours on the settlement day following the settlement date.⁷

When FTDs in a security become large and persistent, it may be placed on the Regulation SHO Threshold List.

A security qualifies for this list if it has an aggregate FTD position for five consecutive settlement days of 10,000 shares or more, and this amount is at least 0.5% of the issuer’s total shares outstanding.⁹

Exchanges like Nasdaq and the NYSE, as well as FINRA for OTC securities, publish these lists daily.¹⁰

The SEC cautions that an FTD is not necessarily the result of abusive short selling.¹ However, within this investigative framework, a security’s persistent appearance on the Threshold List is a critical data signal. It is an unambiguous symptom of severe ‘settlement tightness’ that demands deeper investigation.

Section 2: Case Study I – Newegg Commerce (NEGG): Anatomy of Post-Split Volatility

The case of Newegg Commerce, Inc. (NEGG) in 2025 provides a compelling illustration of the analytical framework. The sequence of events demonstrates how ‘settlement tightness’ can be created and potentially exploited.

2.1 The Catalyst: The 1-for-20 Reverse Split

In early 2025, Newegg’s stock price had fallen to $0.27 per share.¹² This placed the company in violation of the Nasdaq Capital Market’s $1.00 minimum bid price requirement.¹²

To avoid delisting, Newegg’s board and controlling shareholders approved a 1-for-20 reverse stock split. The action became effective on April 7, 2025.¹¹ The company combined every twenty existing shares into one new share.¹² The par value was adjusted proportionally, and a new CUSIP number was issued.¹²

The immediate effect was to elevate the share price above Nasdaq’s minimum. However, the more profound consequence was the drastic contraction of the company’s public float. With tradable shares reduced by 95%, the market for borrowing NEGG stock became inherently fragile. This action served as the primary catalyst, creating the ‘settlement tightness’ that would define the stock’s trading.

2.2 The Accelerant: Vladimir Galkin’s Concentrated Position

The low-float environment was soon met with an accelerant: aggressive, concentrated buying from investor Vladimir Galkin. Galkin has a documented history of making large, directional bets on volatile securities. He reportedly profited from the GameStop (GME) surge and later built a large stake in JetBlue Airways (JBLU).¹³

Galkin’s accumulation of NEGG shares, chronicled through SEC filings, was both rapid and substantial. It occurred almost entirely after the reverse split had tightened the float.

• Initial Position: As of a June 5, 2025, filing, Galkin and his wife, Angelica, reported shared beneficial ownership of 1,009,400 shares, a 5.2% stake.¹⁴
• Post-Split Consolidation: On July 10, 2025, their trust transferred its entire position into a joint account. This move coincided with the beginning of aggressive open-market purchases.¹⁵
• Rapid Accumulation: A July 16, 2025, filing disclosed the acquisition of another 222,222 shares for approximately $6.4 million. This brought their total holdings to 2,777,777 shares, or an estimated 14.3% of the company.¹⁶
• Cresting 19%: The purchases continued through the fall. By September 3, their stake had grown to 3,600,000 shares (17.6%).¹⁵ By September 30, it reached 3,810,000 shares (18.6%).¹⁷ An October 10 filing reported a position of 3,888,888 shares, representing approximately 19.0% of Newegg’s stock.¹⁸

In a matter of months, a single investing entity acquired nearly one-fifth of the company’s shares. This aggressive buying systematically removed the already scarce post-split float from circulation, dramatically intensifying the ‘settlement tightness’.

2.3 The Symptom: Extreme Volatility and Fails-to-Deliver

The combination of a constricted float and relentless buying pressure produced a textbook market dislocation. This was characterized by a parabolic price surge and significant settlement failures.

Correlating Galkin’s accumulation with NEGG’s price chart reveals a direct relationship. The stock opened on a split-adjusted basis at $5.27 on April 7, 2025.¹⁹ It began a dramatic ascent as Galkin’s buying accelerated. The price exploded in August, peaking at an intraday high of $128.09 on August 14—a gain of over 2,300%.¹⁹ The stock subsequently experienced extreme volatility.¹⁹

This price action was accompanied by clear evidence of a settlement crisis. Fails-to-Deliver data indicates a substantial and persistent problem. For the three months leading up to September 30, 2025, the cumulative dollar volume of FTDs in NEGG stock reached $0.14 billion.²⁰ The high volume of FTDs confirms that market participants were consistently unable to locate and deliver shares on time, a direct symptom of acute ‘settlement tightness’.

The sequence of events in NEGG exemplifies a potent playbook for exploiting market microstructure vulnerabilities:

1. A distressed company (NEGG) executes a high-ratio reverse stock split.
2. This action creates a low-float, illiquid environment.
3. A well-capitalized investor (Galkin) identifies this fragile state and begins a rapid, large-scale accumulation of shares.¹⁵
4. This intense buying pressure forces the price upward, creating a “short squeeze” feedback loop as short sellers are forced into buy-ins.
5. The resulting parabolic price move and massive volume of FTDs are the observable symptoms of this acute settlement crisis.

Section 3: Case Study II – Intrepid Potash (IPI): Distinguishing Macro from Micro

To properly contextualize the anomalies in securities like NEGG, it is essential to analyze a company whose price movements are driven by clear, macroeconomic fundamentals. Intrepid Potash, Inc. (IPI), a U.S.-based fertilizer producer, serves as an effective control case. Its performance during 2020-2022 was heavily influenced by global geopolitical events.

3.1 The Macro-Fundamental Narrative

The global fertilizer market experienced unprecedented disruption after the Russian invasion of Ukraine in February 2022.²¹ Russia is a top global exporter of key fertilizers, and its ally, Belarus, is another major supplier.²² The conflict and subsequent sanctions created an immediate and severe supply shock.²³

Fertilizer prices, already rising in 2021, surged to record levels.²¹ Between February and April 2022, prices jumped over 50%.²³ The Bloomberg Green Markets North America Fertilizer Price Index hit an all-time high in March 2022.²¹ This crisis created a powerful fundamental tailwind for fertilizer producers outside the conflict zone, like Intrepid Potash.²³

3.2 IPI Market Performance and Analysis

The stock performance of Intrepid Potash during this period largely reflects the positive macroeconomic narrative. The company’s market capitalization grew from $321.06 million at the end of 2020 to $574.43 million by the end of 2021.²⁴ The stock price continued to appreciate into 2022, coinciding with the spike in global fertilizer prices.

The crucial investigative question is whether these fundamentals fully explain the volatility, or if there is evidence of microstructure anomalies. This requires a detailed analysis of IPI’s FTD data during its periods of highest volatility. The available research materials do not contain this specific data, which is a critical missing piece required to fully strengthen the control case.²⁵

IPI serves as a vital “control case.” The framework dictates two potential outcomes from a full analysis of its FTD data:

1. If a company like IPI, with a clear fundamental story, also exhibited persistently high FTDs, it would suggest a broader systemic issue. It would imply ‘settlement tightness’ may be a more widespread market phenomenon.
2. Conversely, if IPI’s FTD data proved minimal, it would reinforce the conclusion that the phenomena in cases like NEGG are anomalous. It would strengthen the argument that those settlement crises are linked to specific circumstances like reverse splits and targeted market pressures.

Obtaining and analyzing the FTD data for IPI is the necessary next step to isolate variables.

Section 4: Case Study III – Applied UV (AUVI): Validating Allegations of Manipulation

The case of Applied UV, Inc. (AUVI) presents an opportunity to apply the investigative framework to a company that has publicly alleged it is the target of illegal trading activity.²⁶ AUVI’s claims provide a clear, testable hypothesis: that its stock has been subjected to abusive naked short selling.

4.1 The Company’s Allegations

On January 25, 2023, Applied UV announced it had retained the law firm Herrick, Feinstein LLP to “investigate potential illegal short selling” of its stock.²⁶ The company stated its concern “that there may have been certain illegal activities with respect to the trading of our securities”.²⁶

The company’s CEO, Max Munn, affirmed a commitment to “aggressively investigate these activities”.²⁶ To bolster its investigation, the law firm engaged Oyster Consulting, a firm that includes a former FINRA Enforcement Director.²⁷ The retention of such specialized expertise underscores the seriousness of the company’s concerns.²⁸

4.2 Applying the Investigative Framework

Applied UV’s statements provide a direct hypothesis to be tested: that the stock was subjected to unusual and potentially illegal shorting activity that manifested as persistent Fails-to-Deliver. The framework allows for a data-based validation of the conditions that would accompany such activity.

The primary evidence required is the SEC’s official FTD data for the ticker symbol AUVI.²⁹ The raw data files for the period of interest—late 2022 and early 2023—are publicly available for download from the SEC.¹

The analytical process dictated by the framework is as follows:

1. Download the relevant semi-monthly FTD files from the SEC’s website.¹
2. Parse these files to extract all entries corresponding to the ticker “AUVI”.
3. Aggregate the daily FTD quantities and compare them against the criteria for the Regulation SHO Threshold List.

While the processed results of this analysis are not available in the current research materials, a finding of AUVI on the Threshold List for a prolonged period would lend significant credibility to the company’s concerns. It would serve as powerful, empirical evidence of a severe and persistent ‘settlement tightness’—precisely the market condition that abusive naked short selling is known to create.³⁰

Section 5: Dissecting the Regulation SHO Threshold List

To move the analysis from individual cases to a broader market view, this section dissects a recent NASDAQ Regulation SHO Threshold List. This approach allows for the identification of patterns and concentrations in the types of securities experiencing persistent settlement failures.

5.1 Methodology

The analysis is based on the NASDAQ Regulation SHO Threshold List for the trade date of Tuesday, October 21, 2025.⁹ The methodology involves a two-step process for each security on this list:

1. Classification. Each security is categorized as either an “Operating Company” (OpCo) or an “Exchange-Traded Fund” (ETF). This classification is determined by reviewing the security’s name and cross-referencing with financial data sources.³¹ ³² ³³ ³⁴
2. Tabulation. The results are compiled into a comprehensive table that lists the ticker symbol, security name, classification, and Nasdaq market category.

This process provides a structured snapshot of the Threshold List’s composition.

5.2 Analysis of NASDAQ Regulation SHO Threshold List (October 21, 2025)

The following table presents the classified results from the NASDAQ Threshold List for October 21, 2025.⁹

Symbol	Security Name	Classification	Market Category
ADAP	ADAPTIMMUNE THERAPEUTICS PLC S	Operating Company	S
AIPO	TIDAL TR II DEFIANCE AI & PWR	ETF	G
AKAN	AKANDA CORP COM PAR $ NEW 08/2	Operating Company	S
APPX	INVMENT MNGERS SER TR II TRADR	ETF	G
AREB	AMERICAN REBEL HLDGS INC COM P	Operating Company	S
ASST	STRIVE INC CL A COM (NV)	Operating Company	G
BIAF	BIOAFFINITY TECHNOLOGIES INC C	Operating Company	S
BJDX	BLUEJAY DIAGNOSTICS INC COM PA	Operating Company	S
BNC	CEA IND INC COM NEW PAR $0.000	Operating Company	S
BTM	BITCOIN DEPOT INC COM	Operating Company	S
BULG	THEMES ETF TR LEVERAGE SHARES	ETF	G
BYND	BEYOND MEAT INC COM (DE)	Operating Company	Q
CCHH	CCH HLDGS LTD USD ORD SHS (CYM	Operating Company	S
CDT	CDT EQUITY INC COM PAR $0.0001	Operating Company	S
CERO	CERO THERAPEUTICS HLDGS INC C	Operating Company	S
CHNR	CHINA NAT RES INC SHS NEW COM	Operating Company	S
CRCG	THEMES ETF TR LEVERAGE SHARES	ETF	G
DKNX	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
DPRO	DRAGANFLY INC (CANADA)	Operating Company	S
ECDA	ECD AUTOMOTIVE DESIGN INC COM	Operating Company	S
ELBM	ELECTRA BATTERY MATLS CORP COM	Operating Company	S
FGNX	FG NEXUS INC. COMMON STOCK (NV	Operating Company	G
GLTO	GALECTO INC COM NEW	Operating Company	S
HIMZ	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
HSDT	SOLANA CO COM CL A NEW MAY 20	Operating Company	S
IBG	INNOVATION BEVERAGE GROUP LTD	Operating Company	S
IONZ	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
KMLI	KRANESHARES TR 2X LONG MELI DA	ETF	G
LAWR	ROBOT CONSULTING CO LTD SPONSO	Operating Company	S
LFS	LEIFRAS CO LTD ADS REPSTG ORD	Operating Company	S
LITM	SNOW LAKE RES LTD COM NO PAR (	Operating Company	S
LITS	LITE STRATEGY INC COM PAR $ (D	Operating Company	S
LWAY	LIFEWAY FOODS INC	Operating Company	G
MSTX	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
NFE	NEW FORTRESS ENERGY INC. CLASS	Operating Company	Q
NUAI	NEW ERA ENERGY & DIGITAL, INC.	Operating Company	G
NVA	NOVA MINERALS LIMITED AMERICAN	Operating Company	S
NVX	NOVONIX LTD SPONSORED ADS (AUS	Operating Company	G
PFAI	PINNACLE FOOD GROUP LTD SD CL	Operating Company	S
PLTZ	TIDAL TR II DEFIANCE DAILY TA	ETF	G
PMAX	POWELL MAX LIMITED CLASS A ORD	Operating Company	S
QBTZ	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
QCLS	Q/C TECHNOLOGIES INC COM PAR $	Operating Company	S
QUBT	QUANTUM COMPUTING INC COM	Operating Company	S
RKLX	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
SGBX	SAFE & GREEN HLDGS CORP COM PA	Operating Company	S
SLE	SUPER LEAGUE ENTERPRISE, INC.	Operating Company	S
SLMT	BRERA HLDGS PLC CL B NEW (IRL)	S	Y
SMCZ	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
SMST	TIDAL TR II DEFIANCE DAILY TAR	ETF	G
SMX	SMX SEC MATTERS PLC SHS CL A J	Operating Company	S
SPRC	SCISPARC LTD COM PAR $ (ISR)	Operating Company	S
TAOX	TAO SYNERGIES INC COM PAR $0.0	Operating Company	S
TURB	TURBO ENERGY S A SPONSORED ADR	Operating Company	S
WAI	TOP KINGWIN LTD NEW CL A ORD S	Operating Company	S

A striking pattern emerges. A substantial portion of the list consists of ETFs. Out of the 56 securities on this list, 15 are ETFs, representing over 26% of the total.

These are overwhelmingly thematic, leveraged, or single-stock products. They are concentrated within a small number of ETF trusts. Tidal Trust II, which sponsors the Defiance brand, appears ten times.⁹ Themes ETF Trust appears twice.⁹

This “ETF Anomaly” reveals a potential systemic vulnerability. ETFs are created and redeemed in large blocks by “Authorized Participants” (APs).³⁵ To create new ETF shares, an AP must deliver a specified basket of the underlying securities to the ETF issuer.³⁵ If an AP cannot source one of the underlying securities, the AP cannot assemble the creation basket. This inability to create new ETF shares can lead directly to FTDs in the ETF itself. This mechanism allows the settlement risk of a few illiquid components to be inherited and amplified by the broader ETF structure.

Section 6: Mapping the Ecosystem: Counterparties and Structural Interconnections

The final stage of this investigation maps the network of financial intermediaries associated with the entities on the Regulation SHO Threshold List. By identifying the bookrunners, placement agents, ETF sponsors, and distributors, it is possible to uncover recurring relationships and potential structural links.

6.1 Identifying Counterparties

Identifying key counterparties requires a forensic review of public regulatory filings.

• For Operating Companies (OpCos): The primary sources are SEC filings related to capital-raising activities, such as Registration Statements, Prospectuses, and Current Reports.³⁶ These documents explicitly name the underwriters or placement agents. For example:
  • Filings for American Rebel Holdings, Inc. (AREB) show the company has engaged H.C. Wainwright & Co. and EF Hutton as exclusive placement agents.³⁷ ³⁸
  • A press release for Akanda Corp. (AKAN) names Univest Securities, LLC as the underwriter for a public offering.³⁹
• For Exchange-Traded Funds (ETFs): The key counterparties are the ETF’s sponsor, the legal trust, and the distributor. This information is in the ETF’s prospectus and statement of additional information (SAI). For example:
  • The prospectus for the Defiance AI & Power Infrastructure ETF (AIPO) indicates it is a series of Tidal Trust II. The distributor is Foreside Fund Services, LLC.⁴⁰
  • The prospectus for the Tradr 2X Long APP Daily ETF (APPX) shows it is a series of the Investment Managers Series Trust II. The distributor is Vident Financial Distributors, Inc..⁴¹

6.2 Counterparty Mapping for Selected Threshold List Entities

This methodology reveals a relational map of the ecosystem. The table below connects securities experiencing settlement failures with their financial intermediaries.

Symbol	Entity Name	Classification	Offering Type	Key Underwriter/Placement Agent	ETF Trust/Sponsor	ETF Distributor
AKAN	Akanda Corp.	OpCo	Public Offering / IPO³⁹	Univest Securities, LLC³⁹	N/A	N/A
AREB	American Rebel Holdings, Inc.	OpCo	NASDAQ Uplisting / Private Placement³⁸	H.C. Wainwright & Co.³⁷, EF Hutton³⁸	N/A	N/A
ADAP	Adaptimmune Therapeutics plc	OpCo	Initial Public Offering (IPO)⁴²	BofA Merrill Lynch, Cowen and Company⁴² ⁴³	N/A	N/A
AIPO	Defiance AI & Power Infra. ETF	ETF	N/A	N/A	Tidal Trust II / Defiance⁴⁰	Foreside Fund Services, LLC⁴⁰
APPX	Tradr 2X Long APP Daily ETF	ETF	N/A	N/A	Inv. Managers Series Trust II / AXS⁴¹	Vident Financial Distributors, Inc.⁴¹
BULG	Themes ETF Trust	ETF	N/A	N/A	Themes ETF Trust⁹	Not specified in research
DKNX	Defiance Daily Target ETF	ETF	N/A	N/A	Tidal Trust II / Defiance⁹	Foreside Fund Services, LLC⁴⁰

This mapping reveals a potential structural nexus. A specialized group of boutique investment banks (such as Univest, H.C. Wainwright, and Aegis Capital) appears to focus on underwriting capital for the small-cap companies that frequently populate the Threshold List.³⁹ ³⁷ ⁴⁴ Simultaneously, a distinct group of service providers (such as ETF trusts like Tidal and Themes, and distributors like Foreside and Vident) specializes in creating the thematic ETFs that appear on the same list.⁴⁰ ⁴¹

This forms the basis for a critical line of inquiry. A preliminary review of the holdings for AIPO and APPX does not show direct ownership of the other operating companies on this specific day’s Threshold List.⁴⁵ ⁴⁶ However, this does not negate the hypothesis. A comprehensive, longitudinal analysis of ETF holdings against Threshold List data remains a critical next step.

Section 7: Synthesis and Concluding Observations

This investigation has applied a structured framework to analyze anomalous market dynamics. It reveals a recurring pattern of market stress centered on ‘settlement tightness’. The findings point toward a confluence of factors that can create significant vulnerabilities in market structure.

7.1 The ‘Settlement Tightness’ Flywheel

The analysis demonstrates a repeatable and self-reinforcing mechanism that drives settlement stress and extreme volatility:

1. Catalyst. A high-ratio reverse stock split acts as the initial catalyst. As seen with NEGG, this action drastically reduces the public float, creating inherent scarcity in the stock’s borrowing market.
2. Pressure. This low-float environment becomes highly susceptible to pressure. This can come from aggressive, concentrated buying (as with Vladimir Galkin in NEGG) or from significant short interest.
3. Amplification. The proliferation of thematic and leveraged ETFs acts as a powerful amplifier. The analysis of the NASDAQ Threshold List revealed a high concentration of such ETFs. These products often hold the same illiquid small-cap stocks prone to settlement tightness, absorbing scarce float and transmitting settlement failures from the underlying stocks to the ETF itself.
4. Symptom. The result is acute ‘settlement tightness.’ This condition manifests as a surge in Fails-to-Deliver and a security’s appearance on the Regulation SHO Threshold List. This settlement crisis can fuel a feedback loop of forced buy-ins and parabolic price moves detached from fundamental value.

This flywheel represents a significant structural vulnerability. Routine corporate actions and modern financial product innovation combine to create a fragile market environment.

7.2 The Role of NASDAQ

The NASDAQ exchange serves as both the venue for these events and a primary regulator. NASDAQ’s MarketWatch department uses sophisticated, real-time surveillance programs, like the Nasdaq Market Surveillance (SMARTS) system.⁴⁷ These systems monitor trading for manipulative practices like spoofing or layering.⁴⁸

However, the patterns identified in this report pose a different kind of challenge. The ‘settlement tightness’ flywheel does not necessarily involve overtly illegal actions at each step. A reverse split is legal. Creating a thematic ETF is standard practice. The potential issue arises from the structural and cross-entity relationships between these activities.

This raises a critical question for regulators: Are current surveillance systems equipped to detect these “second- and third-order connections”? Enhanced surveillance might include tracking relationships between underwriters and ETF sponsors. It could also involve developing alerts that trigger when a significant portion of an ETF’s underlying holdings appear on the Threshold List. The patterns identified here suggest a systemic fragility that may not be captured by surveillance focused solely on anomalous trading in a single instrument.⁴⁹

7.3 Concluding Remarks and Avenues for Further Research

The evidence suggests that the confluence of reverse splits, thematic ETF creation, and the activities of a concentrated network of financial intermediaries can systematically create ‘settlement tightness.’ This condition represents a material vulnerability in modern market structure. While not definitive proof of coordinated manipulation, the recurring patterns warrant heightened scrutiny.

This investigation opens several clear avenues for further research:

1. ETF Holdings Analysis. A comprehensive analysis of the holdings of all ETFs on the Regulation SHO Threshold List is imperative. This research would quantify the systemic risk of ‘settlement tightness’ propagation and confirm the extent of the ‘flywheel’ amplification effect.
2. Intermediary Network Mapping. A deeper investigation into the business relationships between the boutique investment banks that underwrite high-risk companies and the sponsors of the thematic ETFs that invest in them. This analysis could uncover potential conflicts of interest that contribute to market fragility.
3. FTD Causality Analysis. A quantitative study of FTD data for a larger universe of stocks undergoing high-ratio reverse splits. Such a study could provide a predictive model for identifying securities at high risk of settlement stress, allowing for proactive regulatory oversight.

By pursuing these lines of inquiry, regulators and researchers can develop a more nuanced understanding of these complex market dynamics. This will help them assess whether new rules or enhanced surveillance techniques are needed to mitigate the systemic risks posed by ‘settlement tightness’.

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Glossary of Terms

• Authorized Participant (AP): A large financial institution that has an agreement with an ETF issuer to create and redeem ETF shares in large blocks.
• Bookrunner: The lead underwriter in a securities offering responsible for managing the process, gauging investor demand, and allocating shares.
• CUSIP: A unique nine-character identification number assigned to all stocks and registered bonds in the U.S. and Canada.
• Fails-to-Deliver (FTD): A situation where one party in a securities transaction fails to meet its delivery obligation by the settlement date.
• Float: The number of a company’s shares that are available for trading on the open market.
• Initial Public Offering (IPO): The process of offering shares of a private corporation to the public in a new stock issuance.
• Naked Short Selling: The illegal practice of short selling shares that have not been affirmatively determined to exist for borrowing.
• Regulation SHO: A set of SEC rules designed to address concerns about persistent fails-to-deliver and potentially abusive “naked” short selling.
• Reverse Stock Split: A corporate action that consolidates the number of existing shares into fewer, proportionally more valuable shares.
• Settlement Tightness: A term used in this report to describe a market condition characterized by an acute supply-demand imbalance for borrowable shares.
• Threshold List: A public list of securities that have had a substantial number of settlement failures for a sustained period, as defined by Regulation SHO.

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