Quite a day yesterday wasn't it? Many are scratching their heads as they watched the violent move to the downside yesterday in the stock market(including myself).
The housing news was bad yesterday, but its been bad for two years so why did everyone so get so riled up and sell? Rick Santelli was complaining a lot about the SEC games and I think this story has legs.
The "tampering" of the markets by the SEC has created a huge "uncertainty" as to how stocks will trade as they change the rules on short selling.
If there is one thing the market does not like its uncertainty. I know its taken me out of the market. How can I play the game if I don't know the rules? I haven't made a trade since the SEC started with all of this crap.
Imagine how spooked traders will be tomorrow after seeing the financials free fall to their biggest one day loss in EIGHT YEARS just days after the new shorting rules on the financials kicked in. Do you go long? Do you go short? Who knows! The game has changed.
You think any trader is comfortable making trades now? Hell no. What happens to the stock market if they decide to take their money home and stop trading.
When there are no bids for stocks they drop!
Word on the street is many traders can't find any shares to short right now. They simply aren't available. Some companies have shares that are available to short and others mysteriously don't. No one has been able to figure out why. This just kills market confidence.
Now the SEC is trying to expand these rules to the entire stock market!
"By Karey Wutkowski and Rachelle Younglai
WASHINGTON, July 24 (Reuters) - The top U.S. securities regulator remains steadfast in a plan to broaden an emergency rule to curb abusive short selling despite opposition from the hedge fund industry and other short sellers.
U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers on Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market.
"We have immediately pivoted to a broader rule making ... so we can extend this kind of procedural protection to the entire market," SEC Chairman Christopher Cox told a House Financial Services Committee hearing.
"I think very soon we will be in a position to issue a proposal on that," he said. The SEC could consider its next steps at the end of July or beginning of August.
The SEC is also considering other remedies to short selling abuses, such as requiring the reporting of substantial short positions, Cox told reporters after the hearing.
"At the hearing, lawmakers asked Cox why the agency did not reinstate the so-called tick-test rule on short sales, which was implemented after the 1929 stock market crash. Cox reiterated that studies have shown that the tick test is no longer effective.
In June 2007, the SEC repealed the rule, which only allowed short sales when the last sale price was higher than the previous price.
Cox said the idea of using a price test or some sort of circuit breaker to regulate manipulative short selling is a "subject currently under consideration by the commission staff."
Final Take:
Good idea Mr Cox! Lets spook the markets even more! Now I realize shorting has become abusive at times and power driving a company into BK has to be stopped. Something needs to be done about this.
However, attempting to paint such a broad stroke of regulatory power over the markets is a big mistake by the SEC. They are over stepping their boundaries just like the Fed is attempting to do with the Fannie legislation.
Here's an idea:
Why not just bring back the uptick rule? I think the market would handle it without a problem. Why? Because they traded with this rule in effect for almost 70 years. They know what to expect. It would create a sense of calm in the markets versus uncertainty. It would also at least partially reign in the shorts.
If you think you need to do more then that then increase your policing of the markets. I am sure its pretty obvious when the shorts are piling on a stock and driving it into the ground. This would keep the main rules of the game in tact which would entice investors to come back and make trades.
Bottom Line:
All of this meddling is increasing the risk of a major event in the stock market. The economy is already in shambles and investors look like they have seen a ghost.
When you decide to change the rules of the game in the middle of a rattled stock market thats trying to find itself, the risk of a crash increases dramatically.
2 comments:
I used to work for a brokerage and it was amazing how many naked shorts were going through the market. The stock loan departments never had their crap together well enough to guarantee shorts had underlying stock in the trade. These changes will absolutely kill the ability of hedge funds to manipulate pricing in the way they've been used to!
Minton
Yeah they need to do something with naked shorts. The uptick rule makes sense to me although they say its not enough.
Did you see Chrysler today? No more car leases!
They must be in deep financial trouble to be announcing this.
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